Renting with no security deposit or dividing the security deposit into rent
Member since 2022 · 8 posts · 7 votes
Renting with no security deposit or dividing the security deposit into rent
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3yQuote from @Alex Place:
Yes, security deposits are worth it. That's the only leverage you have that they will honor the terms of the agreement and leave the property in decent condition. Even if they start off well, life happens and good tenants can turn bad.
Your philosophy on Landlord greed is naive. You know what happens when you rent a $2,000 property for $1,500? You get lower-qualified renters that treat your property like a $1,500 rental instead of a $2,000 rental. I work for nearly 150 different owners and a good percentage of them came to me after losing tens of thousands, sometimes hundreds of thousands, despite renting well below market. Like you, they didn't want to be seen as greedy Landlords and they thought the tenants would be grateful for the lower rent. I would love to travel into the future to see how long it takes you to change your mind.
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20 Replies
- 3yAlfath AhmedBusiness MemberReal Estate Agent · Columbus, OH · Member since 2022 · 1k+ posts · 1k+ votes
Quote from @Alex Place:
I own a few rental properties and had a question that I wanted to run by you all. My wife and I own a small real estate investment company and while our goal is to make a living off this company, we don't want to do it on the backs of our tenants. We despise slum lords and land lords who are jacking up rent just because the market claims we can. If my mortgage is $1,000, we're not charging the market rent of $2,200. We might charge, $1,500 or $1,750. Our hopes are to help people who are less fortunate than us, raise the total wealth of the community, and attract interest ensuring the properties are rented out full time.
My question to you all is, are security deposits worth it if you have vetted the tenants properly? We all know that a large barrier getting renters in is the ridiculous practice of first months, last months, and security deposit upfront. We are highly considering eliminating our security deposits knowing that we are taking on a risk.
Thoughts?
I would not recommend voiding the security deposit. You are shooting yourself in the foot by doing this. No matter how much you are are vetting the tenant, you never know what they might do to your property or what their boyfriend/girlfriend/family member's will do. They may not have the money to afford paying you for the damage. That is when you can lean back at the end of their lease and use the security deposit to cover those damages. Also, it is really hard to judge a book by its cover even after doing a background check, credit check, and gut check. There is always a risk of eviction which you lose out on the security deposit to if you have to evict them.
Also, I would charge slightly under market rent. So, for example, if market rent is $2,200 and my mortgage is $1000. Then I would charge ~$2000. There are other expenses as an investor like maintenance, property management, capEX, vacancy. If you don't take those into consideration when renting you will never be able to scale.
ReafCo | Ahmed Group 534 Reviews - 3yRandall AlanPro MemberInvestor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
Quote from @Alex Place:
I own a few rental properties and had a question that I wanted to run by you all. My wife and I own a small real estate investment company and while our goal is to make a living off this company, we don't want to do it on the backs of our tenants. We despise slum lords and land lords who are jacking up rent just because the market claims we can. If my mortgage is $1,000, we're not charging the market rent of $2,200. We might charge, $1,500 or $1,750. Our hopes are to help people who are less fortunate than us, raise the total wealth of the community, and attract interest ensuring the properties are rented out full time.
My question to you all is, are security deposits worth it if you have vetted the tenants properly? We all know that a large barrier getting renters in is the ridiculous practice of first months, last months, and security deposit upfront. We are highly considering eliminating our security deposits knowing that we are taking on a risk.
Thoughts?
Your security deposit is leverage for the tenant to comply with the terms of the lease.
When your tenant is ready to move out and they have left 75 nail holes in your walls without patching them you will be glad you had a month’s deposit as compensation… and I have had 250 before! Or scratched up the paint with their furniture, or the 100 other ways they could damage your apartment… not change the air filters, leave the unit a mess that requires a $200 cleaning to prep for the next tenant, etc, etc.
When your tenant decides to break there lease with no notice and you are now vacant for 2-3 weeks while you work to fill your unit you will be glad you had a security deposit.
When your prospective tenant said they were moving in and then ghosts you after you waiting on them for 2 weeks you will be glad you collected a security deposit to hold the unit.
You can be as friendly as you want to be and screen as much as you want… but you only put yourself at a disadvantage as a landlord by not protecting yourself.
