How Much Should a Landlord Charge for a Security Deposit?

Landlords have much to consider when perfecting their rental units and maximizing their ROI. Marketing the property, communicating with tenants, and handling repairs are part of the day-to-day. One of the hardest things to do is determine how much rent to charge. But, in all of the chaos of figuring out rental fees, sometimes, an essential aspect of the rent gets overlooked; the security deposit. But how much should a landlord charge for a security deposit, and what are the limitations?

The Benefits and Importance of Security Deposits

Security deposits are designed to be a form of collateral to ensure that any unforeseen issues or damages have the money in place to be taken care of. It also incentivizes tenants to keep the property clean and pay their rent on time. While it may seem only to benefit the landlord, accidents do happen, and having a security deposit can be a fantastic resource. Either way, landlords should always make it a priority to charge a fair security deposit.

How Much Should Landlords Charge?

Typically, a security deposit is the amount of about one month’s rent. However, some landlords charge up to three months of rent in some circumstances. When deciding how much to charge for rent, there are a few factors you need to take into consideration.

A large part of what determines a security deposit is the price of the unit itself, the cost of amenities, furnished units, and the rental competitors in the area. For example, suppose your competitors only charge one month’s rent as a security deposit. In contrast, you charge three months, and there isn’t much discernable difference between the amenities and rent price of the two properties. In that case, you may want to consider lowering the deposit amount.

However, if your tenant has a poor credit score or doesn’t have a strong employment history, you may want to consider charging more as these tenants may be more likely to miss rent payments. The same applies to a tenant that has a poor rental history.

What Are the Limitations of Security Deposits?

Landlords need to be very familiar with state and local laws in general, and security deposits are no different. Each state has different laws regarding the caps for security deposits. For example, states such as Kentucky, Idaho, and Colorado have no statutory limit, meaning there is no stipulation regarding how much landlords can charge. However, in Hawaii, the limit is one month’s rent and only an additional month if the tenant owns a pet. Meanwhile, Missouri’s overall limit is a hard cap of two months. Security deposit laws vary widely in different states, so make sure you know the law in your area.

Knowing how much to charge for a security deposit and understanding the law are critical to being a responsible landlord. So be sure to check your state and local laws and always have your charges written out in the lease agreement.