Can I do an incremental deposit?

Question

This is just a theoretical that popped into my head, but for those markets where rents are relatively low, would it be reasonable to take on a tenant with the typical one month's security deposit, but in addition you add $50 or $100/month to the rent to build up the deposit till it hits two month's worth? This would still be fully refundable to the tenant and is a nice way to save up for their next place, be it another rental or a purchase while giving the LL more security.

I ask because I get the impression that tenants often find a sense of comfort with their LL's over time and are more likely to get lacks in their upkeep of a property over time. Sometimes they add a pet under the radar, etc. Damage and poor upkeep especially seem to occur during the chaos of moving out.

In addition, the cost to repair any given damage done to a property is relatively uniform over different markets (especially if you do the repairs yourself). Sure contractors cost more in higher end markets, but the materials are roughly the same in price, while the deposit can differ significantly.

Does anybody do this or has anybody every tried it? What pro/cons do you see in applying this concept?

Frank Chin · Answer

Same here. I've been land lording for nearly 40 years, did a handful of them, and turned out to have problems with all off them.

In fact, I use it as a test for the future tenants. It's a very competitive market here, some people are borderline, and for those I ask 1-1/2 month and see how they react. One I had a retired couple agree verbally to 1-1/2 month, hemmed and hawed about it, and they're suppose to bring it to the lease signing with the first months rent. They came to the lease signing, only bought one month, so right then and there, I said no deal.

The second choice tenant I wasn't too sure about, and he happened to call me, right after it happened and I mentioned that I had someone already but had trouble with the 1-1/2 month security. This second choice guy I'm not sure about because his job is seasonal. Then he shocked me by saying "I'm happy to pay you two months security, and if it makes you feel better, three months." So I said "let me think about it and get back to you."

I called him a little later and said "I hope you don't have to take a loan out to pay the security". His reply was "since my job is seasonal, I put a lot away when times are good." Then I told him "you don't have to pay 3 months, 1-1/2 months is good enough", to which he says "are you sure"?

When the tenant hems and haws, or wince when I mention the security, that a red flag. But if someone puts money away and willing to pay me 3 months, with no hesitation, is a really good sign. This guy has a blue collar job, on paper borderline, but the way he aced the security deposit issue convinced me that this is one of the indicators of a good tenant.

That's why tenants who couldn't even come up with the month is in my book, certain sign of trouble.

Joe Splitrock · Answer

@David Smit some landlords collecting part or even all a tenants deposit over several months. We did this last year for one tenant. We took half their deposit before they moved in and the other half the month after they moved in. I never do that, but these people had good references and it was January which is a horrible month to rent here.

Have you considered rather than charging double deposit to just charge the extra $75 per month? More rent is better than more deposit. In your "bad apple" example if they can afford the extra $75, you could just keep it as rent rather than have to give it back. If they do damage, you are no worse off. If they don't do damage then you made extra money.

Tenants look at the monthly payment more than where the money is going. Whether $75 is going to build up deposit or for extra rent, will not make much difference to the tenant. If they tenant is high risk, you want all the money up front. Building it up over time does no good if they don't pay rent and trash your place.

Patrick M. · Answer

I agree along the lines of @Peter M. in that there are a slew of landlords that will use a deposit for normal wear and tear. I wish it wasn't true but these are the spec landlords that are getting through each month by the seat of their pants and bragging about appreciation. They have already spent that deposit.

As a quality tenant I would be extremely wary of a landlord that charged an incremental deposit. As a landlord I would most likely collect what the market collects.

I am limited to 1 and 1/2 months deposit and quite frankly if all that money is used for repair then I have done a number of things wrong in vetting my tenants and monitoring my property.

Peter M. · Answer

I don't think it's a bad idea if the tenant will go for it but I don't think the psychology of the average tenant lines up with your theory. Most renters assume the "evil" landlord will keep the deposit so they don't expect it back. So they will just see your program as higher rent than advertised. But, like I said, if you can convince them that they may actually get this little bit of savings back, maybe it can work.

Nathan Gesner · Answer

Bad idea. If the tenant can't afford the deposit up front, that's an indication they can't afford the rental. I require the deposit within 24 hours of application approval. I require last month's rent, first month's rent, and any other charges prior to move-in.

In my early years, I allowed people to make payments maybe a dozen times. I remember every single one of them being bad tenants.

David S. · Answer

@Joe Splitrock It's strictly a hypothetical for future purposes. I was hoping this might be a somewhat normal practice outside of my knowledge, but apparently not at all and I can see why. I'll probably do as @Patrick M. does and ask for 1.5 months deposit; that seems a reasonable middle ground without scaring most prospective tenants away.

David S. · Answer

@Peter M. My thought/worry exactly and I'm actually quite curious what the industry averages are on the practice of keeping security deposits in situations where they shouldn't be. My current tenant ran into exactly that with her last rental where the management company effectively by default charged the entire deposit... she had to fight to get it back. I suspect they see what they can get away with and only bother paying it back if the tenant puts up a fight. It's not right, but for the money it's an easy paycheck for them, so I have to assume it's very common.

David S. · Answer

I’m not sure if I’m not explaining this correctly, but the intention being EXTRA security deposit. So opposed to just having the one month deposit, this is a way getting a second month in a market place where most are taking just one month. A lot of prospective tanants are either unwilling or unable to fork over four months worth of money up front and when other LL’s are asking three, it tends to cut down your list of prospective tenants.

David S. · Answer

@Levi T. The intention is to maximize the deposit where asking for first, last, and two months security up front is just too much for most folks, but where they might have no objection to paying one month security (say $900) while spending an extra $75 per month to build that up to $1800 by the time a year passes. $900 doesnt fix all that much if you have a bad apple. The extra 900 bucks makes a big difference in the renter’s psychology as well as covering potential damage while the $75 a month is often not a deal breaker, especially if they intend to recoup it. If they move on and need funds, now they have a potential $1800 coming their way.

Levi T. · Answer

I've bought properties where the LL was allowing tenants to pay the deposit over time, it never works out. Tenants stop paying it.

If you really want to expand it, setup a fee to wave the deposit. The tenant would pay $75 lets say per month to not have to have a deposit, your betting on that they will stay more than 12 months. It's a win-win, however most the tenants that take that option are low income and likely to default more quickly.

Can I do an incremental deposit?

Can I do an incremental deposit?

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