When you invest in rental properties, you will be collecting money every month from your tenants. This is part of the property management. Not only do you need to collect the rent, but it is very wise to insist upon a security deposit from your tenants when the begin living on your property. A security deposit will protect you from the financial hardships that can accompany damages done by your tenants. In addition, if they should attempt to leave without paying you some money they owe you, then you can retain their security deposit in exchange. So, a security deposit can protect you, the investor, in multiple ways.

What you charge for a security deposit can vary, depending on the individual circumstances. For instance, there are some states that have specific regulations regarding how much money you can collect. It is in your best interest to collect the highest amount allowed by law, to prevent any hassles down the road. Many landlords demand a security deposit that is equal to one and a half times the amount of the monthly rent. There are a couple of circumstances that may change the amount you collect from your tenants.

One potential situation that may require a security deposit adjustment is when your tenants have pets. If you are going to allow pets, then you are placing your property at an increased risk of damage. Another situation that would require a higher security deposit is when your tenant has a waterbed. Poor references may be another circumstance that could prompt you to demand more. In any of these situations, you will want to have more money as a security deposit, provided it is still within the legal limit.

All security deposits should be collected before you allow your tenant to move in. Do not hand over the keys to the rental property until you have collected the full amount of the security deposit, or else you run the risk of not collecting the security deposit and this totally defeats the purpose. Allowing a tenant to make monthly payments toward a security deposit is a bad idea, as well. And, common sense dictates that you should not accept a personal check for a security deposit unless you cash it prior to the tenant moving in and ensure that there are adequate funds in the account.

Be sure to verify any local or state guidelines regarding collection of security deposits, and how you must account for it while the money is in your possession. Some landlords will complicate matters by breaking down the entire security deposit into smaller fees: such as “key deposit,” “final month’s rent,” or “cleaning deposit.” While this may make sense at the beginning of the process, it will quickly become very cumbersome and confusing. Charging one lump sum and determining at the time the tenant leaves what is owed is much wiser. Additionally, formally including a statement in the lease that the security deposit is not intended to be the last month’s rent is wise—people who intend to use the deposit for this purpose are far more likely to leave your property in poor condition. If you have to use the security deposit for the last month’s rent, then you get stuck with the cost of any repairs or cleaning fees coming out of your own pocket.

If you are going to be in charge of your own property management, then you will need to learn many “tricks of the trade,” including how to best handle matters involving security deposits.