Note: For an extensive overview of security deposits, see our guide: Security Deposit Tips for Property Managers, Landlords, and Tenants.
Every property owner should require tenants to issue a refundable security deposit which is held on file to insure against non-performance of the lease agreement. Non-performance may be, but is not limited to, anything from damages occurring during occupancy to expenses accrued due to the tenants conduct or failure to pay rent.
The confusion begins with the property owner not knowing how much to require the tenant to issue for the security deposit. It is important to understand that security deposits for residential properties are controlled by statute and call for nondiscriminatory and equal treatment. It is a prohibited discriminatory practice to charge a family a different amount then an applicant without children. It is also prohibited by law to require an excessive amount for the security deposit. In addition to collection of one month’s advanced rent, the maximum security deposit allowed (at least in the state of California) for an unfurnished unit is two months rent and three months rent for furnished properties. [California Civil Code 1950.5(c)] Check your local area laws for similar guidelines in your area.
Many owners will ask for the first and last months rent along with the security deposit. This is allowed; unfortunately most renters are unable to afford twice the rent plus the security deposit upfront. Some owners will offer their property with a reduced security deposit. The owner will advertise the rental property at $1,000 monthly requiring a security deposit of $500, half the monthly rent.
Now, initially this looks like a good idea, an incentive for the prospective tenant to take occupancy without having to pay a large amount upfront. This security deposit structure is common with larger apartment complexes. Most individual property owners don’t realize that large apartment complexes typically have a higher rent roll and more funds on reserve to draw from in the event of unexpected non-performance that exceeds the security deposit funds on file.
Now let’s look at why most professional residential property management companies would advise property owners to require the tenant’s security deposit to be at least equal to the initial rental rate. First, it weeds out the financially challenged tenants or prospective tenants that may be stretching their finances to reside in your property. If a prospective tenant is unable to pay the full security deposit upfront, this could be a sign of financial instability. Second, it provides an emergency buffer that can be used if the tenant defaults on their rent. Third, some tenants will vacate the property unannounced (without giving notice) thinking the security deposit can be used as the last months rent regardless of what the rental lease agreement states. When this occurs the property is usually in need of repairs and you are left without the last months rent and an insufficient security deposit to cover the cost associated with preparing the property for another tenant.
If this occurs you can serve a 3-day notice to pay rent or vacate — upon expiration you can file an unlawful detainer action against the tenant. This will allow you to use the security deposit to make the necessary repairs and apply the remainder, if any, towards unpaid rent. If there is a remaining amount due, the owner could place a demand on the tenant for that amount and if unpaid pursue them in small claims court.
Depending on your property location and the local market conditions, when given the choice of having more or less security deposit funds on file, having more only makes sense. Stay consistent and within the law when requesting a security deposit and require your tenants to issue a deposit at least equal to the monthly rental rate.
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