Deer Valley Real Estate

by nancyarora2020

Rental Property Investing: Why a Security Deposit is Necessary

Collecting security deposits from tenants absolutely, positively must be part of your rental property investing plan. If you?re a regular reader, then you know I advocate purchasing older 2-4 unit multifamily investment properties as part of a long-term (10+ years) buy-and-hold strategy. Thus, it?s highly likely that you will need to be a landlord, and when it comes to managing tenants, the security deposit is one of the few leverage points you have.

Here is a real world example of why the security deposit is critical. In 2007 I wound up with terrible tenants living in the large half (4 bedrooms) of one of my side-by-side duplexes. I still remember this couple well ? Rolando and Lynette. They hold the prize for the worst tenants I ever had.

Within 3 months they were falling behind on the rent, which was $ 1,200 per month. He wound up being unemployed and she collected disability from the state for some unknown (and questionable) reason.

I wasted many hours of my precious time calling them, leaving messages that went unanswered, and then calling them some more. The only thing that worked was showing up unannounced at their doorstep. At least, it worked the first time?the second time they gave me a check that wound up being from a closed bank account.

Beyond the money hassles, there were other problems too. First, they argued violently day and night, which prompted many complaints from the single mom who lived next door in the duplex. Additionally, the couple turned out to be drug dealers and drug users, so people were coming and going at all hours of the night. They also snuck in a dog without my approval, which luckily I found out about 3 days later and removed. All in all, a complete nightmare in every way imaginable.

So, 5 months later I filed for eviction and I obviously won the case. Of course Rolando and Lynette did not leave voluntarily, so I had to execute a lockout with the local police. On top of all this, the apartment was in a shambles. There were so many items of clothing strewn around in every room that in most parts of the apartment you could not see the floor! To add insult to injury, I then had the pleasure of packing up all of their belongings in trash bags and putting them on the front porch for them to pick up. Yes that?s right ? I literally helped them move out!

Luckily, I did not incur a financial hit for this episode, thanks to the fact that I collected a month and a half security deposit from them ($ 1,800). They stiffed me on the last month of rent, so I first deducted this amount from their deposit. That left $ 600 to clean up the place, pay for the eviction fees, and make a few repairs. And within 2 weeks I had the place re-rented to an excellent tenant who still lives there today, so I only incurred a couple weeks worth of vacancy loss.

Therefore, despite the nightmare, at least financially I was pretty much able to break even. So the lesson is that you must collect the largest security deposit your state will allow. My state (NJ) allows landlords to collect 1.5 months worth of rent for the deposit, but all states are different so make sure you find out the maximum that your state will allow.

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