What Are Holding Deposits? + When to Charge Them

Every day a rental isn't occupied, money is lost.

So, what can you do?

One way to protect yourself is with a holding deposit. With a holding deposit in place, you can hedge against the scenario in which a tenant backs out after applying and giving a verbal commitment.

Below, we'll cover everything you need to know about holding deposits, including:

What Are Holding Deposits?

A holding deposit is a sum of money-- typically a few hundred dollars-- given by a rental applicant to a landlord in exchange for reserving a rental property.

If an applicant applies with you but can't immediately move in, you can offer to accept a holding deposit to hold onto that rental for the applicant and take it off the market.

With a holding deposit in place:

• The applicant can rest easy knowing they won't lose the rental to another applicant while they prepare to move

• And the landlord has insurance covering the lost rental income in the event that the applicant backs out

Imagine: For days, you've held the property for them with the plan being that they'd move in soon.

However, they suddenly change their mind and you're now out of several days of rental income.

Maybe you've even experienced this first-hand.

A holding deposit protects you on exactly this occasion, when an applicant changes their mind and decides to rent somewhere else.

Difference Between Holding and Security Deposits

Before we talk about how much you should charge for a holding deposit, let's talk about holding deposits vs. security deposits.

A holding deposit's purpose is to reserve a rental property and protect the landlord in the event that an applicant backs out.

A security deposit protects the landlord in the event that the renter damages the property while occupying it (beyond the normal wear and tear).

Both deposits act as a form of insurance to protect you against potential losses. However, one protects you on the front end before the renter signs a lease while the other protects you during the lease.

When Should You Charge Holding Deposits?

You can choose to charge a holding deposit when an applicant is serious about renting your property, but can't immediately move.

Typically, this time period is no more than a few days, as anything beyond that and you'll start incurring a heavy cost in the form of lost rent that a few hundred dollar holding deposit can't recoup.

However, it's important to note that you're not required to charge a holding deposit.

Whether you charge a holding deposit or not depends on the situation as well as your preference.\ It's also important to determine how much you should charge for your holding deposit.

How Much Should You Charge?

Now, let's talk about how much to charge.

The average holding deposit is between $100 - $500, typically closer to the $200-300 range.

However, as we touched on earlier, how much you charge for your holding deposit is completely up to you.

When deciding how much to charge for a holding deposit, consider:

• How many days does the applicant need before they can move in? (i.e. how many days must the property or unit sit unoccupied)

• How much is that going to cost you?

• How much will it cost you to remarket the property?

With these two points in mind, you can figure out how much you need to recoup your losses by dividing the amount you're charging per month by 30 (average number of days in a month), then multiplying it by the number of days the property is being held and adding your marketing cost.

For example, if you're renting a unit out for $1,500 per month, you're making roughly $50 per day (1500 / 30 = 50).

If the applicant is asking you to hold the property for 3 days, $150 will cover the lost rent. However, if you factor in the remarketing cost and the time to do another showing + application, you may want to charge $200 or more for the holding deposit.

How to Draft a Holding Deposit Agreement

Now that you've learned everything you need to know about a holding deposit, let's talk about drafting a holding deposit agreement.

In addition to basic information such as the name of the tenant and deposit amount this agreement will outline:

• The holding period

• What the holding deposit is for

• Under what terms the deposit will or will not be returned

• And how much of that deposit can be kept by the landlord

As with everything else in property management and investing, having an agreement in place helps avoid issues and ensures you're protected if problems do arise.

On that note, it's also important to specify in the agreement-- and communicate to the prospective tenant-- if the deposit will be returned to them in the event that they move into your property or not (and why).

Let's talk about that next.

Should the Holding Deposit Be Refunded?

What happens with a prospective tenant's holding deposit depends on whether they end up moving into the unit or not.

To make it simple:

• If they move in: You'll either refund the deposit or put it towards their first month's rent. 

• If they don't move in: You'll either keep the deposit or return it (more on why below).

Let's talk about both scenarios for a sec:

If the Tenant Moves In

In the best-case scenario, the prospective tenant moves in.

When that happens, the money is refunded back to the tenant or contributed towards the security deposit or first month's rent.

If you're allowing the deposit to be applied toward either the security deposit or first month's rent, make sure to specify this in the agreement and explain it to your applicants when signing the deposit agreement.

Landlord-tenant laws are not consistent regarding holding deposits across states, so it's vital to have everything outlined clearly in your agreement and to make sure your applicant has a clear understanding upfront.

If the Tenant Does Not Move-In

If the tenant does not move in, you have two choices:

• Keep the security deposit, or

• Return it

Why would you return it? After all, you need to recoup the lost rental income and cost of putting the property back on the market to find new renters.

The truth is, in many states you're required to prove the damages that were incurred by way of you holding the property or unit for the prospective tenant.

Typically, this whole process is a paperwork-filled headache and not worth a few hundred dollars. Because of this, in most cases, the holding deposit is simply returned.

State Laws and Holding Deposits

We touched on state holding deposit laws earlier, but let's dive in a little deeper here.

Here's what you need to know:

Most states do not have clear holding deposit laws

If you decide to hold onto an application's holding deposit, be careful.

Holding deposit laws are not consistent or clear across state lines like other landlord-tenant laws.

Even finding out what your state's policies are on holding deposits can be tough, which makes getting in trouble for the wrong holding deposit practices even easier.

In most states it's easy for tenants to file a small claim

It's entirely possible that a (once) prospective tenant may request a refund of their holding deposit even if they backed out of their agreement.

In most states, filing a claim in small claims court doesn't cost them anything. However, handling the disagreement-- even if you're right and have documentation to prove it-- may not be worth it.

Instead, it's common for landlords who choose to use holding deposits to refund them in most cases even if the applicant decides to back out.

Protect Yourself with Holding Deposits

Determining whether to charge a holding deposit-- and how much you charge-- is entirely up to you.

However, it's important to take steps to protect yourself-- and your investment-- as a landlord.

One of the best ways to protect yourself from lost rental income is to take advantage of Apartment List's massive community of renters.

Find qualified renters faster by listing your portfolio on our AI-powered marketplace, allowing you to reduce your vacancy rates as well as the time it takes to find new tenants.

Discover the benefits of listing your property with Apartment List today.