Best Practices for Security Deposits.

[Kyle Haney]

Hello BiggerPockets Community,

I am a fairly new investor and have been rehabbing an investment property in Mt. Vernon, Indiana that is a fourplex. I'm curious to see how other investors handle security deposits especially when you are raising the value of a property with existing tenants. Here are a few of my questions; 

1. It is has been recommended to me not to have the security deposit equal to the rent rate. This prevents the tenant from thinking that the security deposit also acts as the last months rent. Does anyone have best practices or rules in place that decides the amount of the security deposit for your investment?  

2. How do you handle a security deposits with a tenant that renews after the rent is increased or the value of the property is increased? Has anyone asked for an additional security deposit when a tenant renews based off of increase value in the property?

3. One of the tenants I inherited with this property from the previous owner had not fully paid their security deposit. This tenant has since moved out of the property and luckily I did not have any significant costs due to damages to the apartment. Are there any recommendations for the best way to handle this type of situation? 

4. The previous owner did not document the state of the apartments upon move in for the tenants I inherited when I bought the property. Therefore this made it difficult for me to say that any existing damages were due to the tenant or were there upon move in. The property was inspected and walked through prior to purchase and there were no significant issues found at the time. Does anyone have recommendations for handling poorly documented move-ins when purchasing a rental property?

Thanks in advance for your input and advice!

[Alex Smith]

1. I would recommend to have the security deposit be at least one month's rent. You can write in your lease that the security deposit cannot be used for payment of rent. Security deposit is a safety net for you, and while ti may not always cover tenant damages, it's better than not having one, or having a meager one. 

2. We've always kept the same security deposit and not asked the tenant to contribute any more towards the SD. Both you and the tenant are still bound by the original lease, so I'm not sure that you can ask for more SD money without sending a new lease altogether. Others may have more insight into that. 

3. Are yous saying the tenant didn't pay the full security deposit, or the owner didn't return the full security deposit to the tenant?

4. Not much insight here. I'd be curious what others have to say. As an individual owner, you could walk the units with the current tenants to establish the current state as the standard if/when they move out...?