The Truth About Security Deposits
After the 2008 housing crisis more Americans are opting to forgo the typical home buying experience. With the average single family home selling for over $350,000, renting is increasingly becoming a more budget friendly option for many families. But there’s one barrier to entry that prevents many qualified renters from finding their dream space, the dreaded security deposit. Here are a few things you should know about security deposits before signing your next lease.
What is a Security Deposit?
A security deposit is a refundable lump sum of money paid to the landlord and kept for the duration of your lease. It is primarily used to cover any damages, late payments or breaches of contract committed by the tenant. It usually costs the same amount as first months’ rent and acts as a cash insurance policy in case anything goes wrong with the lease agreement. The thought is that by having some of their own money tied up, tenants are less likely to wreak havoc on the property and risk losing their deposit. After a period of time, the deposit will usually be returned to the renter.
It is not the same as first or last month's rent?
A common practice is having a new tenant pay both first months rent and a security deposit and charging them both at the same price. For example let's say the average price for rent in your area is $1,200. A landlord may ask for first month’s rent of $1,200 plus a security deposit equal to the first month’s rent, so another $1,200. This would put the total, without adding any other fees, at around $2,400 just to move in. In some cases a tenant may be required to pay up to 3 months rent up front depending on their credit history. This can out price people who can afford to pay rent each month but don’t have thousands of dollars to pay the lump sum. The main difference between the two is that the security deposit is there to cover damages.
It dissuades qualified buyers
Young renters may barely cross the income threshold to qualify for a decent property. With millennial student debt being at an all time high, it is becoming increasingly harder for tenants to save the extra hundreds to thousands of dollars for both the down payment and first month's rent. Not to mention all of the other costs that are associated with moving such as renting a moving truck, buying furniture and covering any changes in living expenses. Many potential tenants will completely skip applying for a lease if the initial fees are too high. This can lead to less revenue for landlords due to extended periods without rental income.
It may not protect the landlord completely
One of the biggest fears landlords face is having to deal with an unreliable and destruction prone tenant. But due to issues with slumlords and unethical property managers, there are now several legal precautions in place that actually advantage the tenant over the landlord. For example in Chicago, landlords could be required to return the original security deposit to the tenant and pay two times the deposit amount if certain guidelines aren’t followed. If a tenant wins a claim against the landlord, all of the tenants court fees and attorney fees must be covered in full by the landlord.
You can always opt out
The good news is, there is a way for the tenant to move into their new property without the hassle of a deposit and for the landlord to be fully covered for the damages. It’s called a “landlord guarantee” and it protects the landlord completely for the entire duration of the tenants stay. A tenant would pay a percentage of first month’s rent over a 12 month period on the same bill as the rent. This works better for the tenant because they can move in faster and after the first year, the payments end but the guarantee stays, so rent is actually lower for the tenant! This leads to happier tenants who end up renewing their lease again and again. For more about the landlord guarantee or to learn how it would work with your property, visit www.jackandlandlords.com