Yes, you can deduct the 8 days rent from the security deposit.

Here's the deal: You don't need to withdraw and return the current security deposit just to collect the additional $100.

Now, over a year and a half later, he sent a certified letter last week demanding the security deposit or legal action within 30 days.Please advise. 

The pet fee or deposit for the move in of 2 cats (you did charge one, I hope) should have just about covered the extra anyway.

Now, I'm imaging a scenario when every one of these tenants move out that I'll be paying their entire security deposit + interest even if there are damages beyond normal wear and tear. 

If it's not a holiday, I would say, "No, the deposit remains in place until your lease ends."

A good property manager can help with tenant screening, enforce lease terms, and handle evictions more efficiently if it comes to that.Require a Larger Security Deposit: Within the bounds of local regulations, a larger deposit can provide a cushion in case of damage or unpaid rent.Consider Rent Guarantee Insurance: Some companies offer insurance products that can cover lost rent in case of tenant default.

Sharing leases, profit and loss sure but no inspection. 

Quote from @Phillip Austin: There are two alternatives to a security deposit, which I speak about in my book.

Under the law there is no way around the scam.