The purpose of charging a security deposit in connection with a rental property is to cover potential damages a tenant might inflict on a unit. If a tenant were to splash some bleach in the carpet, for instance, the real estate investor could use the security deposit would be used to repair it. Security deposits, therefore, are simply part of income property ownership and inherent to smart real estate investing.
Okay, let’s look.
Should You Charge a Security Deposit?
Yes, charge a security deposit and the bigger the better. You inherit less of a financial burden with deadbeat tenants, and the tenant who has money at stake is more likely to respect the property. Real estate investors who do not charge a security virtually let in tenants who have nothing to lose by damaging the unit.
How Much of a Deposit Can You Charge?
Many states limit the amount that can be charged for a security deposit, and sometimes the state limit is based on other factors such as the age of the tenant, whether the unit is furnished, what kind of rental agreement is being used, or whether a pet or water bed is being permitted. Real estate investors would be wise to learn what state limits are and to charge as much as the legal limit and the market will allow though it is not uncommon for the market to dictate a security deposit below the legal limit set by state and local law.
If you charge different security deposit rates to different people, you can be headed for trouble because a claim of discrimination could be held against you in a lawsuit. Always be sure that your security deposit policies remain consistent with every tenant and avoid even the appearance of discrimination.
Can You Increase a Deposit?
Yes, but it depends on the situation. You cannot raise the security deposit during the term of the lease unless the lease allows it, for example. With a month-to-month tenancy, on the other hand, the security deposit can be increased the same way that the rent is increased, by giving the tenant proper notice (typically 30 days). If your rental properties are under rent control, raising the security deposit may have even more restrictions. In this case, real estate investors who own rental property under rent control are advised to understand the restrictions before raising deposits.
Must You Pay Interest?
State laws vary regarding security deposit interest requirements; whereas some states impose no regulations, many states require that landlords accrue and pay interest on deposits. It’s best that you learn the security deposit regulations imposed in your state.