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Rental Investment Properties: Dealing With The Security Deposit

Published on Monday - March 24, 2014

You need to make sure every investment you make is protected. One of the ways, if not the only way, to protect your rental property investment is by holding the security deposit. This is by no means a guarantee that your tenant won’t skip out on the property or won’t cause damage, but it makes them accountable. Coming up with the first, last and one month security deposit is admittedly a large sum of money to come up with at once or in a short period of time. If you do not stand firm on collecting all of this money before your tenant moves in, you open yourself up to extended vacancy and ultimately foreclosure.

You may show your property to a prospective tenant, but they may not be able to come up with all of the money right away. You may get a good feel for them and want them to rent the property. You tell them to pay the first month just before they move in and just the one month security for now with a promise to pay the last month at some point down the road. One month turns into two and all you are holding is one month security deposit, not even the last month’s rent. Unfortunately, bad things happen to even the nicest tenants and you get a call one day telling you that they can’t pay next month and they need to move out. When you go to the property, you see extensive damage and a note saying they apologize they had to move out so quickly. At this point, your one month security deposit is not going to get you very far.

Most tenants know what they need to do before they move in. Asking for this money upfront is not an outrageous demand, regardless of what the monthly rent is. You can be flexible with your tenants before they move in and if you have a few months you may be able to getting your security over a few payments, but even that puts you at risk. Before your tenant moves in, you need to protect your investment. To do that, you need to have them put some skin in the game. If they truly need or value the money, they will protect your property and do everything they can to get their deposit back.

The idea of not having your property rented out can cause you to make some questionable decisions. If you are running out of time, you may consider not collecting the full security deposit or bending your pet or smoking rules. A one month vacancy may hurt, but not nearly as bad as having an eviction. Your rental property is designed to make money for you and by definition your security deposit acts as a means of doing that for you. If you take less, you are not security yourself against default or damage. In doing so, you are relying and hoping that your tenant pays on time and takes care of your property. Hope is nice, but security is much better.

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