5 Basics of Rental Property Security Deposits
Learn Why, When, and How To Collect
A security deposit is a one-time, refundable sum of money a landlord collects from a tenant in addition to their first month’s rent. Collecting a security deposit is not required by law, but it can help protect you financially if a tenant causes damage to a rental or leaves unexpectedly without paying rent. While your state may limit how much you can collect, all states allow you to collect an amount equal to at least one month’s rent.
Here are five basics every landlord should know about security deposits.
State Security Deposit Limit
All U.S. states allow landlords to collect security deposits, and the maximum amount depends on the location of the rental property. Some states, such as Illinois and Texas, have no limit on how much can be collected. In Connecticut, landlords can't require more than two months' rent as a security deposit. This limit is reduced to one month's rent if a tenant is 62 years of age or older. Other states allow landlords to charge tenants a maximum of anywhere from one to three months’ rent.
Cities and counties also can place limits on security deposits. Regardless of the state laws where you own a rental property, familiarize yourself with any relevant local ordinances.
Knowing legal limits is necessary, but it's also important to understand the local market. If other landlords in your area are charging a one-month security deposit for comparable units, you may lose these prospective tenants by charging a two-month deposit. Extended vacancies will be more costly in the long run than any losses you might incur from matching the lower security deposits demanded by your market.
Deposits Due Date
Collect the entire security deposit before a tenant moves into a rental. This should be a condition of the lease, so if a tenant is unable to provide the full amount upfront, you can cancel the lease and rent to another prospective tenant who also has been thoroughly screened.
Allowing a tenant to move in without paying the security deposit puts you at risk.
Some states do not regulate where you must store security deposits, but others require you to place each deposit in a separate interest-bearing account.
Security deposits are not income for landlords. They are funds both parties agree, through a lease, to set aside for expenses tenants may or may not incur at a future date.
Some states also require you to give a tenant a security deposit receipt within 30 days of move-in. The receipt must identify the bank where the deposit is being held and the annual interest rate. Some states go a step further and require you to annually report the interest that has accumulated on the security deposit.
Each state has a specific law about how long landlords have to either return security deposits or identify reasons for keeping it. Some set the limit at 15 days after the lease has ended, while others give you up to 30 days to return the deposit or to give a tenant written notice as to why it was not returned.
A security deposit is a kind of insurance for landlords, as it protects against a violation of the lease by your tenant. Although you're allowed to sue a tenant for the money they owe you, even if you're awarded the judgment against them, it often is difficult to collect the money. Security deposits offer you a buffer to soften the blow of lost income.
You cannot keep a security deposit whenever you feel like it. Each state has certain laws regarding when you're legally allowed to keep a tenant’s security deposit. San Francisco, for example, allows the landlord to make deductions from a security deposit for certain reasons including:
- Unpaid rent or bills
- "Reasonable" cleaning charges to bring the unit to the same level of cleanliness as at the inception of the tenancy
- Failure by the tenant to restore, replace, or return personal property or appurtenances
- Damage to the unit caused by the tenant or the tenant's guest that exceeds normal wear and tear
If there's a legal reason to keep the deposit, document the issue and provide a written explanation to the tenant within your state's established timeframe. Sometimes, you might keep only a portion of the deposit and return the rest. For example, if the deposit was $1,000 and you identify $400 worth of damage, you would be required to return $600 and a written explanation of why you kept the $400.