How much is your Security Deposit really costing you?
I spend many Saturdays in the fall, on a college campus. As we walk to the stadium we pass one of probably dozens of bicycle racks, each holding probably a hundred bicycles. I am amazed at how often I see one glimmering wheel secured with a heavy duty chain and monster lock. I strongly suspect that the wheel used to be attached to a bicycle. The owner after locking his bicycle no doubt walked away feeling that his property was secure. But the owner only focused on locking the wheel, and not the frame. In the end, that singular focus proved costly. In Houston property management, a singular focus on the security deposit could prove just as costly.
The security deposit is designed to provide the owner some measure of security (protection) from both breach of lease, or
Often times in this business you hear “First and last month’s rent” is the cost of a rental. If this is you, as the landlord I can assure you that more times than not, the tenant will use the security deposit as the “last months” rent, leaving you with either no security deposit, or no rent for the last month of tenancy. Since it is the last month and the tenant has given notice, even filing an eviction will give you little recourse to recover your lost rent, and the result will likely just add to your “out of pocket costs”.
Some landlords require a security deposit far in excess of one month’s rent. The landlord derives some additional comfort in holding thousands of the tenant’s dollars for security. But, from the tenants prospective, with a higher than market security deposit they often times feel “entitled to damage” the property. After all, “my deposit should cover it”. In addition, this practice sets up the landlord for paying the hidden costs of having mispriced the security deposit as we will discuss next.
The tenant is looking for a place to live. They are looking for the right location, with the right features, in the right price range. Not much different than the way any of us shop for the right product or service. Each landlord with a vacancy is really offering a competing product. Too often landlords only focus on one feature of their product, rent. But that is not the sole focus of the tenant. The tenant is more concerned with total move -in cost. For illustrative purposes, two properties in a subdivision, a model match in every way, each rents for $1400. You would expect both properties to have a similar amount of marketing time (vacant days) However, consider, one property requires a security deposit of $1400 or more, while the other property requires a security deposit of only $1000. From the tenants prospective these properties are no longer equal, one has at least a $400 or higher total move in cost. Now which one will rent faster? The one that offers the most value at the most competitive price.
What about those rental hidden costs the landlord will be paying? A rent rate of $1400 equals $46.67 per day (1400/30) in gross revenue to the landlord. If the landlords mispricing of the security deposit results in the property staying vacant just two weeks longer (14 days), it would cost that landlord $653 in lost rent revenue right out of his pocket. That is 50% more than what the landlord would have received from the $400 in increased security deposit which he would have to return to the tenant..Just as bicycle security requires locking both the wheel and the frame, the proper balance of rent and security deposit provides the owner with both security, and maximizes revenue. Where is your focus?
Written by John Grey/ Real Property Management Houston Owner/ Broker