Tenants expect a security deposit. Sure, you can be new-wave and go the other direction, but I won’t be following you. 😜
Do you wear your seatbelt? Ask yourself why? No one means to crash!
All the best!
Randy
- Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes3y
Aloha,
You know the saying....Stuff Happens! People get divorced; fall off the wagon; have unforeseen major medical problems; become victims of accidents or crimes; lose close family or friends and fall into depression, etc. None of this is foreseeable by any amount of vetting or a 15 minute conversation with someone. It is one thing if you want to operate as a charity, but you better have deep pockets to do so if you are throwing out good business practice. The Security Deposit is just that, a small amount of security...for YOU, "in case".
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes3y
What if your mortgage is zero , are you going to charge even lower rent ? By charging less rent you are hurting yourself , not helping someone else . If you lower your rent and requirements , you will get lower grade tenants , who have more potential not to pay and or damage the unit .
No , security deposits arent worth it , rarely do they cover the damage . And if there is no damage , the tenant gets the money back .
Help those less fortunate by giving to a good local charity
- 3yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
It depends on where you live, but at a minimum you need a security deposit. Where I am, that is capped at 50% and we can't do last month's rent. I've heard of some places in the US that remove the deposit through some insurance thing (I'm sure a search of BP will turn up those posts). While many tenants are good, others aren't. What happens if they trash the place, don't pay rent and skip out? I've had great tenants and I've had a couple that fell in the last category-one who had been along term renter and then something happened in her personal life (guessing drugs) and she quickly stopped paying rent and left the place a mess.
While the costs can be high for first time renters, for seasoned renters when they move out of their last place, they should get all of their deposit back if they left it in good condition, so the outlay of money is a short term thing (ie 1 month). Similarly if they have to pay last month's rent at the time they sign the lease, then they don't have that expense when they are looking for a new place (ie they didn't have to pay rent for that month, so have that money to put towards a new place). While I'm sure some live month to month, others have savings (as should every one).
- Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes3y
Quote from @Theresa Harris:
It depends on where you live, but at a minimum you need a security deposit... While I'm sure some live month to month, others have savings (as should every one).
Pretty consistent statistics from variety of sources show 3 out of every 5 adults in the US are living paycheck to paycheck. It takes very little to disrupt your life in that situation.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
Quote from @Alex Place:
Yes, security deposits are worth it. That's the only leverage you have that they will honor the terms of the agreement and leave the property in decent condition. Even if they start off well, life happens and good tenants can turn bad.
Your philosophy on Landlord greed is naive. You know what happens when you rent a $2,000 property for $1,500? You get lower-qualified renters that treat your property like a $1,500 rental instead of a $2,000 rental. I work for nearly 150 different owners and a good percentage of them came to me after losing tens of thousands, sometimes hundreds of thousands, despite renting well below market. Like you, they didn't want to be seen as greedy Landlords and they thought the tenants would be grateful for the lower rent. I would love to travel into the future to see how long it takes you to change your mind.
The DIY Landlord Book4.7244 Reviews - Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes3y
Quote from @Alex Place:
I own a few rental properties and had a question that I wanted to run by you all. My wife and I own a small real estate investment company and while our goal is to make a living off this company, we don't want to do it on the backs of our tenants. We despise slum lords and land lords who are jacking up rent just because the market claims we can. If my mortgage is $1,000, we're not charging the market rent of $2,200. We might charge, $1,500 or $1,750. Our hopes are to help people who are less fortunate than us, raise the total wealth of the community, and attract interest ensuring the properties are rented out full time.
My question to you all is, are security deposits worth it if you have vetted the tenants properly? We all know that a large barrier getting renters in is the ridiculous practice of first months, last months, and security deposit upfront. We are highly considering eliminating our security deposits knowing that we are taking on a risk.
Thoughts?
So you don’t want to charge market rent or a security deposit. You are running a charity. To each his own.
@Alex Place Wow! I love your philosophy and business plan. Yes, if you vet your residents properly, you are really not taking on any risk. So why require a security deposit at all. Also, why don't we stop charging late fees? Why don't we ask our residents to pay their rent at the end of each month of residency. I call on all BiggerPockets members to adopt your business plan. Let's do the right thing!
