Alex Smith here from Evernest in Chattanooga with another edition of “Questions Owners Ask.” Today’s question is, “Should I require a security deposit on my rental house?”
As a rental property owner, ensuring your home’s value through different tenants is incredibly valuable. But what are your options? By requiring a renting security deposit upon move-in, you can ensure that any property damages you find upon move-out can be covered with these funds.
In this article, we’re going to take a closer look at what security deposits are, how they work, and whether or not you should require a security deposit on your house.
When it comes to deciding whether you should require a security deposit on your house, keep in mind these essential factors:
A renting security deposit is an amount of money you request from a renter before their move-in. This deposit typically depends on the amount of the monthly rent payments. The idea behind a security deposit is that it helps to protect your home from any potential damages incurred by the tenants.
While you aren’t legally required to receive a security deposit from your tenants, it is in your best interest to do so. This way, tenants will hopefully be encouraged to take better care of your property in hopes of getting their deposit back upon move-out.
Tenants are more likely to:
The goal is for the tenant to want to make your rental home as spotless as possible. They might even repaint the home’s interior if they chipped, scuffed, or otherwise removed paint simply because it may be cheaper to do it themselves than to let you hire someone to do it later and pay it out of your deposit.
The short answer is yes. You should always require a security deposit for your house.
Security deposits mitigate some of the risks you take on bringing a tenant into your house to live for at least 12 months.
Take this rental horror story as a prime example of why you should always require a security deposit. One rental property owner decides not to require a security deposit while her house was on the market. Now, a year later, this same owner has to evict the tenant. Once she got into the house and was able to see its condition, she found $3,000 worth of damage. Now, a year later, this same owner has to evict the tenant.
Unfortunately, this story has a sad ending for this particular owner. She was left with a lot of work to be done to the house and zero safety net in place.
The moral of the story is that a security deposit creates a safety net.
Keep in mind that even if you require a security deposit, you are not necessarily eliminating the risk of work needing to be done when a tenant moves out. The deposit will at least create some semblance of a safety net.
As a rule of thumb, you can typically require a security deposit equal to one month’s rent upon move-in. That figure tends to be industry standard. You can require a double deposit for tenants with low credit scores as long as they are not Section 8. Here are a few other requirements to keep in mind.
Across the country, it is entirely legal for landlords to collect security deposits of their choosing. The specified maximum amount will be dependant on the location of your rental property. In some states, such as Texas or Illinois, there are no limits to the amount you can request as a security deposit.
Not only do you want to know what your local laws are, but also keep in mind the market. You want to keep your property competitive, and asking for too high of a security deposit compared to other properties might deter potential tenants.
Make sure you collect the total sum of the security deposit before a tenant’s move-in date. You can fully detail this information in the lease agreement to have no doubts about due dates. Should your tenant fail to complete the payment, you can cancel the lease agreement and move on to another.
When doing your research, be sure to look into the state requirements for holdings of security deposits. Some states will require deposits to be placed in separate bank accounts.
Every state has its laws regarding how long you have to return any tenant’s security deposit funds to them. Typically, states require you to return the deposit anywhere from 15 to 30 days after the move-out day.
Remember that you cannot just keep security deposits on a whim. The legalities surrounding what funds can be used from a security deposit on your home are detailed by each state. Some examples might include:
Any time you plan to keep any funds from the security deposit, make sure you keep a written record. For example, any cleaning services hired to get your property back in its original condition should provide receipts that you can use should the tenant try to fight you regarding this financial matter legally.
If you’re wondering if you should require a renting security deposit, the answer is yes. Security deposits will not deter any quality tenants away from your property, meaning that the benefits far outweigh any downsides.
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.