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Building A Better Business
When Should You Require Surety Bonds Rather Than Security Deposits From Your Tenants?
Dennis Jenkins
If you're the owner of an apartment building or single-family rental home, you may feel as though you're constantly straddling a balance between requiring enough of a rental deposit to pay your turnover costs and turning off potential tenants by charging high security deposits. However, a single incontinent pet or incorrigible child can cause thousands of dollars of damage to your rental unit, erasing any profits you may have pocketed so far. Read on to learn more about the differences between surety bonds and security deposits to help you decide which is the better financial choice for your rental properties.
How do surety bonds and security deposits protect you against damage?
A security deposit is usually equal to one or more month's rent and is designed to cover any damage to the unit that isn't covered under normal wear and tear -- from large holes in the drywall to severely stained carpet or broken cabinet hinges. In most states, you'll be required to account for the cost of any repairs to the unit and return any excess security deposit to your tenant; you're not usually permitted to keep the deposit to compensate yourself for expenses like posting a rental ad or having the carpet cleaned.
A surety bond provides you with the same level of coverage against damage, but requires the tenant to pay a third-party bond company, which then insures your unit against damage. In exchange for a non-refundable fee, your tenant can gain a greater amount of financial coverage than he or she is likely to be able to provide in cash. And both surety bonds and security deposits protect you in another, less tangible way -- a tenant who's able to scrape up a month's rent and security deposit or who has the credit to qualify for the issuance of a surety bond is probably more likely to pay his or her rent on time and be relatively respectful of the rental unit.
Should you require a surety bond rather than a security deposit?
There are a few situations in which requiring a surety bond rather than a security deposit from your tenants may be a good idea.
One is if you suspect your tenants may be judgment-proof—that is, unable to spare any extra income to pay a judgment if they cause more damage to the unit than a security deposit can cover. Requiring a surety bond can also be a good idea if your tenants have pets or multiple young children, as you'll have a relatively high ceiling when it comes to the amount of damages you can claim after your tenant leaves.
For more information, contact companies like NFP, P & C, Inc.
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