Security Deposit

A security deposit is a refundable sum collected when a lease starts, kept by the owner as protection if the tenant skips rent or leaves the unit damaged. It is a liability, not income. It stays out of NOI unless and until the landlord keeps some of it under the lease and local law.

Counting deposits as rent inflates NOI. A $4,000 deposit on the default house is owed back to the tenant at move-out, less any lawful deductions. Many states limit the amount, set a deadline for returning it and sometimes require interest to be paid.

When a landlord keeps part of a deposit to cover unpaid rent, that amount offsets credit loss. When it covers repairs, it offsets the repair expense. Either way, net it against the related line instead of adding it as a separate source of income.