Four Questions Landlords Ask About Security Deposits
Most new landlords likely enter into their new role understanding that security deposits are a necessary part of the rental process, but may still have some questions about the particulars before they go about asking their first tenants for a deposit. That’s why we’re answering some of the most pressing questions about security deposits so that you can feel confident knowing what you need to do in collecting and distributing security deposits moving forward.
What amount should I require as a deposit?
Landlords typically have discretion about how much they wish to collect upfront as a security deposit, but there are considerations to keep in mind when setting an amount. A security deposit can be as much of an inducement (or deterrent) as the amount of rent itself — too low and potential renters may wonder about the condition of the unit; too high and it will be unaffordable for all but the most well-off renters.
Most landlords set the security deposit amount somewhere between the cost of one and three months’ rent, although you should be aware if your state has laws on the books regarding maximum security deposit amounts. Crucially, whatever amount you’re asking for a security deposit should be clearly stated on the listing, rental application, and lease to avoid any confusion or conflict.
What do I do with the deposit amount during the tenancy?
While your natural inclination might be to deposit your renter’s security deposit as you would any other check or electronic transfer, managing those funds isn’t quite so simple, and putting that money into your own accounts in the interim can, at a minimum, create an accounting headache.
While you are holding your renter’s money for the period of their tenancy, the money remains theirs and is due to be returned to them upon moving out. Moreover, many states require that a tenant’s security deposit gain interest during the period it is deposited with a landlord, and tracking the interest accrued while that money is sitting in your account could prove next to impossible.
For the purposes of both accounting and transparency, most landlords place security deposits in separate accounts to avoid confusion or commingling of funds, making it easy to return a tenant’s deposit in a quick and orderly fashion. A quick note here is that if you are running your rental properties as a business, you should have a business bank account separate from your personal one.
What can I deduct from the security deposit?
One of the more contentious points of a landlord-tenant relationship can come as tenants are seeking the return of their security deposit when the lease is terminated. The issue is typically deductions from the security deposit, with disagreement over what and how much a landlord can and cannot charge a tenant.
While it might be tempting to use a tenant’s security deposit as a fund to refresh the rental unit, there are rules governing what a landlord may deduct from a deposit. Broadly speaking, anything considered wear-and-tear from normal use cannot be charged to the renter, whereas actual damage, such as broken features or fixtures, or excess dirt, stains, and grime can be deducted from the deposit. In order to keep everything above board, it’s wise to note what is acceptable and what isn’t in the lease and to provide an itemized list of the noted damage and the cost (with copies of receipts or estimates) when returning the reduced deposit to your former tenant.
When do I need to return the security deposit?
Further disagreement could arise between landlord and tenant over the timeline for the return of a security deposit. There are legitimate reasons for you to keep a renter’s security deposit, like damage, termination fees, and unpaid rent or utilities, but short of that, you have an obligation to return a security deposit in part of full in a timely fashion. Each state has its own prescribed deadline for the return of a deposit, so ensure that your lease adheres to that timeline.
When returning the security deposit, you should include a letter outlining that you are returning the deposit and in what amount, and itemizing any deductions that you have made from the initial amount, as well as any interest accrued on the amount during the period of their tenancy. Because this needs to be done expediently, you should make sure that tenants include an address to send the letter and deposit to, lest you're stuck tracking down contact info while up against a deadline. Depending on the situation, providing the itemized information upfront can be helpful, particularly if the tenant actually owes money in excess of the security deposit. This is an area where a lawyer may be helpful to review the situation and draft the letter.
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