The issue of security deposits can be a tricky one for many landlords. You may want to ask for the traditional first month’s rent, last month’s rent and a security deposit, but during these rough economic times it may be in your best interests to be a little flexible. In many cases a landlord can ask for as large a rental deposit as s/he deems necessary to secure an agreement.
There are a number of considerations that bear upon the size of the security deposit:
- State Laws: It is essential to learn the laws of your state or locality governing the size of security deposits. Once you understand the limits to what you can seek from potential tenants, then you may consider whether to seek the maximum or something less. . In many states there are few regulations governing the size of the security deposit. Other states may limit the security deposit to one to three months’ rent.
- Rent Stabilized Properties: In some areas of the country, rent stabilized property owners cannot seek more than one month’s rent as a security deposit. If you are a landlord with a property under these restrictions, it is in your best interest to scrutinize the financial histories of applicants thoroughly because you cannot insure yourself against property damage or contractual breach through an increased security deposit.
- Market Conditions: If your property is located in an area where it is common to ask for one, two or even six months’ rent as a security deposit, then it is advisable to follow the common practices of fellow landlords. It will be easier to rent out your property if you aren’t placing undue restrictions on potential renters.
- Tenant Creditworthiness: If you feel that a prospective tenant may be likely to break your lease and leave early, cause damage in excess of normal wear and tear, or create a hardship for you through unreliable payment, you are within your rights to increase the security deposit. If the prospective tenant cannot produce a guarantor that will ensure payment for lost rent or property damage, it is sensible to increase the security deposit accordingly. You may not wish to discourage potential renters if you are anxious to secure a new tenant, but increased risks to you or your property should be compensated.
- Prospective Tenant’s Income: Like any business transaction, the rental agreement poses certain risks. In order to mitigate these risks, it is important to deter unworthy applicants. Having an established policy for the amount of income the tenant receives as a multiple of the rent may lower the risk of contractual breach. It is also essential that you consider the monthly income, credit history and liquid assets of a prospective tenant when determining how much to ask for as a security deposit.
- Negotiated Deposits: In the current economic climate it is not unreasonable to expect a prospective tenant facing a large deposit to counter with a reduced amount. You should double check the prospective renter’s income, credit history and guarantor’s financial assets before determining whether to lower the size of your security deposit. You should also keep in mind that the market for good tenants is always competitive, so be cautious about overreaching.