Collecting security deposits can be hard for landlords and real estate investors, but it's an important part of their business. Depending on the state your rental property or properties are in, there can be different rules, laws, and regulations landlords should be aware of.
Our goal in writing this post is to share our thoughts on tenant liability and landlord responsibilities. Keep reading to learn more about why and when to collect a security deposit, where to store a security deposit, how much to collect, and when to return the rental security deposit.
What is a security deposit?
A security deposit is a payment the tenant makes to the landlord or property management company when a new tenant signs a lease agreement. A security deposit is held by the landlord as a form of insurance against property damage and early lease termination. Typically, rental security deposit amounts to at least one month's rent, but can be higher or lower depending on laws and the location of the rental property. When collecting a security deposit, do your research on the laws relevant to your property.
Collecting a security deposit
A landlord or property management company should collect a security deposit from the tenant after signing a lease agreement but before the tenant moves in. If you don't pay your security deposit in full, it could be a violation of the terms of your lease.
Landlords often, by law, need to store the security deposit in a dedicated bank account. This is to avoid the mixing funds used for other business or personal expenses.
Some states also requires interest to be remitted to the tenant once the tenant vacates. If your property is in a state that requires a separate account that earns interest, the landlord will have to let the tenant know (in writing) the interest rate, amount, and date of the deposit.
Some states and cities have a limit on how many landlords can charge for their security deposit. If you are a property manager or landlord with properties in multiple states, you may need to research each state’s laws, as each state can have wildly different limits on tenant security deposits.
When can the security deposit be used?
Security deposits should be returned after the tenant has vacated the property. Though, there are some circumstances where the security deposit can be used by the landlord. Keep in mind that repairs that are within the realm of "wear and tear" typically do not qualify for security deposit deductions.
- Repairs beyond typical "wear and tear"
- Breaking the lease early
- Violating lease terms (eg. cleaning and repairs that restore the property to how it was initially)
It’s a good idea to do a walk-through of the property with the tenant to ensure the tenant is in compliance with the terms of the lease agreement upon moving out. Should there be a need for the landlord or property manager to clean after the tenant has vacated or make major repairs, itemized documentation of the cost to the landlord should be provided to the tenant.
If the tenant doesn't pay, the landlord is permitted to use the money from the security deposit to make up for any financial costs used for repairs. Information on returning the security deposit is usually outlined in a lease.
When to return a security deposit
After a tenant moves out, the landlord or property management company needs to return the security deposit -- usually in a "timely fashion" or sometime within 14 to 30 days. Most states have laws regarding how long a landlord has to return security deposits.
Should the landlord need to deduct money from the security deposit, they must document the deductions and provide an itemized statement of damages or cleaning costs to the tenant. If the tenant requests the security deposit be returned and the landlord decides to withhold it without a valid legal reason, the tenant may file a small-claims lawsuit.
In the event of security deposit disputes, landlords and tenants should have documentation.
Alternatives to security deposits
At Nophin, we recommend landlords collect security deposits from tenants.
The financial burden of coming up with large sums of money in order to find and secure housing is causing a shift in laws all over the country. Alternatives to traditional security deposits are helping reduce housing insecurity for many Americans. Some security deposit alternatives exist to ensure the landlord's investment is protected while the tenants aren't paying too many move-in costs. Should you want to forego a security deposit model, here are some alternatives to traditional security deposits.
Lease insurance can cut down on the cost of a security deposit while still protecting the rental property. Lease insurance can be paid in monthly installments and collected along with the rent. This is a popular alternative because it saves money and makes it easier for both the landlord and the tenant to deal with the paperwork.
This is typically a third-party service that will act as a middleman should damage occur. In the event there is damage to a rental property, the bond company will pay the landlord for the damages and then seek reimbursement from the tenant. This eliminates the need for an upfront security deposit, which often only requires the tenant to pay a modest monthly fee.
A third party manages a bank account that a landlord can use to bill tenants in the event of property damage or unpaid rent. Landlords are limited to the amount they can bill from the account so as not to exceed the amount of a traditional security deposit. This allows tenants to be able to pay for damage in installments rather than provide a lump sum upfront.
Nophin offers security deposit accounts
Nophin offers security deposit accounts for landlords and property investors. In just a few clicks, landlords can open up a dedicated account to store their security deposit and comply with local regulations. These accounts are FDIC-insured so you can rest easy knowing that the tenant's money is safe.