5 Basics of Security Deposits at Your Rental Property
Learn about why, when, and how to collect it
Collecting a security deposit is not required by law, but it's as close as there is to a requirement for success as a landlord. A security deposit is a one-time, refundable sum of money you collect from a tenant in addition to their first month’s rent. It helps protect you financially if a tenant causes damage to one of your rentals or fails to pay 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.
There are at least five basics every landlord should know about security deposits.
How Much to Charge
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. 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 state laws where you own rental properties, 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 charing 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.
When Deposits Are Due
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 up front, 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. The most likely scenario is that you never will receive the security deposit, which leaves you financially vulnerable if the tenant causes damage or stops paying rent.
Where Deposits Are Held
Some states have do not regulate where you must store security deposits, but others require you to place them 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.
When to Return Deposits
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.
When to Keep Deposits
A security deposit is a kind of insurance for landlords. It protects you when there is a violation of 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 often is difficult to actually collect the money. Security deposits offer 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 an apartment in excess of normal wear and tear and nonpayment of rent.
If there is 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.