Can Rental Deposit be Turned Into a Profit Center?

Question

I recently purchased my second property in a condominium complex located in a St. Louis suburb. I am looking for some feedback on whether to require a damage deposit or charge a non-refundable move in fee.

1. Damage Deposit: Traditional one months rent ($1,000) to be returned at the end of the lease assuming no damage.

2. Move In Fee: $500 non-refundable move in fee

I am leaning toward option two. Assuming no damage this money becomes profit. It also eliminates the hassle of keeping the damage deposit in a separate account earning almost nothing and returning at the end. A $500 deductible is very reasonable for a condominium unit with no wind/hail exposure so even if something goes wrong I will have the funds on hand to pay the deductible. Obviously if multiple things go wrong I would have $500 less but I think with careful tenant selection this could end up being much more profitable I am hoping to get feedback from those in the BP community that have experience with both or either of these. I look forward to feedback!

Chris Mason · Answer

Whelp, I was going to post "non-refundable deposit" might as well equate to "license to use it as a party house and act like I'm 23 years old again, without consequences," but it looks like others have already covered that. :)

Marc Phelps · Answer

I have done both. The problem with taking a non-refundable fee is when your tenant moves out, no matter how great they were when they moved in, they will remember that the 'deposit' is non-refundable and many (if not most) will make a point of trying to stick you for $500. They won't clean up or they just will leave it out of their last rent payment. Of course, you can track them down and try to collect your damages if you want. Just keep in mind that you aren't the only party in the transaction who may find motivation in the 'non-refundable' part of the move-in fee.

Adam Christopher Zaleski · Answer

I always collect first months rent, last months rent and security deposit equivalent to one months rent. This is a single family home with many opportunities for damage. The rent is $2,000. So I have an extra $4,000 (deposit and last months rent) from the tenants. Because I have a lot of their money, the tenants are on their best behavior. If I collected only a $500 non-refundable fee, I would imagine I would get lots of repairs beyond $500 because the tenants know that they won't have to pay for it. They aren't getting their $500 back, so they don't care. Not exactly the same thing, but I have noticed that my tenants behavior changes dramatically when they decide they are not going to renew the lease. The rental market is tight, so when tenants first move in, they are on their best behavior, just in case they need to renew the lease in a year. If they are lucky enough to get another rental lined up, they stop being nice. They still pay on time, but they stop listening to any of my concerns or let me know if something stops working. I wish it was a more positive experience, but it is what it is.

Matt Clark · Answer

Mike Flavin in my opinion the core issue is not "how much of the deposit is withheld at move out to cover damages," but rather, "how much damage is prevented by collecting the a deposit at move in." As others have alluded to, the property will be left in better condition at move out when the departing tenants know that they will then receive a large refund. The other problem I see with a fee rather than a deposit, is that your exposure increases in regards to unpaid rent. Even with the best screening practices there will be isolated incidents of nonpayment.

Michele Fischer · Answer

What is customary in your area? You should take that into account.We do a split - about 30% of the deposit is non-refundable, the rest is refundable.Isolating the refundable deposits in a separate account is not a big deal, not worth changing business practices over. We don't run to the bank with every turnover, we true it up a few times a year. Especially if the account has more than is required. It's critical if you are running the business in such a way that you are likely to get pulled into court. Tighten it up faster if you think there is risk of that.The fee is nice because then there is some income with each turnover to help offset the costs that happen no matter how smooth the turnover. The refundable part is good because it keeps skin in the game for the tenant and it can help offset any damage, cleaning, or unpaid rent experienced.

Account Closed · Answer

Thanks all for the feedback.

Account Closed · Answer

Thanks @Deanna McCormick In your experience do you end up using more than half of the damage deposits you collect to fix problems?

Deanna McCormick · Answer

Multiple units, and multiple things go wrong, damage security deposit is still the best way to protect the unit you are permitting them to live in.It's your asset you can do what you want but if they have no reason to treat their apartment other than like a disposable what can you expect when they leave.