Security Deposit: What Landlords Must Know

When finding a tenant, you may be wondering about security deposit. How much to collect? When should you collect it? Or when do you need to return it?

Security deposit is a sum of money that the landlord collects from a tenant in addition to rent payments. It's also known as rental deposit.

This deposit is a form of collateral to protect you if the tenant violates the terms of the tenancy agreement. You can use the security deposit to cover for damages to the property caused directly by the tenant. If the tenant defaults on the tenancy, you can also use the deposit as back rent.

However, many landlords commonly misunderstand the intention of collecting a security deposit. They only use it to offset rental owed by the tenant, while still continuing to rent to them until the deposit has run out.

By reading this post, you'll have a better understanding of how rental deposit can protect your interests.

How Much Security Deposit Should You Collect?

It's up to you and the tenant to negotiate the amount. The market practice is to collect half a month of rent for every 1 year lease as security deposit.

For example, a tenant wishes to rent your property at $2,000 a month for one year. It's typical to collect $1,000 of deposit. On the other hand, if the tenant rents for two years, the deposit would be $2,000.

However, as a landlord, you're not required to strictly follow this established practice. If you foresee an elevated risk of renting your property to a tenant, you have the right to request a larger security deposit.

Below are some scenarios where there's an increased risk of renting to a tenant. Therefore, asking for a higher amount of security deposit is justifiable.

Scenario A: Singapore Company With No Singaporean Officers

Tenant is a company incorporated in Singapore. But none of its key executive officers, such as directors and company secretary, are Singaporeans.

In the event of a tenancy default, whatever the causes may be, it's very easy for the tenant to simply leave Singapore and disappear. The landlord will not be able to recover the amount owed by the tenant. It's safe to say the money owed is lost for good. As such, landlord is taking an elevated risk when renting to this company.

If you're considering to rent to such a company, consider collecting a larger deposit.

Scenario B: Foreign Registered Company

Tenant is a foreign registered company with no Singaporean key executive officers.

This is similar to Scenario A. Landlord is taking on a risk, when renting to this tenant. Any money owed by the tenant will eventually be lost.

Scenario C: Low Rental Amount

Tenant is renting a small space where the monthly rent is $400.

When renting to this tenant, the higher risk may become realised should the tenant damages the property and refuses to pay. The cost of repair may be higher than the $400 security deposit that the landlord holds on to. Eventually, landlord will suffer an irreversible loss.

Scenario D: Short Lease

Tenant is renting for four months at $1,200 per month.

Based on the short lease, the landlord will be holding on to a proportionately smaller amount of security deposit. This situation is similar to Scenario C. Should the property incur damage by the tenant, the landlord is likely to pay for the repair partially from his own pocket.

Scenario E: High-Risk Businesses

Tenant is in a relatively high economic risk business and is only renting for one year.

Businesses in high-risk industries are very sensitive to economic volatility. Adverse economic conditions may put certain companies out of business relatively quickly, resulting in rental default. If the landlord doesn't pay attention to the timeliness of the tenant's monthly rental payment, when the tenant eventually goes out of business, the landlord will inevitably suffer financial losses.

The above scenarios are by no means exhaustive. Landlords are strongly advised to conduct your own due diligence on the tenant. This includes checking on tenant databases and see if there are any reports against a prospective tenant. Then, determine the risk involved in renting to the tenant and request a sufficient amount as security deposit.

While protecting your interests as a landlord is important, demanding a higher rental deposit may turn a prospective tenant away. Balancing between your interests and your tenants' is a delicate act. Thus, it is important to exercise good judgement and seek second opinion from a real estate professional.