Still using security deposits?

Question

What is everyone’s thoughts on using security deposits vs other methods? The last few places I have personally rented have not had security deposits but rather smaller non refundable fees during application process. Looking for advice on small multi family unit property. New investor and any advice helps.

Thanks

Brie Schmidt · Answer

@John Warren - I still take SD's in Chicago. I prefer them over move in fees.  But I also know the rules of the RLTO very well and have zero concerns about breaking them

John Warren · Answer

@Steve Staggs a lot of this depends on where you are located. For instance, here in the Chicago area you would be crazy to accept a deposit instead of a move in fee if you live in the city proper. In the suburbs, I still use security deposits. If your local laws allow for deposits then I would strongly recommend them. Nothing encourages good behavior like a security deposit when a tenant gets ready to move out. Even good tenants will do dumb things that will cost you time and money. For instance, one tenant left a perfectly good couch in his storage unit in my Berwyn building. No big deal, except I have been busy so now the dumb couch has been there for months... If I had used a deposit at that time then I would have had some leverage.

Theresa Harris · Answer

I still use security deposits.  It is a good incentive for the tenants to take care of the place and return it in a good condition, so they can get it back.

Steve Morris · Answer

Still think security deposits are the best.

However, I think things like surety bonds or damages insurance will be a better solution for both the tenant and landlord.

Crystal Smith · Answer

We'll use SD when we determine may be a high risk, otherwise, we use move-in fees. High risk meaning their falls into our conditional approval range.

Steve Staggs · Answer

Where would I be able to find the restrictions in my area on how much I can charge for a security deposit? I am glad that was brought up because I had always thought it was equal to one month's rent. However, it seems like if I can charge slightly more that might not be a bad play?

Richard Borthwick · Answer

I'm in Ontario, Canada and shockingly we aren't allowed to collect security deposits, only last months rent.  So by the time the tenant moves out I have nothing to cover damages.  I've been looking at insurance products that cover if the tenant doesn't pay rent or causes damages, but am struggling with the cost.  Any experience share using such insurance products would be much appreciated!

Sarah Brown · Answer

I  still use security deposits and may charge more depending on risk.  I provide full details on what it takes to get that full security deposit back.  There is a company called Rhino that helps facilitate the security deposit portion if you do not want the liability of carrying it.  It's pretty interesting set up.

Nathan Gesner · Answer

I'm in a market with no restriction on the amount charged for a deposit. I charge 1x, 1.5x, or 2x the rent for a deposit, depending on the tenant's level of risk.

There are a couple alternatives I'm aware of:

1. Surety bond. Tenant is charged a non-refundable fee, somewhere around 15% of the deposit amount. Instead of a $1,000 refundable deposit, they pay a $150 non-refundable fee. If they leave the unit dirty or damaged, the Landlord bills the tenant or pursues them via collections.

2. Billing authorization. Tenant qualifies with a checking account and a credit card (both) showing the accounts are active and with a minimum balance. They sign an agreement authorizing the billing company to charge their accounts if they leave owing money. Tenant leaves the unit dirty or damaged, Landlord files a claim that is paid immediately, and the billing authority collects the funds from the renter's account(s). If the renter closes their accounts in an attempt to hide, the billing authority pursues them via collections.

In both cases, I believe they have to be renewed each year. For example, a tenant using the billing authorization may pay $120 to one year of coverage up to $1,400 and then they pay another $120 for the second year of coverage. It can get expensive for a renter that stays 3+ years.

I use MyObligo which is a billing technique. It's fairly simple to use and a lot of the renters appreciate the ability to spend less to move. However, I don't know if it's available to small Landlords and I don't know if it's worth revamping your processes for just a few renters.

Still using security deposits?

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