Savvy Strategies for Security Deposits

How much should owners request in order to ensure that residents pay the rent and return the unit in good condition? And what are the best ways to retain some or all of the deposit?

Within the residential leasing business, the security deposit has long been a vital tool that has allowed landlords to ensure their properties and rent rolls are protected. Figuring out what to charge and whether to return deposits after alterations have been made to the apartment, however, can be quite tricky. As a longtime specialist in landlord representation, these topics are ones to which I have given much thought.

Typically, tenants are required to pay a deposit that is equal to one month’s rent. For recent college graduates or those who have been at their job for less than six months, I will typically request a deposit equal to two month’s rent. I will make an exception if someone can prove that they’ve been previously employed in a similar industry for a significant period of time. If I’m dealing with someone who has no credit, often because they’re from a foreign country, I will likely require that a deposit somewhere from three to six month’s rent be paid upfront. Guarantors, whether individuals or companies, may certainly help to reduce the amount of security deposit that’s required, on a case-by-case basis.

Credit Counts

Many younger people in particular don’t have the credit score required to put down only one month’s rent for a security deposit. Due to faulty advice they’ve received, many recent college graduates have only one or two credit cards, which doesn’t bode well for their credit when it comes time to rent. I always advise young people to open as many lines of credit as possible and either pay them off in full every month or to not use them at all. The more cards one has open and paid off and the more available lines of credit that one has but doesn’t use, the better their credit looks to a landlord who is considering what amount of security deposit to retain. Other ways by which a potential tenant may establish credit include securing a mortgage or car loan.

When it comes to the traditional rule that a potential tenant’s salary must be 40 times the rent, I am definitely not religious about this requirement, and I would advise other landlords to not focus as much on salary. After all, the creditworthiness of a potential tenant is a much better indicator of how they pay their bills. In general, I find myself requiring a larger deposit for those with poor credit as opposed to those with lower incomes.

Damages Subtracted

In terms of returning security deposits to renters, the laws often favor tenants in this regard. In the state of New York, landlords have 30 days to return deposits. If they’re keeping part of the deposit, they must send a letter by certified mail within 30 days that includes an itemized list of damage done and the cost for each item of damage. If certain damages aren’t on the list, landlords must refund the non-itemized balance. If a tenant wishes to dispute charges, they may sue in court and the statutory maximum which they can be awarded can be as high as three times the initial deposit. A landlord can likewise be sued for triple damages if they fail to return the tenant’s security deposit within 30 days.

Situations in which landlords have the right to withhold part of the security deposit include a tenant leaving very dark paint on the walls or if a tenant uses faux paint or wallpaper. Holes in the wall and floor that require more than basic repairs such as plastering and sanding are also damages for which the tenant must pay. At times, I have noticed major damage of appliances beyond regular wear and tear. If a refrigerator door is falling off or a stove has stopped working due to being jammed, I will certainly add those damages to an itemized list. These scenarios can be even more frightening when dealing with furnished rentals where televisions, chairs and coffee tables are often destroyed. Water damage that either was the tenant’s fault or wasn’t the tenant’s fault but that they failed to report is also something for which I hold tenants accountable.

Landlord’s Rights

Last but not least, if tenants vacate unexpectedly without proper notice or if they refuse to let their residence be shown by a broker even after they’ve said that they are vacating, landlords are entitled to keep part of the security deposit. Likewise, if a tenant breaks their lease in the middle of it, their landlord can keep the security deposit and often may charge a penalty on top of that.

While they often prove useful to landlords for now in terms of maintaining their properties, security deposits may be a bit of an arcane system in light of new products that are coming to market which may allow landlords to bypass them. This could prove especially useful for tenants from foreign countries with decent income but no credit. However, only time will tell if these products will be embraced by landlords.

 Adam Frisch is managing principal of Lee & Associates Residential NYC, the first residential division of the national Lee & Associates brand.