The Future of Security Deposits

13 Replies

As rents continue to rise, this in turn increases the cost for tenants to move in to a rental property. It is not uncommon for us to list properties for $1500 per month. This can end up costing a new tenant over $3k to move into one of our properties if the "standard" 1 months rent security deposits applies. Our firm has a very thorough screening process for tenants that we place. However, qualifying for a particular property is one thing but having $3k+ to move in is another. I am certain there are  plenty good tenants we are missing out on that simply don't have that kind of cash on hand.

I am wondering if there are any BP owners or property managers that are trying anything different from requiring traditional security deposits? ( ie. full month, 1/2 month ) Maybe you are using Obligo or another service/product that allows the tenant to pay a low nonrefundable monthly fee to insure their unit against damages. Or, has anyone come up with their own system to help lower the financial barriers to moving tenants in. 

*I would like to keep this discussion limited to security deposits funds and not get into the weeds of how we qualify tenants or what is considered a "chargeback" to tenants. 

If a potential tenant doesn't have at least one month of rent saved that they can use for a security deposit, then I don't want them as a tenant. 

Do you really want a tenant that is living paycheck to paycheck?

I will be starting up with Obligo in February. I learned about them from another property manager that has over $900 single family homes in San Antonio and he's had a really good experience with them.

I believe it's the way of the future. Government regulation continues to side with renters and is forcing landlords to become creative you know how we protect our investment.

I find using the rental rate as a security deposit to be difficult in lower income areas and hard to compete with other property owners that offer much less . I typically ask for half the rent price as a security . At the end of the day If they are going to trash the place another few hundred isn’t going to really help much and there’s an opportunity loss by letting rentals sit without a good qualified tenant so it’s a wash in my market . I’ll take the fast nickel over a slow dime in this case

Originally posted by @Dennis M. :

I find using the rental rate as a security deposit to be difficult in lower income areas and hard to compete with other property owners that offer much less . I typically ask for half the rent price as a security . At the end of the day If they are going to trash the place another few hundred isn’t going to really help much and there’s an opportunity loss by letting rentals sit without a good qualified tenant so it’s a wash in my market . I’ll take the fast nickel over a slow dime in this case

In my experience, it's usually more than just a few hundred. Tenant fails to pay rent and abandons the property or is kicked out. You could lose that month's rent, utilities, and be faced with $500 - $1,000 in cleaning and repairs. Tack it all together and you could be losing 2x - 3x the monthly rent, not just a few hundred.

I charge a full month's rent for about 80% of my tenants. Higher risk tenants pay 1.5x or 2x the rent and account for about 20% of all tenants. You know how many of those higher-risk tenants have cost me money? Not one. I haven't lost a single dime to a single one of them becuase they're paying a lot of money up front and they want as much of it back as they can get. Some of them still pay for cleaning and repairs but it's usually pretty minimal and they get the majority of their deposit back.

The ones that burn me are the ones with only a month of rent. It doesn't happen often but they are the ones that leave with several thousand in damages or fail to pay their last month of rent and then abandon the property and leave it filthy.

 

Originally posted by @Nathan G. :
Originally posted by @Dennis M.:

I find using the rental rate as a security deposit to be difficult in lower income areas and hard to compete with other property owners that offer much less . I typically ask for half the rent price as a security . At the end of the day If they are going to trash the place another few hundred isn’t going to really help much and there’s an opportunity loss by letting rentals sit without a good qualified tenant so it’s a wash in my market . I’ll take the fast nickel over a slow dime in this case

In my experience, it's usually more than just a few hundred. Tenant fails to pay rent and abandons the property or is kicked out. You could lose that month's rent, utilities, and be faced with $500 - $1,000 in cleaning and repairs. Tack it all together and you could be losing 2x - 3x the monthly rent, not just a few hundred.

I charge a full month's rent for about 80% of my tenants. Higher risk tenants pay 1.5x or 2x the rent and account for about 20% of all tenants. You know how many of those higher-risk tenants have cost me money? Not one. I haven't lost a single dime to a single one of them becuase they're paying a lot of money up front and they want as much of it back as they can get. Some of them still pay for cleaning and repairs but it's usually pretty minimal and they get the majority of their deposit back.

The ones that burn me are the ones with only a month of rent. It doesn't happen often but they are the ones that leave with several thousand in damages or fail to pay their last month of rent and then abandon the property and leave it filthy.

 I agree wholeheartedly, the issue is for me in tough areas is That the other landlords offer their units at much less security some not even taking a deposit ! If somebody is paying out 500 bucks to get in down the road versus 1000 for your similar unit it’s much more difficult to rent that out if not impossible. Like I said a few hundred bucks isn’t going to go far if they need evicted and or trash the place out . If someone’s market can get them double or triple the rent for a security then by all means get what the market can bear . 

 

@Brandon Sowers  

I commend you on looking at this in a way that is going to help the tenant move ins easier.

I'll share an interesting data point with you.  I live in the San Francisco Bay Area where we have some of the highest rents in the United States.  Let's say you go and rent an apartment in a sparkling modern building in downtown San Francisco.  $3500 a month for a 1 bedroom would be very normal.

Now you would think you would be putting down at least $3500 deposit, right? Nope.  If you've got a good income and a good credit score your deposit is more like $1000.

Why do these very sophisticated PM firms like Essex and Prometheus offer such easy low-cost move-ins?  

It's because they've done the math and calculated the risks. Over a large volume of tenants its better to make sure your building has generous move-in conditions (because your competitors sure do) especially when the building is new and getting it filled to 100% as quickly as possible is the #1 goal.

These larger PM operators have found that good credit scores + good income means = low risk for damages or non payment of rent.

Now the question is can this work in lower income properties?  I think the answer is yes. I think 50% of the first months rent is perfectly reasonable deposit if there is good credit scores (700+) and good income. 

@Carlos Carbajal

Our firm actually does offer flexibility on security deposits on most of our multi-family units. That is, if the owner agrees. For example, if a tenant meets our requirements and has a credit score over certain amount, they would qualify for 1/2 of the standard full months rent security deposit.  Unfortunately, in our market, tenants rarely qualify for this "special". With lower rents, come lower incomes... 

Originally posted by @Theresa Harris :

Interesting discussion.  If the tenants were good in their previous rental, they should get most if not all of that deposit back.  They are still out of pocket for a bit which can be a challenge for some.

Here in North Carolina, a property owner/manager has at least 30 day to process security deposits. If there are charges, you can send an interim accounting letter giving you an additional 30 days. Because of this, often tenants will have to pay 1st months rent + a security deposit on their new home all while waiting up to 60 days to get their previous deposit back. 

I agree with others saying if they cant afford it they are not qualified. Especially if they want to try and dip out midway through the month, I'm sure they'll think twice because they have a $1500 deposit to lose. 

I enjoy reading these discussions and have become more open to it as a property manager. I think doing it based on credit score and income is smart. It sounds good until a unit is left trashed but I have never had to use an entire security deposit and I've had $9000 deposits where we took $7k because the unit was in such bad shape. Then again, if we only had 1 month security...we'd be out of pocket. It warrants further discussion and thought if you want to stay competitive as a larger business.