How Do you Determine Security Deposits

[Paul Stout]

I am working through an analysis on a SFR and I am researching realtor.com and Craigslist to make an informed decision on what I can expect to get in rent. As I am getting closer to acquiring my first property and placing a tenant, I have to decide what I want to charge for a security deposit. I also need to decide whether or not I want to get the first month's rent or the first and last month's rent up front.

In my research I have seen spreads on similar properties that are too wide to make an informed decision.  On one property with a $1075 monthly rent and a $1075 security deposit all the way to a $1625 monthly rent with a $5000 security deposit.  Some people ask for first month up front some don't and some ask for first and last. 

Please chime in and let me know how you determine what the security deposit should be and if you charge any rent up front.  I remember reading somewhere that charging the same amount for a security deposit as the monthly rent was a bad idea because it connotes a monthly payment to a tenant. 

From my research it looks like the market rent is between $1400 and $1500 for this particular SFR. I am thinking about charging first month rent up front and a $2000 security deposit. Thoughts?

[Christian Brodin]

Paul,

I’m a bit late to the game of answering you, but here I go anyway.

When it comes to determining your security deposit I usually follow the following check list:

1. Understand what a basic unit turn will cost you if a resident moves out or is evicted and have more than normal wear and tear. If your basic unit turn is $1,500 and you only charge $300 for security deposit you will have substantial losses every time you have a "bad" tenant. This will set the bar for how low you can go in absolute terms. (if you find that your neighborhood has too low security deposits you may want to reconsider the area)

2. Do a market survey to see what your competitors are charging. Make sure you determine if the quote they give you is for perfect credit, and no remarks on the screening results. Some properties will vary the security deposit based on the credit score of the applicant.

3. Sign up for your local landlord association!!! (i found this online for Illinois http://www.irpoa.org/) They will most likely have all the documents you need. Like applications, screening criteria, standard applications etc. Usually, they can give you legal advice too, and will be able to give you all the information you need on security deposit regulations in your area. This investment is worth its weight in gold and can save you from many, many problems down the road.

4. Subscribe to a resident/application screening service (one time or ongoing). Usually your landlord association can help with this too. Again, an investment that is worth its weight in gold!! You want to check this with your attorney, but I believe that you can charge different security deposits based on the outcome of the screening results.

All said I prefer to have one month rent for security deposits. That is if the market allows for it. The worse credit the more I would charge, but again you need to verify this with your lawyer, and or landlord association.

As for rental criteria. Here is a check-list for things that you should consider/request at time of application.

You should have your standards in writing, and follow the same guidelines for all your applicants and residents (NO DISCRIMINATION!)

Generally required information may include:

 Applicant on-time for showing appointment

 Positive Government Issued ID

 Fully completed application for every occupant 18 years and older

 Applicant(s) able to pay complete deposit and rent deposit at time of lease signing

 Proof of adequate income which could include any of the following:

Most recent paycheck stub

Tax return copies for self-employed applicants

Copies of deposit slips, investment earnings documents or Social Security earnings for retired applicants

Any additional sources of income, ie child or spousal support, trust fund income

Income, Credit and Employment information required may include:

 Proof of verifiable employment and / or verifiable source of income

 Adequate gross income to rent ratio (2.5 to 3 times income to rent)

 No excessive debt which may impact applicant(s) ability to pay rent

 Good credit history free of negative credit issues which may indicate an applicant is high-risk and / or indicates a pattern

of payment delinquency

Court Records:

 History of criminal activity (arrests and / or convictions by any occupant, adult or minor) which could negatively affect tenancy

Rental history information required may include:

 If applicant has prior rental experience, good references from prior landlord(s)

 No prior evictions on applicant(s) record

State dependent:

ADVERSE ACTION NOTICE REQUIRED WHEN DENYING OR OFFERING CONDITIONAL TENANCY TO APPLICANT

Note: In the event an applicant is denied tenancy, or any other form of adverse action is taken against the applicant including requiring an additional deposit, a qualified guarantor, last month’s rent, or increased monthly rent, the landlord is required to provide an Adverse Action

Notice. This notice must inform the applicant of the basis for denial of tenancy, as well as providing contact information for the applicant to obtain a copy of their background check.