How Do you Determine Security Deposits

12 Replies

I am working through an analysis on a SFR and I am researching realtor.com and Craigslist to make an informed decision on what I can expect to get in rent. As I am getting closer to acquiring my first property and placing a tenant, I have to decide what I want to charge for a security deposit. I also need to decide whether or not I want to get the first month's rent or the first and last month's rent up front.

In my research I have seen spreads on similar properties that are too wide to make an informed decision.  On one property with a $1075 monthly rent and a $1075 security deposit all the way to a $1625 monthly rent with a $5000 security deposit.  Some people ask for first month up front some don't and some ask for first and last. 

Please chime in and let me know how you determine what the security deposit should be and if you charge any rent up front.  I remember reading somewhere that charging the same amount for a security deposit as the monthly rent was a bad idea because it connotes a monthly payment to a tenant. 

From my research it looks like the market rent is between $1400 and $1500 for this particular SFR. I am thinking about charging first month rent up front and a $2000 security deposit. Thoughts?

I suggest that 1. you look to the market as you are as to what is customary and 2. to check state laws concerning security deposits as they are often limited for residential. Know also that rent deposits and security deposits are not the same thing, rent applies to uncollected rents, security deposits often can't cover rent but damages. Could be you'll have to return security deposits to a tenant who is late or not paid rents! What you call things matters. :)

Hi Paul, there are several ways you can go about it. Bill is definitely right about checking the market and the state law. Many landlords and management companies are moving towards non-refundable move-in fees instead of security deposits nowadays.

Do you have certain qualifications that your potential tenants need to pass? For example, background and credit checks. You want to make sure your tenants will qualify and won't skip out on paying rents.  

Most of the times, security deposit is the same amount as the rent. So, if you're leasing an apartment for $1500, you may ask for $1500 security deposit prior to the tenants moving in.

If credit is not as much of an issue to you, many tenants are willing to pay you higher security deposits to make up for their low credit score. But remember, you have to give back the security deposits to the tenants when they move out (depending on what else is in the lease agreement). 

As an alternative, you can collect first month and last month rent as well. This just means the tenants don't have to pay for the last month they're staying at the property since they would already have paid that upfront with the first month rent. 

Summary:

1. One month rent security deposit

2. First month and last month rent

3. Move-in fee instead of security deposit

Thank you for the insight.  Do any of you have any suggestions on where I can find these laws by state online?  I know my attorney will have them but if I can take the time and look them up and read them myself I think it would be beneficial.

Is anyone out there willing to let me take a look at one of their tenant applications so I can get an idea of how to put one together.  I don't recall seeing one in file share.  

What kind of tenant requirements have you all used in class B properties that have been successful or unsuccessful.

I'm thinking at least two years steady employment, three times rent for income and credit over 700.  As far as criminal I'm thinking no felonies.  Should I be concerned about misdemeanors and petty offenses?  Should I raise or lower my other requirements?

Paul,

I’m a bit late to the game of answering you, but here I go anyway.

When it comes to determining your security deposit I usually follow the following check list:

1. Understand what a basic unit turn will cost you if a resident moves out or is evicted and have more than normal wear and tear. If your basic unit turn is $1,500 and you only charge $300 for security deposit you will have substantial losses every time you have a "bad" tenant. This will set the bar for how low you can go in absolute terms. (if you find that your neighborhood has too low security deposits you may want to reconsider the area)

2. Do a market survey to see what your competitors are charging. Make sure you determine if the quote they give you is for perfect credit, and no remarks on the screening results. Some properties will vary the security deposit based on the credit score of the applicant.

3. Sign up for your local landlord association!!! (i found this online for Illinois http://www.irpoa.org/) They will most likely have all the documents you need. Like applications, screening criteria, standard applications etc. Usually, they can give you legal advice too, and will be able to give you all the information you need on security deposit regulations in your area. This investment is worth its weight in gold and can save you from many, many problems down the road.

4. Subscribe to a resident/application screening service (one time or ongoing). Usually your landlord association can help with this too. Again, an investment that is worth its weight in gold!! You want to check this with your attorney, but I believe that you can charge different security deposits based on the outcome of the screening results.

All said I prefer to have one month rent for security deposits. That is if the market allows for it. The worse credit the more I would charge, but again you need to verify this with your lawyer, and or landlord association.

