Is this a crazy security deposit idea?

Question

For context, I own a duplex and rent to A-/B+ class. My rent is higher than typical in the area ($1300/month) but had GREAT demand for my property as it was recently renovated and looks much nicer than others. It's a hot young professional town, so I'm not worried about a ton of damage each turnover.

I'm reading Brandon Turner's 'How to Manage Rentals' book and read something interesting.... he described the security deposit as an "incentive to maintain the property". It got me thinking about how tenants completely ignore their security deposit until they move out, so does it really incentivize them for anything?? He also mentions a big reason most people move is because the landlord wasn't responsive/kept security.

So here's what I'm thinking... please give me your feedback!!!

I'm considering renaming it an "Accountability Deposit" in the lease and conducting quarterly walkthroughs (which I do anyway) but where deductions would be made if necessary. If no damages are found the tenant would get back 1/8 of their deposit (~$160). Should they renew for another term at the end of the year they would make me whole again with a new "AD" and the process would start over. It would incentivize them to stay, almost like a "good tenant reward". If they didn't renew I would still have about 1/2 the deposit for turnover and they may be less likely to dispute the charges since they were given so much back over the year/issues were addressed that they likely forgot about.

Terrible idea? Let me know what you think!!

Joe Splitrock · Answer

@Kira DAnnunzio I like that you are trying to think creatively, but I see some problems with this approach. The deposit is held as incentive, but also to secure from damage and unpaid rent. There may be no damage during your quarterly walk through, then they run into a garage door the last week they live there (for example). Half the time when I have deductions, the tenant didn't even believe there would be deductions. That means despite their best care and cleaning, something came up. There is also the chance situation that a tenant turns bad and stops paying rent. That security deposit is no longer a carrot, but rather becomes partial compensation for unpaid rent and eviction expenses. Ultimately the bigger the deposit, the bigger the carrot. If you rebate half it back, then there is less incentive.

Another consideration is that most state laws specify "Security Deposit" so naming it something different could have side effects on common law understanding.

Also be aware that "full security deposit refund" is highly sought after by tenants for two other reasons:

1. Pride. People want to get all their money back because it validates they are good tenants.

2. Future references. If a landlord calls you for a reference and asks, "did they leave it in good condition and get all their deposit back." they want you to say yes.

The biggest question is what benefit is there in returning money to them throughout the year? It is not going to incentivize them to renew lease. They will do that based on how the property fits their needs and how you act as a landlord maintaining the property. If anything, putting money back in their pocket makes it easier for them to move.

I applaud the thought process, but it is just not going to benefit you in the long run.

Scott M. · Answer

I think changing the name may put you at legal risk as you are only legally allowed to collect certain things from tenants depending on your area.  And I am willing to bet there is no law covering "Accountability Deposits".  I don't think messing with the name is a great idea and may actually land you in some hot water.

You also want to be careful about outstanding rent/damages/utilities when the term does end.  I think an unintended consequence of this plan is tenant has all but 160 of their deposit back and they don't pay last month rent, or don't pay a utility, or do damage on the move-out etc....you now don't have anything to assist in making you whole.

I think the best way to combat that reason that people leave is to be responsive.  Doing regular inspections is also good so you are on the right track.

Uri E. · Answer

Hi @Kira DAnnunzio,

Your idea sounds good at first but here's a concern ... as time goes by you will have less and less of a security deposit in your hands, and @#$#@ happens.

Adam Martin · Answer

It is hard for many tenants to come up with a deposit.  I like the thought of where you are coming from but you are asking tenants to save each year for a new deposit.  I think it is unlikely and may even add a stress factor to the tenants.  Prepare for them coming back saying I got my deposit back with no damages and have proved myself so you really don’t need one.  The incentive to maintain the property just means they know if they don’t you have financial leverage to not return it and apply to damages.  He mentions being responsive but this is referring to quickly and efficiently managing issues as they arrive.  I don’t see how someone could move out because the landlord didn’t return deposit because they wouldn’t know until after they were out they weren’t getting it back unless they broke the lease.  It sounds like you have a nice place with reasonable rents.  Assuming this and that you are responsive to issues you will be a step above many other landlords and people should want to stick around.  If anything you may consider a gift card for resigning or a Holliday gift if you want to have some token of appreciation for them.

Is this a crazy security deposit idea?

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