As a rental property investor, you will find it necessary to collect money on a regular basis. Generally, your income will come from rental payments; however, you will also need to collect a security deposit. This is used as a type of security to ensure that the property will be maintained well during the time of the tenant’s occupancy and also that they will not leave without paying their final rent. In case either of the above circumstances should occur, you will have the security deposit to serve as a recompense for the money you might otherwise be out.
The exact amount of the money that you collect will vary depending on circumstances. Some states have regulations regarding the amount of money that can be collected for a security deposit. Ideally, it is best to collect the largest deposit allowed in order to ensure that you do not run into any problems later on. Where allowed by law, many landlords find it beneficial to collect a security deposit that is equal to one and a half times the regular rent. There are some circumstances that may dictate a change in the normal amount of the security deposit which you collect.
For example, if you allow pets and the tenant has a pet, you may decide to collect a larger security deposit. The same would be true for other circumstances such as the tenant having a waterbed, does not have any references, etc. In these cases, you may decide that it is a good idea to collect a larger security deposit than you would normally collect to cover the risk you are taking on; provided, of course, that you are allowed to collect a larger security deposit under local law.
Security deposits should always be paid in full prior to the time the tenant moves in. Keys should never be issued until a security deposit has been received in full; otherwise, you will find that the purpose of the deposit has been defeated. It is simply not a good idea to allow tenants to pay a security deposit in installments. If you do so, it is very likely that you will find that it is veritably impossible to collect all of the security deposit once the tenant has moved in.
Ideally, security deposits should not be paid with a personal check as you run the risk that the check may not be good.
Remember that it is always important to check with and follow your state’s guidelines regarding what you must do with the money after you have received it.
Generally, it is better if you do not complicate matters by labeling the different parts of a this deposit. In the past, many landlords have charged a variety of different deposits including a key deposit, last month’s rent, cleaning deposit, etc. This can become quite confusing very quickly and unfortunately, many landlords found that tenants still tended to move out without paying a last month’s rent because it was already paid. These types of tenants tended to leave the unit in a bad shape and require repairs that the deposit cannot fully cover. You may even wish to state in your rental agreement that the security deposit is not to be used for the last month’s rent.