6 Basics of Security Deposits at Your Rental Property
Why, When and How Much to Collect
Collecting a security deposit is not required by law, but every successful landlord knows it should be. This deposit can help financially protect you if your tenant causes damage to your rental or fails to pay their rent. While your state may limit how much you can collect at your rental, all states allow you to collect an amount equal to at least one month’s rent. Here are six security deposit basics every landlord should understand.
1. What Is a Security Deposit?
A security deposit is a sum of money that you collect from a tenant in addition to their first month’s rent. It is a one-time fee that is refundable.
2. How Much Security Deposit Should You Ask For?
- State Law:
Every state within the United States allows a landlord to collect a security deposit from a tenant. The maximum amount of security you can collect depends on the location of your rental property.
Some states, such as Illinois and Texas, have no limit on the maximum amount of security deposit you can collect. Other states allow landlords to charge tenants a maximum of anywhere from one to three months’ rent as a security deposit.
In addition to the statewide rules, you should always check with the city or county where your rental property is located to make sure they do not have other limits on security deposits in place.
- What the Local Market Commands:
Remember, these are the maximum amounts you can charge tenants. You will have to get a feel for your local market also.
If the other landlords in your area are charging a one month security deposit for comparable units and you charge a two month security deposit, you may lose these prospective tenants to the properties with the lower deposit requirement. Having a vacancy for an extra month because you are charging a security deposit of two months’ rent instead of one month, will become a wash anyway because you will have to pay for an extra month of vacancy costs.
3. When Should You Collect the Security Deposit?
You should always collect the entire security deposit before the tenant moves into the rental. If a tenant is not able to provide the full amount up-front, either you should not allow them to move-in until they do or you should find another prospective tenant who is able to provide the entire security deposit. This is assuming that the other tenant has also been thoroughly screened.
If you allow a tenant to move-in without paying the security deposit, you are putting yourself at risk. The most likely scenario is, you will never receive the security deposit, or the entire security deposit, which leaves you financially vulnerable if the tenant causes damage or stops paying their rent. You will have no cushion to pay for any of these expenses.
4. How Do You Store It?
Again, each state is different. Some states do not have any rules about where you must store the security deposit. Other states require you to put security deposits in a separate interest bearing account.
Certain states will also require you to give the tenant a security deposit receipt within 30 days of move-in. This receipt must show the bank where their deposit is being held and the annual interest rate. Some states will go a step further and require you to annually report the interest that has accumulated on the security deposit to the tenant.
5. When Must You Return It?
Each state has a specific law about when you must return the security deposit. Some require it to be returned no more than 15 days after the lease has ended. Other states give you up to 30 days to return the deposit or to give a tenant written notice as to why it was not returned.
6. What Is a Security Deposit Used For?
Hopefully, you will not have to use the security deposit at all and can simply return it to your fantastic tenant in full when their lease is up. Unfortunately, it is not always that simple.
A security deposit is a kind of insurance for landlords. It protects you when there is a breach of contract, the contract being the lease with your tenant.
Although you are allowed to sue a tenant for the money they owe you, even if you are awarded the judgment against them, it is often impossible to actually collect this money. The security deposit offers you some buffer to soften the blow of the lost money.
You cannot keep a security deposit whenever you feel like it. Each state has certain laws regarding when you are legally allowed to keep a tenant’s security deposit. Common examples include damage to the apartment in excess of normal wear and tear and nonpayment of rent.