Move-in Fees vs. Security Deposits: Which Should Landlords Collect?

There are an estimated 20 million rental properties around the US. While many of those are run by property management companies, there are still a significant number of homes and apartments owned by individual investors who manage the properties themselves.

If that’s you, then you know there’s a lot of work to do as a landlord. And there’s a lot that can go wrong, which can be costly.

That’s why it’s important to plan ahead and charge the right move-in fees to your tenants. After all, you are entrusting tenants with your rental property, which is a huge investment for you, and costs you a lot of money.

But what refundable and non-refundable tenant fees should you require? Should you collect security deposits, or just charge a basic move-in fee? Keep reading to discover the best option when managing a rental property.

Common Fees Collected By Landlords

As a landlord, your main goal is to collect a rent check each and every month. If you ran your numbers on the property correctly and got a good deal on the purchase price, then you should be able to make a profit each month.

That means your rent check will cover the cost of your mortgage payment, property taxes, and insurance on the property. Ideally, there’s a bit left over after making those payments, which is your cash flow.

But rent isn’t the only thing landlords need to collect. Otherwise, your margin for error is very slim.

Other common fees to charge to tenants include application fees. In order to attract the highest quality tenants, you should attach a modest fee to your application. It’s standard to charge around $50 for this.

This will eliminate many of the lower quality tenants or people who are just sending out a mass amount of applications, that may not actually want to rent your property. These people tend to waste time.

Oftentimes, landlords will make the utility payments directly, and charge a utility fee to the tenants. But if it makes more sense to have your tenants register and pay utilities directly, that can be beneficial as well.

Pet fees should be charged for any tenants wanting to bring in a dog or cat. 90 million people in America own pets, so you might want to allow them in your rental. But they tend to do damage to the property from scratching or urinating, as well as making homes smell.

It’s up to you to decide if you want to charge late fees. Doing so can help ensure rent is paid on time.

Then there are move-in fees and security deposits, which we’ll cover more in-depth.

What Is A Security Deposit?

If you’ve ever rented an apartment, then you’re probably familiar with a security deposit. Landlords charge this before a tenant is allowed to move into a unit.

This type of upfront fee has been the most common among property managers and landlords. By definition, a deposit means that a fee is refundable. The expectation is that this money returns to the tenant unless certain events take place.

Security deposits are usually charged in the amount of one or two months of rent. They can be a sizeable amount, but cannot exceed the state’s limits on deposits.

They are intended to cover the cost of damages that a tenant may cause to a property. If tenants damage the property, it should be their responsibility to repair it. And security deposits ensure this happens.

Upon moving out, the property should be inspected for damages. If any damage is present, the cost of repairs is deducted from the deposit. And the amount leftover after repairs is returned to the tenant.

Likewise, if there are any damages during a rental period that need immediate attention, like a broken window, that repair can be made right away, with money deducted from the deposit.

Some landlords will also include a cleaning fee in the lease. Upon move out, the property should be deep cleaned, including having the carpets professionally cleaned.

If it isn’t, and the landlord has to hire cleaners to prepare the property for a new tenant then the cost is deducted from the deposit as well.

Benefits Of A Charging A Security Deposit

What are the benefits of charging a security deposit? For one, it attracts higher-quality tenants. Those who are able and willing to pay the security deposit are likely going to be more responsible tenants.

They will probably have a track record of successful rentals in the past.

Charging a deposit also instills personal responsibility. Because their money is on the line, and they would like it back, they are going to treat the property with care. They are less likely to throw wild parties, and they will think twice about nailing a bunch of holes into the wall.

And with a large sum of money invested in their deposit, tenants may be more likely to stick around longer. Deposits may encourage tenants to stay for a few years, rather than bounce from one property to the next, having to constantly make more deposits.

Lastly, a security deposit provides you with peace of mind. It can be scary, especially for new investors, to put tens of thousands of dollars into a rental property, fix it up, and get it ready for rent.

Then, you entrust complete strangers with your investment. While you can not control their actions or behavior, you at least have the deposit, should you encounter any tenant damages.

That way, repairs don’t eat into your bottom line and eliminate your monthly cash flow.

Drawbacks Of A Security Deposit

Deposits aren’t perfect. If you’re investing in a lower income or even middle-class neighborhood, the number of interested tenants may be lower. Not everyone will be able to afford the security deposit.

Even if they can, they might not want to tie up that much cash for a year or longer.

You’ll also want to ensure you have a thorough inspection process before and after a tenant moves in. This should require both parties to walk through a property, take photos, and make notes of what they see. Otherwise, there might be some disagreements later on.

