How to Determine How Much to Charge as a Security Deposit for Your Rental Property

By Robert S. Griswold, Laurence Harmon

Many states don’t limit the amount that may be charged as a security deposit, which means that for legal purposes, landlords can charge as much as they want. Other states impose strict limits on security deposits — usually not more than twice the amount of the monthly rent.

Here are a few common strategies for deciding how much to charge for a security deposit:

  • Charge the maximum amount allowed or double the monthly rent. A high security deposit protects you from any loss and encourages residents to respect the property. Another option is to charge the maximum amount only in high-risk situations; for example, if a new resident has a history of bad credit, negative landlord references, or prior evictions.

    An exorbitant security deposit is a marketing disincentive that may hurt your occupancy rate.

  • Charge higher rent as the alternative to a maximum security deposit. Residents may prefer to pay more rent rather than a high security deposit. Doing so also benefits you because you get to keep the rent.

  • Increase the security deposit for furnished rental units. By furnishing the unit, you increase your exposure to risk, because more items can get damaged, so charging a higher security deposit is reasonable.

Keep in mind that your prospective residents will be required to write some substantial checks to become comfortable in their new residential rental units. In addition to the check for the first month’s rent and the security deposit, residents may incur the costs of moving, setting up Internet and cable TV accounts, and buying new furnishings and cleaning supplies

Setting a security deposit amount with your renters’ other financial obligations in mind is a useful way to establish a solid, customer-friendly relationship.

Some landlords believe that, because senior renters are less likely to cause damage than others, reducing their security deposit is sensible. Common sense suggests that these landlords are correct; the fair housing law, on the other hand, would probably consider this difference in treatment to be illegal discrimination, most likely because of its differential impact upon familial status. Note, however, that some states may, by statute, allow this disparity.

Setting separate deposits for pets

Many of the most popular pets are notorious for damaging rental units. Dogs may chew carpeting and furniture and scratch floors and trim. Unless they’re declawed, cats often turn any vertical surface into a scratching post and tear up rugs. And most creatures leave a lingering odor in their wake.

Because pets often cause damage, you may want to consider charging a separate deposit or increased rental fee to every household that has a pet and perhaps even a per-pet fee.

To protect yourself from potential losses from pet damage, you have several options:

  • Charge a separate, refundable pet deposit. You can use some or all of the deposit to cover the costs of any damages caused by the pet or extra cleaning required because of the pet and return the remainder to the resident.

  • Charge a higher security deposit for renters who have pets. A two-tiered security deposit policy charges one amount for renters without pets and another for residents who own pets. Theoretically, that should prevent arguments over whether a certain item of damage is attributable to the pet or some other source.

  • Require that residents get renters insurance that includes coverage for pet damages and liability. Or you may charge a pet deposit and offer a discount on the deposit if the resident has renters insurance.

  • Charge a separate, nonrefundable pet deposit or fee. Some landlords charge a pet deposit, sometimes camouflaged as pet rent in the lease or rental agreement, because they reasonably think that pets routinely cause damage. This practice is strongly discouraged, even if it’s legal in your area, because it too often results in disagreements.

    Check state statutes and city ordinances before charging nonrefundable deposits. Some states, including California, specifically prohibit landlords from charging any fee or deposit that’s not refundable. Other states, including Arizona, Nevada, Washington, Florida, and Georgia, allow landlords to collect nonrefundable fees, including pet deposits and cleaning fees.

Of course, you always have the option to prohibit pets altogether for a number of reasons — because they may cause damage, make too much noise, inconvenience other residents, or pose a safety risk.

However, excluding pet owners excludes about 75 percent of all renters, which means that pet owners will automatically reject a “no-pets” property as a prospective resident, irrespective of its competitive pricing, amenities package, or other distinguishing characteristics.

Fair housing laws are absolutely clear about service animals: they’re not pets, which means that they’re not subject to such restrictions as pet deposits. However, the owner of the service animal is liable for any damages caused by the animal.

Avoiding the temptation to charge last month’s rent

Some landlords collect last month’s rent up-front and then use it as a supplementary security deposit, just in case the security deposit doesn’t completely cover the costs of cleaning and repairs.

We strongly discourage you from collecting last month’s rent as the outset of the tenancy for several reasons, including the following:

  • Many states prohibit using the last month’s rent for anything other than the last month’s rent. You can’t use the money to pay any cleaning or repair costs.

  • Residents don’t like the idea of a landlord holding their money for the duration of the lease (or longer). After all, it’s their money.

  • Collecting last month’s rent in advance is likely to drive away any prospective renters.

If, near the end of the lease, a resident forgets that he had already paid last month’s rent when he moved in and pays it again, refund the second payment immediately, especially if you operate in a state that requires last month’s rent be used for its intended purpose.