Two months security deposit, too much?

Question

Should I start charging two months rent, the maximum legal amount in California, for the security deposit before a tenant moves in? Or, will that be too much and scare off potential tenants?

Previously, I've always asked for a month's rent or even less for the security deposit. With my current security deposit, its about five hundred dollars less than the month's rent.

But, after a situation where a tenant threatened to break the lease, I realized how ineffective that smaller security deposit was- it wouldn't have been enough if the place had been vacant for a month or longer despite a reasonable attempt to find a replacement tenant. And, that's assuming that the tenant hadn't caused any damages beyond normal wear and tear.

So, the only way I would have recovered the rest of the amount a tenant owed would have been to go after them in small claims court. Even though there would have been no lawyer fees because lawyers are barred from small claims court in California, it seems a lot of landlords here aren't proponents of going after the tenant in that system because of the court costs and the time and hassle it would take to pursue that money.

By charging two months rent for the security deposit, you're flipping those courts costs and time from the landlord to the tenant. Now, its the tenant who has to go through all that hassle and work if they want to recover that money. Instead of the landlord deciding its not worth the cost and money to pursue the matter, its now the tenant who has to decide whether or not they want to spend that time and money to pursue the landlord.

Let's say the rent was $2000 per month and the security deposit was $1800. The tenant breaks the lease, and the place was vacant for 1.5 months despite reasonable attempts to find a replacement tenant. In this scenario, the tenant breaking the lease costs the landlord $3000 but the security deposit would have covered only part, $1800, of that loss. To recover the rest of the $1200 in losses, the landlord would have to decide whether or not to go to small claims court to recover that amount. And, a lot of landlords decide its not worth it to pursue that money and therefore take a $1200 loss.

But, what if the rent was still $2000 and the security deposit was now $4000? The tenant breaks the lease, and the place was vacant for 1.5 months despite reasonable attempts to find a replacement tenant. In this scenario, however, the tenant breaking the lease costs still costs the landlord $3000 in losses but now the security deposit is large enough to cover that amount. You'd keep $3000 of that security deposit and return $1000 of it to the tenant. If the tenant is unhappy about that amount, its the tenant who has to decide whether or not to go to small claims court to recover more of their security deposit back. And, a lot of tenants will decide its not worth it to pursue that matter in court.

Even if you win in court, it seems like landlords have a hard time winning a judgement beyond the initial security deposit. In that case, shouldn't landlords ask for the highest amount for the security deposit that they can legally ask for?

Finally, a two month security deposit seems like it could be another screening tool. If a applicant has enough money to pay two months rent for the security deposit, then that person is probably a better applicant than somebody who can only afford to pay a month's rent for the security deposit.

What can go wrong if you ask for the legally maximum amount for the security deposit before the tenant moves in?

Elizabeth Colegrove · Answer

I charge one months rent for the security deposit. On the other hand I have a buy out or break lease clause. This gives the tenant a "out" if life changes. This pays me enough to "deal" with the tenants. At the same time the tenant can still break lease while it has been "painful" enough they only do it when they REALLY need/want too!

John Thedford · Answer

IMO the higher the security deposit the better. If they have enough money to pay a higher deposit that might be a good sign they will be able to afford the monthly rent without problems. I just had a situation where a tenant moved out and told me to keep the deposit in lieu of rent. I now collect a minimum of 1.5 times the monthly rent as a deposit. Give the tenant a good reason to do the right thing.

Sarah Lewis · Answer

I was seeking to charge more than one month's rent for the security deposit as a way to deterrent against the tenant breaking the lease. A break lease clause could serve the same function, but its my understanding that such a clause would not be considered legal in California.

Franklin Romine · Answer

@Sarah Lewis I would keep a $2,000 deposit. It will give you a larger pool of applications. If your property is priced right on the market you should have very little or zero vacancy. Mastering the Art of screening tenants and digging in and really listening to there prior rental history and how long they want to stay at your property prior to move-in will benefit us far more than a 2 month security deposit.Frank

Elizabeth Colegrove · Answer

Sarah break lease clauses is very legal in California at least Central Valley. I have had to use it many time! From my experience a large security deposit isn't a deferent. Without being difficult I am confused why it is mention. In all of the states I operate in, unless you have a break lease. You can only charge for "damages" so time the place is empty and costs to rerent but not landlords time. Or you can do a breakleast fee. A set amount to break the lease.

Susan M. · Answer

I was going to suggest this as well. In our state you have to pay interest on any deposit over one month's rent so know your laws. I also know that asking double deposit in my area would remove 99% of my applicant pool.I now either do month to month with risky tenants or I offer 'early lease termination' for good tenants with a fee that is generally 1.5 times my rent which makes letting them out of their lease early worth it to me and it's an easy out for them. Another forum I belong to has a member whose tag line is 'find out what people want and let them pay you for it'. If people want an 'out' on a lease, give it to them, for a fee.

Richard C. · Answer

ESPECIALLY well qualified tenants. Charging more than market in SD will have the same impact as charging above market in rent. Those who are strong enough candidates to have choices will exercise them. You will be left renting to candidates with isses, who can come up with the SD.

Mike M. · Answer

Agree with Fred Heller . I've asked for one month's rent as SD but got feedback I lost potential renters to another property that had a security deposit 40% of mine. Most properties around here have deposits in the 75% of rent range, which is where I'll have to go to in order to drive more folks to my rentals.

Fred Heller · Answer

The substitution principle answers your question. If there are similar properties available which only ask for one month's rent security deposit, no one is going to pay a two month security deposit for your property, even "well qualified" tenants.

Josh L. · Answer

Out here in Southern California, I hardly see anybody ask for 2 months for their SD. Rents here are high, much higher than most of the rest of the country. If a tenant has to pay the first months rent as well as 2 months for their SD, then I'm afraid you'd price yourself out of the market because a lot of tenants won't have saved enough for that amount. If more tenants knew how to save, they'd be buying a home instead of renting.