As for rental criteria. Here is a check-list for things that you should consider/request at time of application.

You should have your standards in writing, and follow the same guidelines for all your applicants and residents (NO DISCRIMINATION!)

Generally required information may include:

 Applicant on-time for showing appointment

 Positive Government Issued ID

 Fully completed application for every occupant 18 years and older

 Applicant(s) able to pay complete deposit and rent deposit at time of lease signing

 Proof of adequate income which could include any of the following:

Most recent paycheck stub

Tax return copies for self-employed applicants

Copies of deposit slips, investment earnings documents or Social Security earnings for retired applicants

Any additional sources of income, ie child or spousal support, trust fund income

Income, Credit and Employment information required may include:

 Proof of verifiable employment and / or verifiable source of income

 Adequate gross income to rent ratio (2.5 to 3 times income to rent)

 No excessive debt which may impact applicant(s) ability to pay rent

 Good credit history free of negative credit issues which may indicate an applicant is high-risk and / or indicates a pattern

of payment delinquency

Court Records:

 History of criminal activity (arrests and / or convictions by any occupant, adult or minor) which could negatively affect tenancy

Rental history information required may include:

 If applicant has prior rental experience, good references from prior landlord(s)

 No prior evictions on applicant(s) record

State dependent:

ADVERSE ACTION NOTICE REQUIRED WHEN DENYING OR OFFERING CONDITIONAL TENANCY TO APPLICANT

Note: In the event an applicant is denied tenancy, or any other form of adverse action is taken against the applicant including requiring an additional deposit, a qualified guarantor, last month’s rent, or increased monthly rent, the landlord is required to provide an Adverse Action

Notice. This notice must inform the applicant of the basis for denial of tenancy, as well as providing contact information for the applicant to obtain a copy of their background check.

@May Pardo

Folks need to know they tenancy law in the local jurisdiction before assessing any administrative fees for move-in / move-out, application, etc.   There are many places where you are not permitted to levy such fees.

I agree with @Roy N. and @Christian Brodin , definitely check out the laws where you're at. I only spoke out of experience dealing with landlords and tenants in Chicago. 

@Paul Stout I don't mind giving some samples and resources to you so you can get better ideas. Having an attorney will certainly makes things easier and they can help you draft the legal documents too. Not sure the best way to go about it on BP since I'm still relatively new. Maybe I can post links to like a Dropbox? Or will I be able to just attach documents here?

I always make the deposit a different number than the rent, this helps clarify that the security deposit is not to be used as the last months rent.  A different number help make this clear to the tenants.  If the rent is $1200, I would try to get $1400 or $1500.  

In my state (California) the deposit is limited to 2x the monthly rent, (3x if the home is furnished).  

thanks for all of the great info.  I just finished writing my first offer!  Fingers crossed, won't get any sleep tonight.

@Gene Hacker Good idea. I had no clue about the laws in CA. Very interesting!

@Paul Stout Good luck! I know it can be nerve wrecking waiting for a response. Hope you get it.

In my market when I was a tenant most places had first month rent, last month rent and a security deposit due when you moved in.

The issue I have found is that if you ask for first and last month rent, how much do you really have left to ask for a security deposit? It makes your rental less affordable if you ask for too much upfront.

What I do is ask for the first month and a security deposit. The security deposit is about equal to 1 month rent, but like everyone else was saying, don't make them exactly the same. 

On the lease I have a section explaining the security deposit and I specifically mention that it is reserved for it's intended purpose and is NOT allowed to be used to pay any portion of rent.

You don't - the marketplace determines what is feasible :)

I've rented (me being the renter) in three totally different areas of the country.  So. CA, Miami, and NOLA.  It was always one month's security and first month's rent required by or before move-in.  Never last month's.  That is also what I require now that I am the landlady.  On occasion, I have also asked for last month's rent if a potential tenant looks good, but is moving in from out of state and has not secured a job yet.

And, while I think first month's rent and security equal to first month's is pretty typical, I'm sure there are some areas where local customs can also demand last month's rent and/or a higher or lower security deposit.

In my current city of NOLA, some of the big apartment complexes will run "move in" specials.  Like low or no security deposit, but that would be highly unusual for a house/multi type of rental.

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