The ability to come up with a month's rent and a security deposit, is part of my screening. Tenants that can't come up with that chunk of money up front, are on the struggle bus. My first eight properties were in a "D" neighborhood where almost everyone was constantly struggling. The security deposit is especially important in that environment if you plan to let people do payment plans when they have an "emergency" if you don't want to lose money. We found that having the nicest and most expensive properties in our neighborhood got us the best tenants willing to live in the given neighborhood.
Hi Alex,
You and I share a similar philosophy, which is always nice to come across in a fellow landlord and RE investor. It's unfortunate some of the less-than-amiable responses you've received, but unfortunately that's just how most people are in this "line of business." A landlord friend of mine is raising one tenant's rent from $1500 to $1800 at the end of their lease next month simply because other rentals in the area are going for between $1800 and $2000. To me, that's an absolutely insane hike all at once. I raised one of my tenant's rent by $50 with a 90 day notice ahead of time and still felt a bit bad about it since I had no need to actually raise rent outside of simply just increasing rent a little to keep up with inflation a bit and in case rent control is ever enacted and whatnot.
While the security deposit might be sizeable and surely may put a strain on a tenant's finances, I wouldn't recommend ever skipping out on having the security deposit and first month's rent paid in full prior to move in. This is the only guaranteed money that you'll have in your hand from the tenant, and you may need this to cover unpaid rent, utilities, or tenant-induced damages. Further, you don't want to waste your time with a potential tenant who can't put in the effort to save up the money necessary for the security deposit; a lack of this ability is a huge red flag in appropriate planning and financial skills, and that may become a problem that ultimately falls onto you as the landlord and property owner. Depending on the property's finances and neighborhood class, it may be helpful to only charge first month's rent and a security deposit upon move-in, rather than first, last, and deposit. This is what I typically do and haven't had any issues arise.
Also, just to expand on your example for potential rent prices: I hope you're not just going off the mortgage alone. I would recommend to include something for future maintenance and repairs into the cost as well. For example, your mortgage (PITI) might be $1,000... consider also $150 on top of that, set aside, for repairs/maintenance. That way, anything you charge for rent above the $1,150 would be pure cash flow, that you ideally shouldn't have to dip into for any fixes or maintenance. This is a practice I've done from the beginning, and has never done me wrong. It might eat into my cash flow numbers, but I sleep very comfortably knowing that I have maintenance and repairs accounted for if something should arise.
With that said, whether you're charging $1500, $1750, or $1900, it doesn't matter in the grand scheme of things as long as (1) you've got a positive cash flow with decent padding, and; (2) you're comfortable and happy with that cash flow number. Not everyone invests the same, after all.
Best!
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes3y
@Alex Place always collect a security deposit. ALWAYS state in your lease that the security deposit CANNOT be used for any portion of the rent, ever.
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes3y
@Alex Place never mix security deposits and rent $. They are 100% mutually exclusive.
- Investor · Canoga Park, CA · Member since 2016 · 114 posts · 50 votes3y
@Alex Place I did the security deposit in payments once, and it didn't work out. The problem was that the tenant really did not have any buffer for money at all, so every month, that rent was a little bit late and not even completely paid. They were very nice people but were not able to afford the property even though the rent was low. If you are giving them such a great deal in the 1st place. I'm sure they can find someone to help them with a security deposit or save up a bit for it. Your intention of helping peope with lower rent will already put them in a better position that another property with market rent.
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes3y
@Alex Place, if those are your goals why not start a non-profit organization whose mission is to provide affordable housing. That way you could be using more of other people's money to accomplish your goal and paying yourself a wage for your work towards this mission.
Conversely, the tenants you give a discount to are the "best qualified" tenants you could find and may NOT need that sort of break. Why not charge FULL MARKET rent and then donate the "extra money" to a charity that provides rental assistance directly to those in actual need.
On the surface your motivations sound noble, but I don't see how your approach would make an inroad into the issue you hope to work on.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Alex Place:
I own a few rental properties and had a question that I wanted to run by you all. My wife and I own a small real estate investment company and while our goal is to make a living off this company, we don't want to do it on the backs of our tenants. We despise slum lords and land lords who are jacking up rent just because the market claims we can. If my mortgage is $1,000, we're not charging the market rent of $2,200. We might charge, $1,500 or $1,750. Our hopes are to help people who are less fortunate than us, raise the total wealth of the community, and attract interest ensuring the properties are rented out full time.
