How Does Rent Deposit Work?

Can a Resident Move In Without Paying Deposit?

As a property owner, it’s common to require a rent or security deposit of some sort from your residents before they move in. Ultimately, this deposit will provide you with a financial cushion to cover any costs due to damages, lack of payments, etc., while the renter is in your home.

But, how do deposits work? Keep reading to find out all there is to know about rental deposits and how they should be enforced.

Article at a Glance:

It is never a good idea to let a renter move into your home without paying the full deposit ahead of time. But, it’s not always as simple as that. Several different factors playThere are several various factors that play into rental deposits.

To grasp the concept of a rent deposit, it is essential to have an understanding of the following:

• Types of deposits
• Lease terms
• Conditions notes
• Collecting interest
• Getting a refund

Types of Deposits

Understanding how do deposits work boils down to understanding the different types of deposits first. As a renter, it might seem unnecessary to have your deposits broken into two separate categories like a rent deposit and a security deposit.

Rent Deposit

A rent deposit can be a specific guarantee that the renter will not have to pay their last month’s rent. This amount is paid upfront and will cover the last month upon move out. Keep in mind that a rent deposit does not guarantee that these will be the terms of this deposit. It can also serve as a guarantee of final funds should you need to evict the resident. Either way, the terms of the rent deposit should be detailed in the lease.

Security Deposit

A security deposit is another form of security for a landlord to get any funds needed from evicting a resident. In some states, this money can also be collected to handle any property damage upon moving out. Security deposits can vary from state to state, so it’s essential to know the laws in your area.

Lease Terms

When your application has been approved to rent your home, the next step in the process is to send over the lease terms. Both parties will sign the lease, and this document will detail the relationship between you as the landlord and your resident’s requirements while living at your property.

In terms of the rental deposits, all details should be explicitly detailed in the lease terms, including the following:

• Types of deposit(s) (rent, security, pet, etc.)
• Specification of each charge
• Amount required
• When the deposit is due
• If the deposit will be used for payment
• Terms of how the deposit will be returned

Conditions Notes

Rental deposits should specifically be detailed surrounding the condition of your property. Once the lease has been signed, you should complete a thorough walkthrough of your home with your resident. Take note of any imperfections or notable items around the house that are not in working condition. Hopefully, this should be minimal. 

Ideally, your resident will return your home to you in the exact shape it was when you hand the keys over to them. The rental deposit can help to ensure they take good care of your home while it is in their hands.

Collecting Interest

A note within your lease should also specify if your resident was paid interest on the deposits paid. This is a requirement at both state and city levels, so make sure you know your details while putting together your lease. Certain cities specify the interest amount of anywhere between one or two percent.

Getting a Refund

As a landlord, you’ll hold on to the deposit funds until it is time for your resident to move out. There are terms based on regions on holding the money or keeping track of it while it is in your hands. There are also specific regulations on how long you have as a landlord to return the money to your previous resident.

Should You Allow Residents to Move In Without Paying a Deposit?

You may have a prospective resident moving into your home, but unfortunately, they can only pay a partial deposit. So, you might be wondering if you should take that partial deposit and the first month’s rent and allow them to move in.

Sadly, this is something that comes up often with people that do manage their own house. Even worse, this becomes a mistake that many people make as landlords. What happens is you listen to a story and feel bad for that person. You get the feeling that the situation is just that that person is in a bad spot at that moment. 

Contrary to what you might believe, it’s generally not the best business decision for you to not make that person pay the full deposit and pay the whole first month’s rent to move in the house.

That’s not to say that you should never allow it. If you want to do that and have plenty of money, and you are willing to take that risk, it’s ultimately your decision. Landlords have allowed it in the past and will likely continue doing so into the future.

Why You Should Always Collect a Full Deposit Before Move-In

Usually, the renter who moves in continues to have financial issues and troubles that compile. As a landlord willing to let the renter move in without paying a full deposit, you need to be prepared for that.

The best word of advice is not to take on that financial risk as an owner. Unfortunately, you should seriously reconsider your options unless you just have tons of money and a big heart and want to do that.

Final Thoughts

If you’ve found the perfect renter but they are in a position where they cannot pay the rental deposit in full before move-in, they might not be the ideal renter at all. How do deposits work shouldn’t be a question you ever have as a landlord. Instead, be well equipped with your knowledge to handle these types of situations to the best of your ability and without compromising your financial situation.

Matthew Whitaker

Matthew is the CEO of Evernest. He is a student of the book Good to Great and is passionate about building the best property management company on the planet (and maybe even the universe if Elon Musk will hurry up). You can usually find Matthew at the baseball field with his son, at a dance recital with his daughter, or at his favorite restaurant with his wife, when he’s not in the office. And if you can’t find him in any of those places, it probably means he’s traveling.