Security Deposit vs. Move-In Fee: Which is Better for Landlords?

Landlords are always looking for ways to reduce risk and increase profitability. And when you let someone else live in your property, one of the biggest risks involves the potential damage they could do to the residence. For years, the security deposit has been the preferred method of compensating for property damage related risk. But the move-in fee has recently emerged as a possible alternative. Do you know which one is right for you?

The Pros and Cons of Security Deposits

The aptly named security deposit is exactly as it sounds – a layer of financial security against property damage and/or unpaid rent. If your tenant damages your property beyond normal wear, the deposit – paid up front – can be used to fund the repairs. If your tenant fails to pay rent and leaves town, it can be used to cover the missing payment. If, on the other hand, your tenant takes great care of the property and is up to date on rent, you’re required to refund the security deposit to the tenant upon moving out.

The pros of security deposits include:

• Added protection. It’s nice to know that you have a buffer built in. Whether the tenant puts a hole in the wall, breaks a window, or spills paint all over the floor, you’re able to use the security deposit to cover the expense. If nothing else, this provides a little peace of mind.

• Because a security deposit is the standard in today’s rental market, almost every renter anticipates paying one. It’s viewed as part of the process, which means you aren’t stepping on anyone’s toes.

• Instills sense of responsibility. When a tenant knows that they have an entire month’s worth of rent waiting to be refunded at the end of their stay, they’re far more likely to take responsibility for your property and keep it in good shape.

The cons of security deposits are as follows:

• Laws can be complicated. Every state and jurisdiction has its own laws pertaining to security deposits. (Check yours here.) And while most cities have pretty straightforward requirements, others are complex and/or tough on landlords. (Take Chicago, for example. Chicago landlords have to place the security deposit in a federally insured interest-bearing account in an Illinois bank. This bank account must be used exclusively for security deposits and the landlord has to tell the tenant which bank holds their money. The landlord is also required to provide receipts and pay back any interest the account earns. If the landlord withholds money, an itemized statement of damages and estimated costs must be provided within 30 days of move-out.)

• Tenants may be hesitant to pay. Particularly in low-income housing, tenants may be unable or unwilling to pay an entire month’s rent in the form of a security deposit. This can significantly reduce your pool of prospective tenants.

• Disagreements often ensue. When it comes time to conduct a move-out inspection, the landlord and tenant often disagree on deductions. This can lead to long, drawn-out arguments that, quite frankly, aren’t worth the time and effort.

The Pros and Cons of Move-In Fees

“Most landlords who don’t collect a security deposit collect a move-in fee instead,” landlord Laura Agadoni explains. “The move-in fee is typically not subject to as many regulations as the security deposit can be. The reason is that the move-in fee is not returned to the tenant at move-out time. The landlord simply keeps it.”

The pros of the move-in fee include:

• Fewer regulations. Because it’s non-refundable, the move-in fee doesn’t fall underneath the same rigid restrictions that security deposits do. You’re free to use the money to repair damage to the home or go on vacation – it’s your call.

• More attractive. If the security despot would be $1,000, a typical move-in fee would be just $300 to $500. From a tenant’s perspective, the lower cost of the move-in fee makes it more attractive.

• Less complicated. When it comes time to move out, there are fewer complications with a move-in fee. Since it’s non-refundable to begin with, there isn’t any haggling over damages and who is responsible for what.

Here are some cons associated with move-in fees:

• Lower fee. From your point of view, a move-in fee provides less protection. It’s only 40 to 50 percent of the typical security deposit. Thus, if something goes seriously wrong – or your tenant leaves town without paying his rent – you can’t fully offset the loss.

• There may be some hesitancy on the part of good tenants who have grown accustomed to getting their entire security deposit back upon moving out. They won’t like the idea of forking over a few hundred dollars as an additional fee (especially if you already have pet deposits, parking fees, etc.).

• No incentive. When a tenant has no security deposit on the line, there’s far less incentive for them to be careful. Small damages become no big deal and they’re less likely to fix or avoid problems.

Which One is Best for You?

“If you live in a jurisdiction where the security deposit laws are complicated and the penalties strict, you might want to consider charging a move-in fee, dropping the security deposit altogether,” Agadoni notes. “But if you live in a state with straightforward security deposit laws, you’re probably better off collecting the security deposit.”

It’s your call. If security deposits have worked well for you in the past, feel free to continue. If you want to change things up and see how move-in fees work, that’s fine too. Take your time to think through this issue so that you can make a wise choice.

Work With Green Residential

Being a landlord is all about managing risk and reward. From the properties you invest in to the ways you customize your lease agreements, every decision you make has an impact on financial health and well-being.

At Green Residential, we want to help you mitigate risk, increase profitability, and sleep better at night. We do this by offering best-in-class property management services to Houston real estate investors and landlords. To learn more about our services, please don’t hesitate to contact us today!