If I wanted to increase cash flow and was willing to tolerate more risk, would it be wise to forego the security deposit and instead ask for higher rent?
Let’s say the market rate is $5,000 for my property and the security deposit is $5,000. Not many tenants could come up with $10,000 at move-in. What if I offered $0 security deposit and, say, $5,300 rent to compensate me for the additional risk?
If a tenant would go for that, would that be too risky for a landlord?
Security deposits rarely cover the expense from the damage a tenant can do. This would really depend on your cash reserves and your tolerance level. Personally, I would not do it. I would make the security deposit as high as my state law allows. If they cannot afford it, they are not your tenant.
Property that commands a $5k rent tag should attract tenants that can afford a $5k deposit. The same is true for a $500/mo apartment and $500 deposit. It shows at least some level of responsibility for their income.
I would never consider skipping the deposit entirely. If they pay perfectly for 11 months and skip the 12th, you'll have gained $3300 in extra rent but net a negative $1700. And then you get to go in and hope the place isn't trashed. Even if it isn't a full month's rent, you still need a healthy enough deposit to encourage the tenant to take care of the place.
@Angelo R. We recently took over a property that was run by a management company that didn't charge security deposits. I have learned some valuable lessons dealing with the repercussions of their actions.
I would say that @Dustin Beam is exactly right. We have had more issues with the tenants that never had to pay a deposit than we have ever had with tenants that did pay a security deposit. Not only does coming up with the money for a security deposit show some level of responsibility, it also gives the tenant some skin in the game. It makes them far less likely to cause damages because they want to get back their security deposit.