Collecting security deposits helps landlords create a financially protective environment for their rental property. In addition to the first month’s rent, the security deposit is important after signing the lease in case the tenant causes damage to a rental or leaves unexpectedly without paying rent.
In this article, we will walk you through all the important information that you should know about security deposits. They vary from state to state and are subject to legal interpretations.
Here are five basics every landlord should know about security deposits.
What is a security deposit?
A security deposit is a one-time refundable payment collected by a landlord from a tenant in addition to their first month’s rent. It is proof from a tenant that they are ready to move in and will take good care of the property. It helps protect the landlord from unexpected damage or in case the tenant leave without paying rent.
For instance, if you’re the landlord and your tenant causes damage or leaves without paying rent, you have the right to take the deposit.
Top 5 Basics of Rental Property Security Deposits
As a landlord, you need to understand 5 basic principles about security deposits.
1. Security Deposit Limit
Landlords in the U.S. are allowed to collect security deposits. The limit of the security deposit is set based on the location of the rental property. While some states have a low amount, some have a higher. Illinois and Texas have no limit on how much deposit should be collected. In Connecticut, landlords don’t allow the collection of more than two months of rent as a security deposit.
The maximum amount landlords in most states are allowed to charge tenants is anywhere from one to three months’ rent.
Keep in mind, Cities and counties can also impose limits on security deposits. Hence, you need to be aware of the local ordinances regardless of the state where you own a rental property.
Understanding your local market is more important than knowing legal limits. For instance, if most of the landlords in your area are charging a one-month security deposit for comparable property, the chances are, that you’ll lose prospective tenants by charging a two-month security deposit.
It is a safer bet to match the lower security deposits charged by your market than to risk extended vacancies.
2. Security Deposits Due Date
Collect the entire security deposit before a tenant moves into a rental. By setting a specific date of collection, it will become easier to collect the deposit. In case a tenant is unable to make the payment on the due date, you carry the right to cancel the lease anytime.
Make sure to collect a security amount before letting the tenant move in, this will prevent you from financial risk.
3. Deposits Holdings
Security deposits depend from state to state. While some states don’t regulate the place to store security deposits, 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 upon to set aside for expenses tenants may or may not incur at a future date.
Some states also require landlords to provide a receipt of the security deposit to the tenants within 30 days of moving in. The receipt should be from a bank where the deposit is being held specifying the annual interest rate. Moreover, some states need to show what the accumulated interest has become in the annual reporting.
4. Returning Deposits
Each state comes with a specific law on how long landlords have to either return security deposits or provide reasons for keeping it. Some set the time of 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.
5. Keeping Deposits
A security deposit protects landlords against a violation of the lease by tenants. So, if a violation happens from the side of the tenant, landlords can keep the security deposits. Although you are allowed to sue a tenant for the money they owe you, sometimes, it becomes difficult to collect the money. There come security deposits, which work as a protection from lost income.
Being a landlord, you cannot keep a security deposit whenever you want. Thus, each state has certain laws for keeping a tenant’s security deposit legally. 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
- Failure by the tenant to restore, replace, or return personal property or appurtenances
- Damage to the property caused by the tenant or the tenant’s guest that exceeds normal wear and tear
Guide To Rental Property Security Deposits – In a Nutshell
Security deposits are a kind of financial protection for house owners. Providing property for rental without receiving a security deposit could be the biggest mistake a landlord could make. Therefore, a landlord can follow the simple tips of collecting security deposits and avoid common pitfalls.
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