Double Deposit As Compensating Factor?

Question

Hi Everyone,

First time (soon-to-be) landlord here. On many of the rental applications I have seen (including the bigger pockets application) I've seen verbiage that states "Compensating Factors can include additional requirements such as double deposit or rent paid in advance for applicants who fall short of above criteria."

My question, is how does this work exactly? If I have someone who has income that only meets 2 times the rent instead of 3 times the rent as required, would this be an acceptable reason to go with a double deposit? How would this play out if one month they couldn't pay rent? Would I be able to take rent out of the security deposit?

Bill Hamilton · Answer

@Gary Hall it looks like my post came out far harsher than I intended. Nothing personal was meant towards you or anyone else. Clearly everybody has the right to set their criteria wherever they feel comfortable. It's your asset and you have complete control (unless local laws mandate other things). I would also say that in the Denver area, if you aren't getting a large number of applications, then your pricing is possibly too high for the neighborhood, but always pick the strongest applicant. I will stick with what I meant as the main point of my post. Having been a wholesale AE for a mortgage company for many years and working in about 35 states, I will say that while the ratio of income to rent/mortgage is certainly important, in high cost areas we would grant a great deal of flexibility to those who had a significant amount (based on actual dollar amount rather than a percentage basis) of disposable income. For instance we would often allow borrowers to go to 55-60%DTI if they also had disposable income, after all expenses, of $3,000-$4000 per month or higher. To us, this meant they had a decent amount of discretionary income they could allocate towards rent if something else went wrong in life. It was huge in terms of "compensating factors".Of course that level of disposable income was far more common in high cost living areas like LA, San Diego or Seattle than it was in Wichita KS. Nothing against Wichita or other areas. It's just a demographic thing. But it's also why higher priced cars tend to be more prevalent in those types of areas. A higher percentage of the people there make higher salaries. A car payment that would be a huge percentage of the average persons salary in Paducah Kentucky, would be a relatively small percentage in Boston etc. Again, whatever makes you comfortable in renting your asset out is what you should do. I was just trying to say (again, I do apologize for the tone) that strict percentages that may be appropriate in one market don't always make sense in another market.

Bill S. · Answer

@Seth Wilcock so the first thing is. I do not share my rental criteria with applicants unless specifically asked and only then after they tell me why they asked. I never want to give a liar the correct answer before asking them the question. I do have all my rental criteria written down. I never change that criteria during a vacancy. I was sane and sober when I wrote it down. My sanity is clouded by my lack of rent so don't change it mid stream. My criteria is pass/fail so no I don't accept more security deposit for lack of income. In reality, it's very hard to collect enough funds upfront to protect against the economic loss from a bad tenant. That says nothing about the emotional toil of dealing with marginal /bad tenants. IMO it's not worth the brain damage of trying to collect more upfront money. More upfront money is a classic tenant head fake to get a landlord to overlook their bad tenant history. Don't fall for it. Keep it simple. Be conservative in your requirements and lower rent to get better quality people if you need to. Remember a vacancy is a blessing compared to a bad tenant.

Travis Sperr · Answer

I am with @Bill S. 100% here - love the "head fake".@Seth Wilcock after your first eviction you will quickly find that income is always more important than deposit amount. Our rental market is too strong for exceptions. One more month of vacancy while finding the right tenant will save you thousands down the road. Good Luck!

Joe Splitrock · Answer

@Seth Wilcock I can see collecting extra security deposit for a low credit score, but never for lacking income. Income is their ability to pay. Credit score and landlord references are their likelihood of paying. If someone doesn't have the money, there is no way to give it to you.

Jeff B. · Answer

Calif:Firstyou can collect first & lastORfirst + security and security can only be up to 2x the rentSecondly, you don't take security as payment of rent. This only occurs during an eviction process and AFTER a judgment has been filed

James DeRoest · Answer

2x isn't enough. Move to the next application.There is no way that they will cover all their other expenses in the other half of their money. They will default on rent in no time.

Account Closed · Answer

I wouldn't do it for an income that's too low, unless I absolutely couldn't find a better applicant. Then, yes.I'm seeing this being done where the income is okay, but the credit is on the edge. For instance, everything else is good, but there is a discharged Chapter 7.

Account Closed · Answer

The State of Michigan says that a landlord can only collect one month and a half rent as a deposit. Example. Rent is $800.00 a month. The Deposit would be $800.00 plus $400.00. ( A month and a half rent). In Michigan, anything called a deposit is considered a "Security Deposit", e.g., Pet Deposit, Cleaning Deposit, etc. If a "Security Deposit" of $1200.00 is allowed as the maximum Deposit one can charge, based on the $800 per month rental amount, then you can't have a Pet or Cleaning Deposit if it goes beyond the $1200.00. However, you can called it a non-refundable Pet Fee or Cleaning Fee. (getting off topic here)Each State may have their own rules on how much Security Deposit you can collect. Check it out before you charge anybody anything, because you could face yourself in trouble by trying to "double dip".Nancy Neville

Elmo Morales · Answer

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Gary Hall · Answer

@Bill Hamilton Nice tirade, only issue is that the OP mentioned that his criteria is 3x rent. Seems like you are the one off base here. Oh and before you try ripping on my local knowledge too, that's Dinosaur Ridge in my profile photo. In business you need to be slow to hire and quick to fire. Its the same in real estate. Finding the right tenant is the best insurance you can have. It doesn't really matter what the issue is. If you had to post in BP to see if you should make the exception the answer is NO!@Seth Wilcock