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Rental Property Investing: The Need for Security Deposits

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Assuming you have a long-term rental property investing strategy, you will need to deal with tenants, and collecting security deposits from them is mandatory. Here is a real world example of why this is critical.

In 2007 I wound up with horrible tenants. I still remember this couple well – Rolando and Lynette. They definitely hold the prize for the worst tenants I ever had. Within 3 months they were falling way behind on the $1,200 monthly rent. I wasted a ton of time calling them, leaving messages that went unanswered, and then calling them some more. One time I actually showed up at their doorstep, at which point they had the gall to give me a check that wound up being from a closed bank account!

Beyond the money hassles, there were other problems too. For example, they turned out to be drug dealers and drug users, so people were literally coming and going at all hours of the night. This, coupled with their non-stop arguing, made life miserable for their neighbors. They also snuck in a dog without my approval (which I soon discovered and removed).

I ultimately had them evicted, but of course they did not leave voluntarily in order to live rent-free for as long as possible. Finally, I did a lockout with the local police. They left the apartment in shambles, and to add insult to injury, I had to pack up all their belongings and put them on the porch for them to pick up. Yes that’s right – I literally helped them move out!

Luckily, I collected a month and a half security deposit ($1,800) so the financial hit was minimal. I was able to deduct 1 month of unpaid rent, plus an additional $600 in cleaning / repair fees, directly from their deposit. And within 2 weeks I had the unit re-rented so for all intents & purposes I broke even.

So the moral of this story is that you must collect the largest rental security deposit your state will allow. My state (NJ) allows landlords to collect 1.5 months worth of rent for the deposit, but all states are different so make sure you find out the maximum that your state will allow.

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