Short and sweet, here are a few security deposit tips for landlords. This isn’t a fun topic, but it’s an important one.
How Much to Charge for a Security Deposit
Nobody likes to think about it, and even fewer people like dealing with the hassles that come with this issue.
Most property management firms know that requiring a refundable security deposit is important. On occasion, you’ll see someone in the old Craigslist ads that just doesn’t get it. That’s a big problem.
The security deposit is usually kept on file to protect property owners and management against a legal term known as “non-performance”. This isn’t just skipping out on the lease, but it’s also for damages or even expenses that happen when a tenant behaves badly.
So going back to the original question on how much to charge for security deposits. The answer is that it depends. Perhaps the most common practice is to charge one month’s rent. So if it costs $1,200 per month to rent the unit, the security deposit would be $1,200.
There are a few things to keep in mind though:
- Some states have maximums for how much you can charge for your security deposit
- If the competition charges much lower security deposits, it will be harder for you to find tenants
- Certain property amenities, such as having newly renovated units or washers/dryers, can increase how much you can charge for the deposit
Security Deposit Tips for Landlords: Legal Stuff
The first step is understanding that with security deposits on residential properties: there are laws in place to prevent discriminatory or even unfair treatment. You:
- Cannot charge a family with children more than you would someone who does not have them.
- Cannot charge an “excessive” amount.
What is an excessive amount? Well, your state probably has a standard to make it simple for you. For example, in California, a property manager may collect one month’s advanced rent. Then, the deposit is only allowed to be the equivalent of two months’ rent for an unfurnished property and three if it is furnished. The laws are different from state to state. You can find your state’s laws at Nolo’s Security Deposit Limits From State To State chart.
In some ads, the owner has listed that first and last months’ rent are required along with a security deposit. Though this is allowed, it’s not always the most marketable way to go about things.
Sometimes property owners will list a property with a security deposit that is only half as much as a month’s rent. When you compare the two, that looks like the better way to go, but there’s a kicker. It’s a good idea if you’ve got a big apartment complex. It’s not so great for houses or smaller complexes and duplexes.
This is because with a bigger rent roll, you don’t have to worry about the hit you’re going to take from one or two. If you don’t have quite as many properties you might lose a lot more money in the time that rental has to be off the market for repairs.
If you’ve only got one or two properties or units, it’s better to keep more security deposit funds, as it is consistent with the applicable laws in your state. It acts as a decent pre-screener and keeps you protected. The rule of thumb here is generally to keep the deposit the same amount as the rent rate per month.
What Can You Use a Security Deposit to Fix?
Some wear and tear will just happen. Things like faded paints, small dents in the wall from door handles, and small marks on the carpet don’t justify you using security deposit funds.
So what does? Basically, bigger, more expensive damage.
- Large holds in the walls
- Stopped toilets due to negligence
- Removing paint the tenant put up
- Broken fixtures and tiles in bathrooms
- Getting rid of pests including fleas or ants
- Excessive mildew and/or mold in the bathroom
- Appliances broken due to negligence
- Very dirty bathroom, kitchen, carpet, etc.
- Damage from pets
Depending on your state, you may need to have the unit cleaned by a professional team when a tenant moves out. For example, California is one such state. In that case, you can decrease how much of the security deposit you return based on the cost of the cleaning crew.
When Do You Need to Return Security Deposits?
Security deposits should always be kept in an interest-bearing bank account separate the rest of your finances and returned to the tenant when they leave, at the end of their lease term. When a tenant moves out, property managers and landlords have the right to deduct money from the security deposit in the amount of the damages caused. Only in some states are they allowed to deduct unpaid rent from it. That is something you will want to check the above link about if you are unsure about your local laws.
If you don’t have a detailed list of damages and costs to go along with the deductions delivered within the appropriate time frame deemed by your state, you can lose the right to deduct anything at all. It would not matter if the tenant had completely wrecked your rental. If you don’t abide by the law, you lose the right to withhold any of that security deposit.
This is why it is vital that you do a final walkthrough after the tenant has moved all of their things out. At this point, it’s a good idea to go ahead and bring the deposit with you. That way if the rental is in acceptable condition, you can return it immediately. If not, wait until you have the appropriate amount accounting for the deductions. It’s also always a good idea to take photos as you do this walkthrough so you have documentation in the event of a dispute. Remember, as you do this walkthrough- normal wear and tear is not an offense for which you can keep part of a security deposit.
The best security deposit tips for landlords we can give you basically boils down to 2 things. Ask for a reasonable amount, and don’t try to nickel and dime your tenants when they move out. If you ask for too much of a security deposit, potential tenants will go elsewhere to live. And if you try to keep every penny of a deposit, even if the unit is in good shape, that previous tenant will let everyone know, giving your property a bad reputation in the area.