Yes, you are welcome to call me Captain Obvious on this one. While I feel like this notion is extremely apparent, it actually wasn’t to me until recently. Therefore, I think it is worth addressing.
In my case over the years, I have moved in numerous places where I pay “x” amount of a security deposit and when I move out however many years later, I get the same “x” amount of security deposit back. Simple. I wondered every time that process occurred, “What is the point of even putting it down in the first place when I just get it all back?” I think I knew the point, which was so any damages incurred by me would be covered, but those damages never realistically happened so I just figured it was merely a paperwork process of sorts that needed to be done.
Then I became a rental property owner. Good grief to the universe above! Tenants can seriously be pains in the… I’m sure I don’t have to say it. I use the example all the time of the property I have that went through two back-to-back evictions. I can unfortunately add to that story now and tell you that the perfectly good tenants most recently in there apparently took a job offer elsewhere, left the house mid-lease, and didn’t tell anyone until well after they were gone. Fan-friggin-tastic. Three sets of tenants in a row in that house! I truly never realized the true impact of abysmal tenants on my checkbook. I digress.
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
The Value of the Security Deposit
Sadly, it has taken me four bunk tenants (three from the house above and now some tenants from another property) to realize how important a security deposit really is. Even when the first couple tenants’ security deposits were being used towards turnover expenses, I still wasn’t connecting the dots with the value of that money. I’ll tell you what I always had in my head about security deposits, and then I’ll tell you what I realize now about security deposits and I think you will see the distinction.
What I used to understand about security deposits-
The money a tenant puts down for a security deposit will help me pay for any damages they cause.
What I now understand about security deposits-
Whatever money a tenant does not put down for a security deposit has to come out of my own pocket!
Translating both of these to a real-life scenario should really drive this home. A tenant puts down a $750 security deposit.
Translation of my old thought process about security deposits-
“Yay! If anything happens to the house, I have $750 of free money to use towards fixing it! Yay!”
Translation of my new thought process about security deposits-
“Oh, uh uh, only $750 of free money? You must be kidding me. That leaves me with $1250 of expenses I have to cover! Uh uh. Not okay!”
See the distinction? So far no turnover from bouncing tenants has cost me less than $2400 (which is very much related to my irritations with property management because that never should have been the case). Even the example above is more generous than reality saying I only had to cover $1250 since in actuality it has been more like $1650, if not more!
Moral of the Story?
Don’t skimp out on security deposits! They may end up being the only thing that keeps any money in your pocket. Whatever you don’t charge, you will have to pay yourself.
A Good Thought
… and one I had never thought of myself. I recently moved into a new place in Venice Beach. Granted, it’s the most I’ve ever spent for rent in my life (and the place doesn’t even have a kitchen), but for that area I’m considered to be paying a “low rent”.
The owner of the building requires anyone in the “low rent” category to pay a TWO months security deposit. Holy kidding me! I gawked at the worthlessness of me having to pay that much out of pocket just to move in and not seeing that nice amount of money until I move back out. Not a day later I found out about some new expenses the tenants who left one of my properties were now costing me, and suddenly the light bulb went off. My now-landlord is the smartest man on the planet! Charging two months’ rent as a security deposit has him doubly, if not more, covered in case I’m a heathen and rack up the damage and move out leaving him with a major vacancy. What a smart man!
I’m truly considering the feasibility of charging my tenants from here on out double the normal security deposit. First of all, it will disqualify a lot of riff raff who don’t have that much money, but it will then cover me so much better for turnover expenses should I have them! Whether I end up doing it or not, I’m not sure yet, but the point is to highlight the option of actually charging more than standard for a deposit. My landlord only does it for the “low rent” tenants (like myself, haha..) because typically they are the ones who walk out and/or cause damage, versus the ones paying thousands of dollars each month in rent as they tend to be a little more caring of the property. So you may not want to do that for all of your tenants, but depending on the applicants and/or the property or area, you might want to consider it!
Anyone else have any other Captain Obvious thoughts they care to share about covering yourself for tenant mishaps?