Security Deposit

At move-in the tenant hands over a security deposit, which the landlord keeps on hand to cover missed rent or damage past ordinary wear and tear. It is not income. Leave it out of the cash flow in a cash on cash calculation, and out of cash invested too.

The deposit belongs to the tenant until the lease ends and any lawful deductions are made. Some states require holding it in a separate account, paying interest on it, or returning it within a fixed number of days, so check local rules rather than assuming.

When you buy an occupied property, the seller should transfer existing deposits at closing. That money is a liability, not a discount on the price, and it should not reduce your figure for cash invested. Treating it as income or as equity makes the return look better than it is.

Further reading: Security Deposit on Wikipedia.