Most landlords collect a security deposit from their tenants initially, allowing them to cover the costs of necessary repairs after the tenant moves out. But how exactly do security deposits work? What are the best practices for collecting them? And when is it appropriate to withhold them?
The Basics of Security Deposits
Let’s start by hashing out the basics of how security deposits work. A security deposit is the sum of money that a tenant delivers to a landlord in advance of signing the lease and moving in. This sum of money functions as a kind of insurance policy for the landlord. If the tenant damages property, stops paying rent, or incurs other costs, they can rest easy knowing they can tap into this money to cover some of those costs.
The amount you request for the security deposit may change depending on where you live and the circumstances of the tenant. Local laws dictate how much of a security deposit you can withhold and how security deposits function. You may also request a greater security deposit if the tenant has a pet or is this associated with other risk factors.
When a tenant moves out, you’ll have an obligation to repay this security deposit, with the exception of any money you need to cover costs that the tenant has incurred.
Hire a Property Management Firm
If you want to make security deposits as simple and straightforward as possible, your best option is to hire a property management firm. Your property managers will take charge of creating lease agreements, finding and screening new tenants, choosing what amount of security deposit to charge, collecting that money, and even handling payouts. Property managers will charge a fixed percentage of your gross revenue every month, but they’ll save you many headaches in the long run.
Understand the Law
Before you do anything with your security deposits, make sure you understand the law. In 20 states, there are no limitations for how much money a landlord can collect for a security deposit. All other states have laws in place for the maximum amount you can collect. In most areas, you’ll be collecting one month of rent or two months of rent, plus any additional fees or deposit requirements that apply. There may also be rules in place for how and when security deposits must be returned.
It’s difficult to understand the law in full, since it can be so complicated. If you’re having difficulty understanding your local laws, consider hiring a real estate lawyer to help you.
Keep detailed records of everything related to your security deposits. Keep copies of the lease agreements and rental agreements that your tenants sign. Make sure you have documents on record that stipulate how the security deposit was collected, when it was collected, and the conditions in which it will be returned. You’ll also want to place your security deposits in a specific account, so you can readily collect them for future return.
Know When to Use a Security Deposit
You may be forced to use a tenant’s security deposit to cover expenses that the tenant is responsible for. There are five categories of expenses that typically allow you to withhold some or all of the security deposit.
- Property damage. If the tenant has committed any property damage beyond basic wear and tear of the property, you can withhold a portion or all of their security deposit to cover that damage. For example, if they vandalize the walls, if they destroy or steal an appliance, or if they allow the carpet to become heavily damaged due to neglect, you can keep as much of the security deposit as you need to pay for these.
- Cleaning costs. Tenants are responsible for returning the property in relatively clean condition. If they leave a terrible mess, you can charge them for any cleaning costs associated with making the property livable again.
- Rent and utility nonpayment. Does your tenant owe more rent or have unpaid bills? You can hold the deposit to cover these debts.
- Lease breaches. Major breaches of the lease agreement are also grounds for withholding the deposit.
Prepare for the Return
If your tenants haven’t committed any damage, and if there are no good reasons for you to withhold the security deposit, you need to return whatever remains. Depending on where you live, you may be required to return this within 14 business days, 30 days, or after some other interval. If you withhold some of the security deposit, be sure to return it with an itemized list of deductions.
Security deposits don’t have to be stressful or complicated. As long as you go in with a plan and know the limitations, you’ll be in a position to maximize the value of this financial element.
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