Tenant Deposits, How to Reduce Risk

hand-holding-a-grenade-1411373825Xtf-PDTenant deposits are one of your keys to risk mitigation.

If you are like most landlords, you think that the largest risk to being a landlord is getting your rent.  You know that deposits will protect you, and if you are calculating your numbers correctly, you will make a big profit.

Make no mistake, if you think all you need is a deposit to protect you, you will be headed for disaster.

The number one way to protect your income stream from tenant defaults is to get great tenants to begin with. Good tenants will bring in a solid income of at least 3.5x the rent in income. Preferably much more. With the average family income over $50K annually, just getting an average income will probably be well over 3.5x the rent in income.

Income will tell you the tenant’s ability to pay rent.

The second piece of the puzzle is credit score. With a C-grade credit score north of 620, and the average tenant’s credit score being north of 650, it is easy to weed out lower scoring tenants to reduce risk.

Why take the bottom of the barrel tenants in terms of credit score, and increase your risk? These people may be great people, and some will definitely pay rent, but it is a higher risk potential. Mitigate your risk by selecting a tenant who has proven their ability to stand behind their financial commitments.

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Do you have any interesting tenant deposit stories? What is your policy on deposits, or what have you experienced as a tenant?

4 Replies to “Tenant Deposits, How to Reduce Risk”

  1. I actually have 2 tenants that I let them use the deposit because they were short of money to fix their car. One paid it back, the other one never did. She played everybody too – Her Dad, her Boss, and I. She got money from all three of us, but she didn’t pay any of us back. She’s however a good tenant, pleasant to be around. 🙂 Oh well, can’t go by the rule all the time. She also only made partial deposit from the get-go.

    1. That seems to be a 50% success rate… Not so good. hopefully she stays a long time, and pays on time between now and then. That is the problem renting to lower income people. No emergency fund. They may be great people, but if your mortgage company will not accept their stories for payment, you should not either.

      If you ever let a renter stay for free, please let me know. I need a cheap retirement place to live…

      1. 🙂 Wow, if my multimillionaire property tycoon is my tenant! Yeah!!

        She has the pattern of paying half at the beginning of the month, and the other half in the middle of the month. I’m sort of letting it go. We’re on pretty good term. She’s neat, clean, and also a health freak (everything organic – I kind of like that so we have stuff to talk about if we wanted to). Also I don’t want to live alone in a 4200 sqft building. So, why not let her slide a bit, and have some company in case of emergency.

        1. It sounds like you are renting to a friend, more than treating it as a business. That is OK, but could lead to problems if she doesn’t pay rent. It sounds like you get some benefit just from having her there though.

          Good luck!

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