My question to you all is, are security deposits worth it if you have vetted the tenants properly? We all know that a large barrier getting renters in is the ridiculous practice of first months, last months, and security deposit upfront. We are highly considering eliminating our security deposits knowing that we are taking on a risk.
Thoughts?
Thoughts....... do you really want them?
Your on a solid game-plan to heart-break and possible bankruptcy. That's a fact, not just opinion.
Your focus is being cheaper, as cheap as possible. You attract what you do, so your looking to attract people who can't afford that kind of unit, but want it anyways. That's called an entitlement mindset. Know what tenant's are most prone to do unit damages? yup, entitlement.
So your doing everything to attract and incentivize bad tenant actions, off an assumption that the tenants will "appreciate" what your doing for them. Lol, that NEVER works. Look up various landlord complaints and this is a universal message, that landlord did xyz and holy-cow these people just didn't care, they did ___. yeah, welcome to reality.
If you really wanted to "give-back" you'd either (a) start a charity, because you basing this like one but without the tax and other advantages.
Or you'd (b) charge market rates, do things normal and standard, and than offer good-tenant incentives. Say offer a rent discount for on time payments, or on good maint inspections. You'd reward good actions.
Things that are given out freely, are held in like kind value, free.
- Rental Property Investor · Laurel, MD · Member since 2016 · 383 posts · 382 votes3y
No one ever gets into any of our units without 1st months and security deposit. There's no exception! Our tenants rent is market rate when they first move in. We allow the rent to be no more than $150 below market rate. It doesn't matter what the mortgage is or isn't, you still have property taxes increasing, building insurance going up and cost of maintenance. If market rate is $2,200 no tenant is going to be paying $2,000 or less with us.
As others have suggested, you might want to change your business model to a Non-profit. Good luck with your adenture.
I'm with you here. My philosophy with landlording is to be a value add. I am able to leverage what I know to get myself into smoking hot deals and can afford to do things like you mention and beyond that, set up my tenants on the path to ownership if they'd like to and complete financial stability. I'd say, weigh the risks, but in the end, follow your heart, in combination with a rational mind.
- Rental Property Investor · St. Louis, MO · Member since 2018 · 2 posts · 6 votes3y
Greetings Alex! As a small landlord/property management company, I would NOT avoid a security deposit EVER. It's an incentive for the renters to return your property in the best condition, in my experience. First/Last Months' Rent Plus a Security Deposit has been a part of this business for as long as I can remember...even in my days as a tenant. I have never questioned it, simply paid it.
When searching to purchase a home, you do not look to purchase a home with zero dollars in the bank...you MUST have your closing costs and down payment available for VOD, no exceptions or you wait until you have it available. Same concept, IMHO, when vetting potential tenants. Although we're unable to verify the availability of funds, we set a date for the move-in costs to be paid in full or the property goes back on the market. I have learned many lessons from being "Nice" in an attempt to help folks, a horrible sense of REGRET.
Nothing in life is free. We make sure you have a safe, nice, place to live...we fix things expeditiously when you place maintenance requests - in return, you pay your rent on time. PERIOD! It's a win, win!
We helped some folks out a few years back, our property was returned in the worst condition ever. Simply put, this is a business, not a charity. I've always taken pride in keeping up the rentals where I've lived by always returning them in the same if not, better condition than when I rented them. It's the right thing to do. Unfortunately, renters today could care less, especially during COVID-19, which was a crutch for many.
In closing, not all renters are bad BUT you have no idea which one is which...so, do not take any chances.
Just my 2.5cents. I wish you well.
Respectfully, Security Deposits are like underwear for landlords--it's what will cover your A$$ when your pants are down and you realize they've trashed the place.
Don't think if someone is a friend or a good person-- it's naive. I guarantee a blind will be broken, or they will leave excessive trash that you have to pay someone to pick up. When that happens, you will feel like the biggest shmuck, and FYI this is coming straight from experience working with a charity-- those people TRASHED my houses. No feelings in business, people have accidents and make mistakes, most of the time innocent, some of the time it's friends coming over, who cares-- it all ends up the same thing-- your security deposit is the only thing you can grab from when someone stops their lease, they are 100% removed from the situation.
You aren't doing them a favor, you're doing yourself a disservice.
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