Also, using the funds from the deposit to actually make repairs can be a complicated process, depending on your state. Some states make it much more difficult to actually use these funds.

If you don’t follow all of the rules when doing this, you can face fines and trouble with the state.

What About Move In Fees?

Move-in fees are an alternative form of upfront fees, charged by a landlord to new tenants. They are usually much less than a typical security deposit, often between 30 and 50 percent of a month’s rent, rather than one or two rent payments.

Move-in fees are designed to pay for tasks such as updating security systems, filing paperwork for new tenants, and other smaller tasks required between tenants.

These are usually charged as fees, not as deposits. That means they are nonrefundable.

Move-in fees are not designed to cover the cost of repairs for damages caused by a tenant. You’ll need to have language in your lease agreement that documents how this will work.

This might mean that your tenants will have to pay for repairs out of pocket if the damage was clearly caused by them. If they refuse to pay for them, then you may be able to pursue legal action against the tenant.

But if you don’t charge a security deposit, you should work with an attorney to help draft a lease agreement that protects you and your property.

Benefits Of Move-In Fees

So why might you want to charge move-in fees rather than security deposits?

For one, they are much lower than deposits. This is much more attractive to tenants and will increase the number of interested parties. It can also make your property more accessible, which is important in man neighborhoods.

You can also use the money in any way you see fit. There aren’t any regulations on move-in fees. Since they aren’t a deposit, you won’t be giving them back to the tenant.

So you can spend the money as needed. You can even set it aside in the event that damages do come up.

With security deposits, since they are heavily regulated, you often need to deposit them into a separate account and not touch the funds until damage has been done. Move-in fees, on the other hand, are immediately accessible to you.

Drawbacks Of Move-In Fees

While move-in fees are becoming more and more common, they do have some drawbacks.

For one, since move-in fees are much lower, they often can’t cover larger repairs. Ideally, a larger repair will be paid for by the tenant, but you can’t depend on them to come through unless you have a strong lease.

In order to get the tenant to pay, a threat of a lawsuit, or an actual lawsuit filing may be required, which is costly and time-consuming.

And since there is no deposit on the line, and no money that could come back to the tenant, they may not be as responsible with your property. They could become more careless. And with a lower barrier to entry, you may attract lower-quality tenants in the first place.

This is where an effective screening process is required.

Security Deposits Vs. Move-In Fees

So which one should you charge your tenants? It really comes down to the area that you are investing in.

Certain state regulations can make the process of collecting, holding, and using a security deposit very difficult. This includes states like Illinois, where Chicago is a huge market.

Security deposits are such a hassle here that many landlords forego them in favor of move-in fees. Without regulations, move-in fees are a much easier way to collect some money from tenants in order to protect the property.

If you’re in a state where security deposits are easy to collect and use, they are usually the better option. But if you’re in a state where deposits are heavily regulated, you might want to move your life easier and just settle for the move-in fees.

What About Concessions?

What about concessions? This is another term that landlords need to be familiar with, especially as you get started for the first time.

Concessions are addendums to a lease agreement. They are changes made to the original lease, which usually reflect a benefit to the tenant.

For example, a common concession could be to waive the first month’s rent or reduce the first month’s rent. Landlords do this as an incentive for existing tenants to stay, or to attract new tenants.

When renting a property for the first time, you may face a lot of completion in your area from other properties and landlords. One way to attract a high-quality tenant to your new rental listing is with an attractive concession.

If you have a good tenant and want them to sign another lease, to prevent a vacancy and all of the work associated with it, you can offer a concession. For example, if they sign a new lease, they could have a discounted rental period of one to three months.

And it doesn’t have to be free or discounted rent, either. You can provide free access to amenities, like laundry. You can provide free moving supplies, or reimburse them for a moving service. You could cover the cost of monthly internet.

When it comes to attractive concessions, think like an entrepreneur. Find creative, yet low-cost ways to add value to your tenants.

There are many different types of concessions you could offer, and many different reasons to offer them. As a landlord, it’s not always about taking. Sometimes, providing value to your tenants, in the form of concessions, is in your best interest.

Becoming A Succesful Landlord

Security deposits and move-in fees are both very important when it comes to managing a successful rental. Landlords need to be ready for the work and the damage that rental properties naturally incur.

By charging the right fees or deposits from your tenants, you can ensure they have a good renting experience, and you have enough to protect your monthly cash flow.

Looking for more tips like this? Check out our blog today to keep reading.

Read more:The Perfect Property: What Does a Property Management Company Do?

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