Tenant with no security deposit

[Aviram Bilder]

Hello everyone,

I have recently bought a small multifamily with tenants in place, on a month-to-month basis. The previous owner did not ask the tenants to provide him security deposits.

I have decided to raise rents in 4%-5% and sign the tenants on annual lease agreements. One tenant refused to sign the new agreement, saying it's too expensive for him. The problem is that his unit is a mess. He made a lot of damage that would probably cost me a few thousand dollars to repair in case I decide to find a new tenant. 

What would you recommend to do?