Traditionally when a renter moves into a new apartment the landlord requires a security deposit (usually equal to one month’s rent) to pay for any damages that may occur. Coming up with a security deposit and the first month’s rent all at once may be difficult for some people, so tenants may try to pay in increments or negotiate a lower security deposit. While you may feel sympathy for their struggle, it’s imperative to get some form of collateral from them to give you peace of mind, and assist you in case of any damage to your property. With that being said, the “security deposit” doesn’t have to be fixed at one month’s rent or even be a security deposit at all. In fact sometimes a security deposit is the wrong move!
Let’s tackle traditional security deposits first. Take a look around your market and see what people typically charge. In some markets, it is acceptable to require two month’s rent as a deposit. Be sure to take a look around and make sure you’re not selling yourself short. Conversely, in some struggling markets, landlords may offer a reduced deposit amount. Also, if a prospective tenant doesn’t have the best credit, but all of their other financials look good, you can ask for more money up front to mitigate your risk in the event something goes wrong. Additional deposits can be taken for things like having pets. Survey your market to find out the going rate. Please note that some states or municipalities may have rules about the amount of security deposit that may be collected.
A downside to security deposits is that some municipalities like the city of Chicago impose difficult rules for landlords to follow in handling security deposits. These rules can include having separate bank accounts for each deposit and paying interest (not much, but still something you have to remember) with penalties that are extreme for landlords, even if they make unintentional mistakes. This has encouraged landlords to ask for a nonrefundable move-in fee from tenants, which is usually about half of one month’s rent, but is sometimes just a flat fee. This fee is not returned to the tenant at the end of their lease so it’s considered revenue for the landlord. The benefits to the landlord are that this is actual revenue that doesn't have to be returned and they don't have to deal with complicated rules; however, if there is damage to their property they have less in their bank account to fix it. To make up the difference, they would have to go after the tenant in court. The move-in fee is good for the tenant because it’s less to come up with up front, but they don’t get the money back, even if they keep up the apartment perfectly.
Sometimes, a combination of the security deposit and fees works best, especially in the case of pets or condo associations, which can require a move-in fee from the tenant regardless of your deal with them.
In summary, get educated about your current market and know that you can ask for a security deposit, move-in fee, or a combination of both. Think about what works best for your situation and the prospective tenant’s situation. Stay flexible but always follow your own rules and get the money up front to protect yourself!
For more info on finding great tenants check out my ebook here How to Find Tenants that will PAY, STAY, and OBEY: A Practical Guide for Simply and Effectively Screening Tenants for Your Residential Rental Unit