Setting the security deposit requirements for your rentals sounds simple enough, everyone charges one month’s rent, right? Not necessarily.

I recently spoke with four year industry veteran Stefanie Mendoza on the subject. She is Director of Operations for the Dallas and Houston locations of Real Property Management.

Stefanie explained their strategy this way, “When processing an application we are screening potential tenant’s criminal background, credit, income, and rental history.  Based on the results, we categorize applicants as low-risk, medium-risk, and high-risk.”

She went on to say, “A low risk applicant will pay the standard one month’s security deposit.  A medium risk applicant will pay a deposit and a half.  Medium-risk is an applicant with a lower credit score, but all other requirements have been met.  A high-risk applicant will be required to pay a double deposit.  High-risk applicants have a combination of a lower credit score, possible poor rental history or slight criminal records.  Past judgments also will play a role in the overall approval process.”

As you can see, not everyone takes the one size fits all approach to setting security deposits. While some prefer to stick with one security deposit for all tenants, there are choices to make there as well. Here are some advantages and disadvantages of the most common options.

Security Deposit Equal to Less Than One Month’s Rent

Advantages

• If your rentals typically need no repairs and you consistently return the full amount to tenants, this can be a great way to attract tenants.
• This can be used to attract tenants to your difficult to rent units and help you fill them.

Disadvantages

• If your rental is damaged, you may not have enough money to cover repairs.
• This type of deposit may attract the kind of tenant you do not want. If they cannot afford the normally expected security deposit in your area, they may not be able to afford the rent.

Security Deposit Equal to One Month’s Rent

Advantages

• This practice has been around so long that many potential renters expect it. You are not likely to lose a lead because they are surprised by this security deposit requirement.
• You will be able to recover some or all of your costs if the tenant causes typical damage to your rental property.

Disadvantages

• If the unit is damaged extensively or an expensive item is involved it may not cover everything.
• In the event you do not collect the last month’s rent at lease signing, many tenants think the security deposit can be applied to the last month’s rent and leave without paying.  If you go through the process to apply it to the rent (if allowed in your area) you will still be short  on money to cover repairs.

Maximum Security Deposit

Advantages

• Most states regulate the amount of security deposit you can require (see regulations below.) In cases where 2 or 3 month’s rent is allowed, you have the opportunity to hold enough of a deposit to cover extensive damage.
• This strategy can be useful when you manage rental units that historically suffer more than the normal amount of wear and tear or deliberate damage.

Disadvantages

• The more money you require up front, the more tenants you are eliminating from the pool of leads. You have to find the sweet spot between covering potential costs and turning people off.
• Other property management companies may set a lower deposit requirement and use it to their advantage when advertising/competing against you.

Security Deposit Regulations

Almost all states, and some local governments, have laws in place governing the amount a landlord or property manager can require a renter to pay as a security deposit. They also regulate things such as when it has to be returned and what it can be used for by the landlord. Check the local regulations for your area. There’s a quick reference list by state for maximum deposits on NOLO.com and one showing time limits on FindLaw.com.