Security Deposit.
A security deposit is money—typically equal to one or two months’ rent—that a landlord holds to help cover unpaid rent, lease violations, or damage to the rental property beyond normal wear and tear. It is not intended to serve as the tenant’s last month’s rent. Allowing a tenant to use the security deposit instead of paying rent defeats its purpose and eliminates an important layer of protection. As a general rule, don’t agree to accept the security deposit in lieu of rent.
I usually require a security deposit equal to two months’ rent, although I understand that can be a significant expense for some applicants. It’s a requirement that protects me.
- Paying the security deposit in monthly installments.
- Paying a nonrefundable fee instead of a security deposit.
- Paying the deposit in installments while also paying a fee until the deposit is fully funded.
- Using an approved insurance product or surety bond in place of a security deposit.
The statute also outlines rules governing when and how landlords may make claims against an insurance policy or surety bond. Before offering any of these alternatives, it’s important to review your state’s landlord-tenant laws and understand the requirements.
Personally, I don’t believe a nonrefundable fee provides adequate protection. Once a tenant has possession of the property, they can simply stop making payments—including the monthly fee. In some states, the eviction process can take months or even years, leaving the landlord with little protection. I remember it took us over a year to get a tenant evicted in New York.
An insurance product or surety bond may be a better alternative, although I don’t have first-hand experience using one. Surety bonds typically cover damages or unpaid rent only up to a fixed maximum, often equivalent to one or two months’ rent. You also have to go through a claims process, and if the tenant’s damages or unpaid rent exceed the bond’s coverage limit, you would still have to pursue the tenant directly for the remaining balance, potentially through the courts.
Another concern is maintaining the coverage. If the tenant is responsible for paying monthly premiums and stops making those payments, the coverage could lapse, leaving you completely unprotected against physical damage or unpaid rent unless you catch the lapse quickly and enforce the terms of the lease.
If you were considering a surety bond as an alternative to a security deposit, I would strongly recommend requiring the tenant to pay the full premium before the tenancy begins. That eliminates the risk of relying on the tenant to maintain coverage throughout the tenancy.
The bottom line is this: once you establish your policy, be consistent.
If you require a full security deposit, don’t hand over the keys until you’ve received it in full. If you offer an installment plan, a fee, or an insurance option, enforce the agreement exactly as written. If the tenant fails to make the required payments, follow the procedures provided under your state’s laws, which may include serving the appropriate notices and, if necessary, beginning the eviction process.
