How to make sure that your security deposit sufficiently protects your rental investment.
Whether you or your rental agent handles the deposit, the decision on the deposit amount should be carefully considered. The current volatile nature of the economy in South Africa, as well as the unpredictable circumstances that arise with tenants, has led to security deposits being more important than ever.
According to Grant Rea, RE/MAX Living Rental Specialist, one-month security deposits were typically enough to cover any damages that a tenant had caused to the property. However, this is no longer the case, due to tenants now struggling to make their rental payments as the cost of living rises. A landlord now needs to factor in more than just damage costs, as defaulting tenants have become a consideration that landlords should plan for in advance.
Rea says, “Generally anything less than two months’ security deposit leaves the landlord at risk of financial loss in the event that their tenant defaults on their last month’s rent or leaves the property with extensive and costly repairs.”
Real life example
Rea gives the example of a situation he recently dealt with involving a landlord whose tenants had divorced. In such a scenario, the tenants financial state can become compromised and defaults are much more likely to occur. In this case, one spouse moved out early, and the last month’s rent was not paid. Also, the remaining tenant had left the property with significant damage. The landlord was then forced to deduct the last month’s rent from the deposit, as well as deductions for the damages caused. However, the cost of the damages exceeded what was left from the security deposit, leaving the landlord to pay out of their pocket. The landlord then had to take legal action to recover the funds owed.
This could’ve been avoided, had the landlord set the security deposit at 2 month’s rent, instead of 1. According to Rea, it is advisable to make deductions off deposits for damages first, and to take legal action in the recovery of the outstanding rental as a material part of the lease.
Plan of action
It’s a good idea to plan ahead and make sure that there is money set aside for unforeseen circumstances such as legal costs, and repairs not covered by home insurance. A great way to build up money is to set aside between 5% and 8% of the rental income every month.
“One must always ensure higher deposits, as in the above mentioned scenario, despite the tenant being exemplary over a two-year period, the demise of their personal relationship, resulted in severe delinquency. It is important to note that a tenant’s conduct and payment regularity can deteriorate swiftly, with hardly any evidence or warning,” says Rea. “Therefore it is best to ensure that the landlord allow themselves leverage, reduced risk and increasing the protection of their property through obtaining a higher security damage deposits,” he concludes.
