12 Jan Don’t Forget the Safety Net! Your Guide to Security Deposits
Congratulations! You’ve filled a vacancy and secured the lease with a new tenant. The hard part is over – but before you sit back and relax, don’t forget about collecting that handy security deposit.
In single family rentals, security deposits are generally collected at application approval, and are mandatory to reserve a property until move in. Moving is expensive for tenants, and it can be a little awkward to ask for more money upfront – but with clear guidelines, you can easily collect the deposit knowing your safety net for the unit is intact, and rent with ease.
Contents
Why Security Deposits are Necessary
Most landlords are aware of the importance of collecting a security deposit, but it’s always helpful to freshen up on common leasing practices.
Security deposits serve as protection to landlords and an acknowledgment that the tenant will comply with all leasing terms. Landlord in most states in the United States have the right to collect security deposits, and a vast majority of them do so in order to cover any damages to the property or missed payments by the tenant.
Know Before You Collect
While it’s legal in just about every state for landlords to collect security deposits, there are varying state and local landlord-tenant laws that can impact the process. Depending on your state, there may be a limited amount of money you can collect as a deposit determined by income or age.
State and local laws also vary on the security of these deposits, and have regulations on where they can be stored. Landlords may be required to hold these deposits in a secure bank account and report accrued interest.
Since there are varying laws regarding security deposits across the country, it’s in your best interest to read up on your state’s landlord-tenant procedures before signing or collecting from a tenant. Disregarding a state’s landlord-tenant laws can bear serious consequences, so be sure you understand the boundaries of this process within your state.
The Collections Process
Collecting security deposits is a relatively easy one-time event, as long as it’s done correctly. Making sure the tenant has available funds so you don’t realize their checks have bounced after having lived there for a few weeks will save you the major headache of monetary loss and eviction.
So, here are some helpful guidelines to collecting the deposit with ease and avoiding any hiccups.
Collect the deposit prior to move in.
It’s fair to expect tenants to pay first month’s rent along with the security deposit before moving into the unit. With that said, the rent due and additional deposit amount should be mentioned both verbally and in writing. The deposit should also be written clearly in the lease, so the tenant can sign off having acknowledged the requirement.
It’s standard to not supply a new tenant with their keys until the full deposit is paid along with any rent due upon move-in. If you properly qualified the tenant via a credit check and verification of income such as reviewing tenant’s paystubs and/or bank statements, you can be confident that their checks will likely clear without much trouble. But in order to fully avoid risk of bank fees or insufficient funds, you can request payment in the form of a cashier’s check, money order or electronic transfer.
Make sure it’s all written and signed.
Never collect money from a tenant that hasn’t been expressly put in writing – especially when it comes to the security deposit.
The deposit and rent amounts should be clearly stated in the lease, as well as the due date(s) for each. If your state has additional laws on where to hold security deposits, this information should also be stated in writing. If you have several units, it may be easier to open separate bank accounts for each to ensure security deposits are safely organized.
How to Collect
There are several options when it comes to collecting the security deposit, and luckily, you don’t have to take a risk on a check anymore. The option of requesting a cashier’s check still stands, but not every tenant will be willing to make payment in that form. Luckily, online payments have allowed for more security and quicker processing times, and most tenants already have the tools for processing payments from their smartphone.
Online collections allow tenants to make payments with a debit or credit card, or by directly linking their bank account. Certain payment apps will issue reminders to tenants and offer to set up automatic payments for monthly rent. This allows landlords to directly collect security deposits from established payment options, and account for any prorated or rent deductions moving forward.
Payments can be collected directly using payment services such as Zelle or Venmo, but if you’re managing several units, it’s in your best interest to get a more comprehensive payment solution.
Instead of collecting one lump sum, be sure to collect the security deposit separate from first month’s rent. It is much easier to organize payments when each sum is dedicated to one purpose, and some states have regulations on handling security deposits. By collecting separate payments for each purpose, you can clearly account for the amounts being attributed to each payment obligation as called for in the lease.
Sign on the Dotted Line First
Before you collect any money from a tenant, make sure they have settled on the terms and signed the lease. Collecting payment outside of a signed lease is outside of many state regulations, and you definitely want to avoid any trouble with landlord-tenant laws. Once a tenant signs the lease, their deposit period begins and it is appropriate to collect payment.
When to Return the Deposit – and How Much
Remember, security deposits are still considered an asset of the tenant while they are being held by a landlord or rental company. The money serves as a financial protection against missed payments or repairs required to correct damage caused by the tenant. If the unit is left fully paid-for and in pre-move in condition (minus regular wear and tear), the tenant is owed their full security deposit back – and in some states/municipalities, the interest accrued, as well.
Deductions to the security deposit include damages to the property such as holes in walls, chipped paint, damaged flooring, broken appliances, ripped screens, burned out light bulbs, etc. You may also deduct for cleaning fees if the unit is left with furniture that needs to be removed or requires specialized deep-cleaning.
Delinquent rent payments can be deducted from the deposit as well if the tenant moved out without paying their last month or skipped a payment over the lease term. The same applies to any unpaid bills, such as electricity or water. Violations to the lease may constitute deductions as well, but be sure to check state and local regulations first. I you’re unsure about the legal requirements and don’t have the time to investigate them, consider hiring a property manager.
Again, unless otherwise noted in writing, security deposits are considered an asset of the tenant unless debt is owed. Additionally, deductions must be equivalent to the work required – if a unit requires some repair equaling half of the funds withheld, the other half of the deposit is due back to the tenant upon move-out.
Getting Savvy with Security Deposits
Security deposits are a necessary element to any real estate lease, and keeping them secure is the landlord’s responsibility during the lease term. They offer security to both the tenant and landlord that the unit is in good condition, and that certain missed payments may be covered thereby avoiding legal action or collections.
When it comes to being a landlord, a security deposit will provide some peace of mind for those worst-case scenarios.
