Security Deposit vs. Move-In Fee: Which is Better?
One of the biggest risks with managing a rental property is having to deal with property damage by existing or outgoing renters.
Over the years, security deposits have been the preferred option by property managers when it comes to compensating for property damages caused by tenants.
But in recent years, property managers are beginning to adopt a new strategy, known as the apartment move-in fee. As a renter or property manager seeking to adopt either of the methods, it is important that you know first-hand what they mean and their pros and cons.
Definition of a Security Deposit
A security deposit is a refundable sum of money a renter or tenant pays to the property manager or landlord when moving into a rental property. It is usually one to two months’ rent, depending on city or state regulations. Also, landlords or managers can legally use the security deposit, or deduct from it, to pay for damages to the property caused by the tenant, or if the tenant skips paying rent and moves out.
Instills sense of responsibility in your tenants: Due to the costly nature of security deposits, renters are more likely to maintain their apartments to avoid losing their security deposits when they move out.
Added protection of your investment: Collecting a security deposit give your investment an additional sense of protection, since you can use a tenants’ security deposit to fix your property.
State laws on security deposits can be complex: For states like Illinois, accessing security deposits made by your tenants involves paperwork and restrictions that can lead to serious fines if you break any of the rules.
Potential tenants may be hesitant to pay: If your rental property is in a low-income area, potential renters may hesitate to release a month or two in rent in the name of a security deposit.
May lead to disagreements over move-out inspections: Tenants may not agree with your findings during a move-out inspection, leading to prolong arguments or even lawsuits.
What is a Move-in Fee?
A move-in fee is paid by a tenant to a landlord or property manager upon signing their new lease.
The fee serves to cover the costs of accommodating and processing new tenants, such as changing directories and reprogramming security systems. A move-in fee is always non-refundable.
Also remember, if the damage is bad you can always go after the tenant in court, just like you would if damage is over the amount kept as a security deposit.
Pros: More attractive for your tenants: Since move-in fees are usually 30 percent to 50 percent of a month’s rent, it will be easy for your potential tenants to agree to it.
No state regulations: In states like Illinois, where state laws require landlords to deposit the money received as security deposit into a separate account, this may delay your access to the money for repairs. With move-in fees, you can easily use the money for repairs or whatever you deem fit, as long as move-in fees are legal in your jurisdiction.
Non-refundable: Move-in fees are generally non-refundable, whether the tenant trashes the property or not. You do not need to hand it back to a tenant upon their moving out.
Cons: No incentive: When tenants have no security deposit or worthy sum of money on the line, they are more likely not to be careful with your property or worry about small damages.
Lower Fee: Since move-in fee are generally 30 percent or more of a month’s rent, it may not be able to cover the cost of serious repair issues. Due to its lower amount, you may need to file a lawsuit for more money, leading to additional delay and stress.
Which is Best for You?
You should base your decision on your location and the method that has worked best in the past.
If your property is in a jurisdiction like Chicago, where there are strict security-deposit regulations and penalties, then collecting a move-in fee may be your best bet.
But if your property is in a location with straightforward security-deposit laws, you should opt for a security deposit.
Most importantly, you should continue with a security deposit if you have had positive experiences about the process.