By Robert L. Cain
It is axiomatic that we collect security deposits from new tenants. We do that so we are protected against any number of tenant activities or lack of activities, such as paying rent, so we don’t lose money. It’s just good business.
But a security deposit only makes it a break-even event. What if we could actually come out ahead, even just a little? That might make collecting security and other deposits a profit center. What I’m about to suggest is all legal and ethical and shows tenants we run a well-organized business.
Here are five things to do to come out on the plus side with deposits.
1. Deposit all security deposits in an interest-bearing account. You keep the interest. Some states require that you deposit security deposit money separately from operating and rent money. But too many times landlords don’t think of a way to make this work for them. Put the money in an account that earns the highest interest rate possible. With today’s interest rates, that “highest interest rate possible” might be .5 percent, but why not?
2. Take deposits to hold units. You undertake a number of responsibilities when you do that, but it is legal and helpful to both you and applicants. You can have consistently full units and the applicant will get the unit he or she wants.
Even so, when you accept deposits for holding a unit, you undertake four legal and ethical responsibilities.
a. You must provide a written statement detailing the terms of the agreement and a receipt for the money, plus the conditions for your refunding or retaining the deposit
b. If the applicant rents from you, either apply the deposit towards rent or refund it.
c. If the applicant changes his mind about renting from you, you get to keep the money.
d. If you change your mind or cannot provide a unit within the time allotted in the deposit agreement, you must refund the money.
3. Create a price list for all damages to a unit, amounts that will be deducted from the security deposit. Build in a profit.
The late Chris Wales, a Spokane, Washington, landlord gave me this, something I thought was a terrific idea. The figures here are his and over 20 years old (he gave me the list when I was doing seminars in Spokane some 20 years ago), so updating to current costs is in order
General Cleaning: $25.00 per hour plus supplies and mileage
Repairs: $30.00 per hour plus supplies and mileage
Carpet Cleaning: $0.16 per square foot, plus mileage
Painting: $60.00 per room, plus mileage. Adjusted down one-fourth for each year since the room painted. (For long-term tenants, you might want to forget about this one since you will probably repaint the interior during the tenancy as a thanks for being a valued customer for so long.)
Yard work: $25.00 per hour plus mileage and dump charges
Keys: $25.00 per lock plus $2.50 per key
Light Bulbs: $2.50 each
I was particularly intrigued with charging for light bulbs. How many times have you gone into a recently vacated unit only to discover the previous tenant had absconded with every light bulb in the place? I believe that new fluorescent bulbs cost at least $2.50 each at a local supermarket, so having to replace a houseful is not only costly but a needless expense.
The essential thing to do here is attach the price sheet to the security deposit form and receipt, and then remind the tenant of the price list when he or she gives notice to move.
4. Make sure that all deposits are “deposits,” not “fees.” If you collect a fee that is all you can collect. Numerous courts have ruled and many state laws include definitions that fees are full payment for a service. A deposit, however, is just that. If it pays for the damage, fine. But if it doesn’t, you can go back for more.
5. Match the deposit to the tenant’s rental history. You have to forewarn each applicant, of course, but if you have a marginal tenant, you can charge a higher deposit than someone with a sterling rental history. Figure out in advance an objective standard for calculating the higher deposit to avoid Fair Housing complaints; then put something a warning on your rental policies and standards.
The following is something to think about:
No late rent payments or damage reports: $500
Late rent payments to previous landlords: $50 for each occurrence
Damage to properties: $250 extra
Eviction: one month’s rent (Of course, nothing says you have to even consider an applicant with an eviction.)
A security deposit is to protect our bottom lines. If we can build in the opportunity to come out ahead, even a little, by collecting them and other deposits, then it is just good business sense. Disclosing what how we operate to applicants is also good business because it shows tenants that we run a well-organized business. That’s a plus to good tenants and something that may send less-than-good tenants off to a landlord who isn’t so diligent.