Imagine that you have a seemingly perfect tenant occupying one of your rental properties. They never complain, pay the rent on time, and the grass out front is always mowed. However, they’ve given their notice to end the lease, and you’ve already lined up a new tenant for the highly desirable property.
Now imagine that you go in to inspect the space, and it is a disaster area. The carpets are filthy, the bathroom looks like it has never been cleaned, and one of the sinks is completely stopped up—and appears to have been that way for weeks.
This all-too-common scenario is the reason for security deposits. They help protect the landlord if a rental property is left unusable due to the negligence or direct damage of a tenant.
What is the purpose of the security deposit?
The purpose of a security deposit is to pay for repairing any damage to the property that may occur during the lease term. It also helps to cover the rent should a tenant vacate the property before the end of the lease term without paying their last month’s rent.
The security deposit is designed to pay for damage over and above normal wear and tear or the loss of keys, gate fobs, or garage door openers. In addition to the security deposit, you may want to charge an additional deposit for pets, though this may also be charged in the form of pet rent, allowing the tenant to pay it over time.
How much can you charge for the security deposit?
The following states, as of 2022, have no statutory limits on the amount that a landlord can charge for the security deposit on a rental property: Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kentucky, Louisiana, Minnesota, Mississippi, Montana, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, Vermont, West Virginia, Wisconsin, and Wyoming. However, it is important to remember that municipalities may have limits, even if the state does not.
Other states have various guidelines that apply to the security deposit. For example, some of them limit the security deposit amount to make housing more affordable. Others apply higher limits to the amount that can be charged to specific types of tenants, like those with felony convictions or those with previous court judgments entered against them for violating the terms of a prior rental agreement.
How much should you charge for the security deposit?
Even if there is no limit in your specific state or city, the security deposit amount is limited by what the market will bear. In other words, many renters do not have the financial capacity to pay the equivalent of several months of rent upfront as a security deposit, then have it held in escrow until the end of the lease term.
A standard amount for a security deposit is one to two months’ rent. This protects the landlord if the tenant leaves without paying the last month’s rent while still leaving additional funds for minor damages to the property.
How should you handle the security deposit?
The security deposit should be kept in an interest-bearing escrow account during the term of the renter’s tenancy. It should not be used for repairs or maintenance during the lease term, since it must be available in full to be returned to the tenant, if eligible.
Be sure that you include information about the security deposit in the lease agreement, including the financial institution in which it is being held and the move-out requirements you’ll use to assess its return. In addition, be sure that your tenant provides you with an address or account where you can return the security deposit after their tenancy ends. You’ll need to do this within 30-60 days in most places.
How do you decide how much of the security deposit to return?
The security deposit should be returned in full if the last month’s rent was paid on time and if the rental property is left in essentially the same condition that it was upon move-in, other than normal wear and tear. In some states, this means the rental should be left “broom clean,” while in other states, the landlord may require the property to be professionally cleaned and the carpets professionally cleaned, with receipts for each.
As the landlord, you should be scrupulous in keeping track of the cost of any repairs or replacements that you need to make to the property after it is vacated. It will be beneficial to provide the tenant with an itemized list of exactly what you are paying for from their security deposit when you return the remaining balance.
In addition, it is a good idea to take photos of the damage that you are charging for in case there is any question later. Another way to provide an extra layer of protection is to conduct a thorough walk-through with your tenant at the beginning and end of the lease term. This allows you to note any damage on move-in that may not have been previously addressed or reported and allows the tenant the opportunity to correct any losses or damages before they are taken out of the security deposit.
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