What are the most common practices in all of real estate is for a landlord to require a new tenant
to provide a sum of money
when they first move into an apartment and initiate a new lease.
This sum of money is most commonly structured in the form of a security deposit,
which a tenant gives to a landlord who then holds it in escrow until the tenant moves out.
An alternative to a security deposit is something called a move-in fee.
I encourage you to only charge one-time moving fees.
There are several reasons for this.
First, a security deposit is money that has to be held in escrow.
It's essentially the tenant's money, unless there are damages in place once they move out.
For me, it's super annoying to have money sitting in a bank account that I'm not allowed to touch.
I feel like it's a much better option to charge the tenant a moving fee
that's lower than the standard security deposit for your market.
And you make it non-refundable.
The tenant is happier because they're paying a lot less than what's normal for a security deposit.
And you're happier because you can actually spend the money.
It's a win-win all-around.
The standard cost to charge for a moving fee can vary drastically
between markets and even landlords within those markets
To give at least some kind of a ballpark though, according to apartments.com
a good rule of thumb is that a moving fee will roughly be 33% to 50% of the monthly rent them out.
Now, obviously, in order to make a move-in fee and attractive alternative to security deposit
you should find out what the standard charges for a security deposit within your market
and then make sure that your moving fee is substantially less than that.
As I understand it, the most common charge for a security deposit is the equivalent of one month's rent,
but this can vary widely depending on the market, the individual landlord,
and the quality of the tenant.
If a potential tenant is considered a higher-risk, meaning they barely meet the standard income credit
and or background check requirements that you want to see in an applicant
sometimes a landlord may offer the apartment on the condition that the applicant pays
a larger security deposit.
This way the landlord can offset their risk.
Oh, and by the way, just in case you're unaware of what's common practice here.
Typically a landlord is going to require both the security deposit and the first month's rent
to be collected before they'll provide keys to a tenant.
So if you're going to be charging a move-in fee instead of a security deposit,
you'll also want to make sure that you receive payment for that before you provide keys.
Again, the most common amount to charge for a security deposit is equivalent to one month's rent.
But depending on the market and circumstances, some landlords may charge only half of that.
Or on the flip side, they may charge more.
I've heard about some landlords requiring security deposits as large as three months' worth of rent.
It all ultimately depends on the individual landlord, the tenant, and the market.
One last thought on this before we move on, a lot of states have a legal limit on the amount
of landlord can charge for both a security deposit and a move-in fee.
You're definitely going to want to do some research in order to figure out
what the rules and customs are for your area.
Once you find out what standard for security deposits in your market, all you have to do
is make sure your moving fee is significantly lower, and boom, you're in the game.
Remember a good rule of thumb for this is to charge somewhere between 33% and 55%
of the monthly rent amount.
Now, something else to be aware of when it comes to charging moving fees, instead of security deposits
when you do this, you're actually increasing the income of your property.
As a house hacker at first glance,
this might not seem that significant, but in commercial real estate,
the value of a property is exclusively tied to the income that the property produces.
People who invest in large multi-family will do whatever they can to increase the income of their investment property
because as the income increases the value of the property itself,
meaning the money that you can sell the property for also increases.
According to the IRS, a security deposit is not considered income unless you ended up
keeping it because your tenant did not live up to the terms of the lease,
but moving fees on the other hand are considered income.
Because a moving fee is a one-time non-refundable charge
It is in fact income for the property.
This means that your property is more valuable, literally worth more money.
If you ever decide to sell it, simply because you charge moving fees instead of security deposits.
Now, one of the things you may be concerned with, if you go the route of charging moving fees
is what happens in the event that a tenant causes severe damage to a unit.
You might be thinking with a security deposit in place
at least the money will be there in the event that it's needed. Right?
Well, this is not necessarily true.
If you do a good job vetting tenants before you lease to them more often than not,
you'll be returning the security deposit, at least in part to the tenant when they leave.
In the event that a worst-case scenario actually does happen
and a tenant leaves a unit in complete disrepair.
If you think about it, a security deposit equivalent to only one to three months' worth of rent
probably is going to help very much.
You'll most likely have to spend a lot more money beyond what you received
as a security deposit in order to get the unit back in shape and rent ready.
So for me, having an additional way to generate income by charging in moving fee,
and then making sure that I have ample savings in place to cover me in the event of a worst-case scenario
is a far better position to be in than having to deal with security deposits.
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