3 Factors to Consider When Setting Your Security Deposit

Security deposits range from $200 to a month of rent and more, but how do you decide how much to charge? A security deposit is an important part of your business as a real estate investor. It protects you from paying for repairs out of pocket and in theory gives your tenants extra motivation to take good care of their unit.

Here are 3 factors at play for setting a security deposit:

State Laws
Some states have laws to limit the amount you can charge a tenant for a security deposit. This is not the case in Colorado but is important to keep in mind if you own rental property out of state. There’s a chance the law could vary from city to city. As with many aspects of real estate investing, it’s important to be familiar with the local laws that can affect your property.

This means in the state of Colorado you have the freedom to charge a tenant a security deposit amount of your choosing. However, you want to research what other properties in the area are charging so you don’t out price yourself.

Rental Price
Price is the biggest factor in how much you should charge for a security deposit. It is relatively common practice, even in states without laws limiting security deposit, to charge some percentage of rent. Often rental properties will charge a month’s rent as a security deposit. Anywhere from half up is an acceptable amount to charge.

Remember, you don’t want to under charge in case there is damage to the property. Having to hunt down more money from a former tenant can require a lot of time, so it’s best to collect before hand and return when you find there is no major damage.

The third part of your decision is based on the amenities your property has. If you are listing a walk up property with street parking and no washer and dryer it would be bad practice to charge a high security deposit. If your property offers full amenities, then charge the high end for a security deposit, likely a whole month’s rent, if not more. If you have a furnished unit, charge a security deposit that will cover furniture in the event it’s damaged.

Remember, there are still other factors at play when it comes to charging a security deposit, such as a renter’s history. Consider all factors when setting your security deposit to ensure you are fully covered. If you’re looking to maximize your investment, contact us today to learn more about our property management services.

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