Tenant Security Deposits as Income Source?

I’ve seen a strong trend, nation-wide, to use security deposits as an income source for landlords. No, I’m not talking about a tenant moving out with a dirty apartment and forfeiting a $750 security deposit.

The trend is to allow good tenants, or tenant prospects with excellent credit and steady employment, to “buy out” of their security deposit completely, or partially. Here’s one scenario:  Jane has a $1,000 security deposit. She’s been a tenant for two years and always paid her rent exactly on time. Her neighbors love her, and the house/apartment is always neat as a pin. When it’s time to renew her lease, you say to her, “Jane, you’ve been a good tenant. We’d be willing to let you buy out of your security deposit for a $300 fee.  We will deduct $300 from the $1,000 as our fee, and write you a check for the other $700.”  Or, “We’d be willing to let you reduce your security deposit by 50%, but there’s a $150 fee. We will refund $350 to you, keep $150 as our fee, and keep the remaining $500 as a reduced security deposit.”

Tenants are lining up to take advantage of this!  No, it doesn’t make economic sense for them, in the long run. They are giving up a full deposit refund some time in the future, for some quick cash here and now. But, many of these same people claim no deductions for their payroll withholding, so they over-pay their taxes each year and get a refund in February of the next year.  Yes, Uncle Sam keeps their money interest-free for a year, and then gives it back to them, and they think that’s wonderful. It feels like a free pot of money, falling out of the sky.

There are several advantages to allowing the best tenants or prospects to “buy down” their security deposit.

  1. Your fee income increases for that property, and immediately drops to the bottom line as pure profit.
  2. For a tenant prospect, it is cheaper to move into your property than a competing property, because the up-front money is smaller.
  3. For a renewing tenant offered this deal, it is a reason to renew with you rather than move to some other property.
  4. For a tenant who buys down their security deposit, and then is later “on the fence” about whether to renew or not–it is easier for them to stay. That is because they no longer have a full security deposit they can expect to be refunded, which can then be used as a security deposit on another property. Now, it is too expensive to move. So they stay!

Share your thoughts with me. I think this is an exciting idea.  Yes, there is some risk the tenant will leave, owing you money and no security deposit. But, that’s only because you already obtained the money much earlier, as a fee. You have the money!  You haven’t lost anything. Plus, you’ve made money on the people who would otherwise have received a full refund at lease end.