Leasing

Establishing Your Security Deposit: How Much to Charge

December 5, 2022

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How Much To Charge For A Security Deposit?

Before you hand over the keys to your new tenant, you need to collect the security deposit and the first month’s rent. 

But how much should you charge for the security deposit? 

It’s an important question and one that deserves some thought. 

The worst thing you can do is choose an arbitrary amount. 

Let’s take a look at what you should consider as you figure out what amount to charge. 

What Is a Security Deposit and Why Is It Important? 

A security deposit is the fixed figure agreed upon in the rental agreement that a tenant must pay before they move in to a rental unit. You hold the security deposit throughout the tenant’s stay at your rental, usually in an interest bearing account at a bank. It acts as a safety net for you in case they damage your property or don’t pay rent. That being said, you cannot keep the security deposit for normal wear and tear. If there is no valid reason to withhold funds, you must return the entire security deposit to the tenant at the end of their lease.

In addition to adding a layer of protection to your most valuable asset (your property) from damage, security deposits are important because they compensate for excessive cleaning costs, unpaid utilities and rent, and early termination of the lease.  

If tenants trash your property, you may be allowed by law to use the security deposit to cover the cleaning costs. This won’t include things like dirty sinks or doorknob holes in walls, but tons of leftover trash and egregious marks on the flooring could merit keeping the deposit. 

Unpaid utilities or monthly rent will entitle you to the security deposit. Tenants break the lease agreement when they don’t pay on time and in full.  

If a tenant wants to leave before the agreed-upon date in the lease, this could also merit you keeping the security deposit. However, there are limits to this. It depends on your lease terms and how long it takes you to find another tenant. 

It’s important to note that you should always provide a security deposit receipt. Or simply utilize technology for the payment so that it’s recorded automatically. Just make sure you cover your bases on this, so you have some kind of paper trail. 

Certain states like Connecticut also have security deposit assistance programs that tenants may qualify for. It’s good to have an awareness around what this means for your state. Doing thorough research will help you prepare and understand the different programs. 

How Much Should You Charge for a Security Deposit? 

Deciding how much to charge when it comes to security deposits is an important part of the move-in process. Because the security deposit is in place as a safeguard for you and your property, it’s generally prudent to require close to what your market generally charges and is permitted by law in your state and local jurisdiction. The benefit of charging a higher security deposit include having more protection from major damage to your property, but state laws dictate the maximum amount a landlord can charge.

As of 2022, these are the states that don’t have statutory limits on the amount that a landlord can charge for the security deposit on a rental property: Colorado, Florida, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, Vermont, West Virginia, Wisconsin, and Wyoming. 

On the other hand, some states have a statutory limit for the highest amount a landlord can charge, so make sure to research the laws in your local and surrounding area. For instance, in California, landlords can charge up to two months’ rent for an unfurnished property and three month’s rent for a furnished place.  

Most tenants are used to paying at least the price of one month’s rent for their security deposit. And here is a critical piece of advice, never charge less than that. You’ll want the extra protection in case of extreme damage or some unforeseeable, unfortunate event. 

There may, of course, be instances where you’ll want to be careful not to charge too much. If you’re in a state that doesn’t have a statutory limit and your property is in a location that isn’t very affluent, it might be wise to consider a slightly lower security deposit. While you want to charge an amount that still gives you security, you don’t want to scare away every possible tenant with an exorbitant security deposit.  

At the end of the day, though, be sure to charge an amount that is reasonable but gives you ample security and makes you feel protected. For example, there’s no reason you shouldn’t charge the equivalent of three months’ rent for a security deposit if most other comparable properties in your area are charging that price. 

Conclusion 

Whether you manage your properties yourself or use a property management company, deciding how much to charge for a security deposit is simple, yet important. Be sure to do your research, understand the area you’re in, have ample knowledge of local laws, and look at your competition. You don’t want to charge way more than most landlords, but you certainly don’t want to charge less. 

It’s important to find an amount that brings you comfort while reading the market properly. Remember, you don’t want to scare prospective tenants away, but you also don’t want to put yourself in a difficult position by charging too little.  

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