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5 Tips for Collecting Security Deposits Smart Landlords Swear By

5 Tips for Collecting Security Deposits Smart Landlords Swear By

4 min read
Remen Okoruwa

Remen Okoruwa is the co-founder of RentDrop, a payment app making rent payments more convenient and rewarding for landlords and renters.

Experience
Remen has a background in the software industry and business strategy, working as product manager at HubSpot and previously serving as a management consultant with McKinsey & Company.

He has property management experience working supporting his family’s residential real estate portfolio with units across the Midwest and Texas.

In addition to BiggerPockets, he writes about on property management topics for the RentDrop blog.

His writing has been featured on the HubSpot, OpenView, and Insight Venture blogs.

Education
Remen received a bachelor’s degree in Engineering Sciences from Harvard University, cum laude.

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Collecting the security deposit and the first month’s rent is the first task landlords do after signing the lease. Although this sounds straightforward, there are many things landlords must keep in mind about collecting security deposits. Apart from knowing local landlord-tenant laws, you need secure ways to manage security deposits and keep them safe. After all, the deposit remains the tenant’s money under the terms of the lease.

This article explains the best ways of collecting security deposits. You’ll also find out about the benefits of using a rent collection app for managing rent collection, security deposits, late payment fees, and rental payment reminders.

Why Collect Security Deposits?

The security deposit is a safeguard for landlords that tenants will comply with the lease. All states in the U.S. allow landlords to collect security deposits. Even though you’re not required by law to collect security deposits, it makes sense to do so. This way landlords have some financial guarantee that they can cover costs if the tenant damages the property or moves out without paying rent.

Related: The Landlord’s Guide to Rental Property Security Deposits

Terrible mess after party. Trash, bottles, food, cups and clothes on floor.

What Landlords Should Know Before Collecting Security Deposits

Before you think about collecting a security deposit, it’s vital to check your state’s local landlord-tenant laws. Some states place specific limits on the size of security deposits, whereas other states don’t set limits. Also, the amount you collect could depend on the age of the tenant.

Another factor to consider is where to hold the security deposit. Again, state laws vary throughout the country on how and where landlords can hold security deposits. For example, you may be required to keep the deposit in an interest-bearing account. You might even have to report accrued interest annually to the tenant.

How to Collect Security Deposits

Although collecting security deposits only happens once, it’s vital to do it properly. The last thing you want is for the first month’s rent check and security deposit check to bounce after your tenant lives there. In this case, you face a lengthy and costly eviction process that you have to pay for yourself.

Here are the smart things to do to collect security deposits from tenants.

1. Collect security deposits before tenants move in

The security deposit and first month’s rent are the first payments tenants make before moving in. So, you must discuss the amount of the required security deposit with potential tenants. You should make sure that the size of the deposit and rent price are included in the lease agreement.

You should collect the security deposit and first month’s rent after signing the lease but before giving tenants the keys. It’s always best to ensure that the funds are available in your bank account before proceeding.

2. Put everything down in writing

Include the amount of security deposit and rent payments in the lease agreement. However, depending on local laws, you may need to specify where the security deposit is held and if the tenant receives interest. Remember that many states require that you keep rent payments and security deposits in separate accounts.

To make collecting security deposits easier, some savvy landlords open separate bank accounts for each rental unit they have. This way, they ensure that security deposits are kept safe and accrue interest for the tenant.

eental agreement form with signing hand and keys and pen

3. Collect security deposits and rent online

Successful landlords now use rent payment apps or property management software to collect security deposits and rent. Collecting rent payments online is one of the best ways landlords can streamline their business. However, most tenants prefer the convenience of paying rent online.

Related: 7 Undeniable Reasons Online Rent Collection Beats Paper Checks

Here are some advantages of collecting rent online:

  • Tenants can pay with their debit card, credit card, or make ACH payments.
  • Rent payment apps send out automated reminders.
  • Tenants can set up automatic rent payments.
  • Landlords can collect security deposits directly.
  • Prorated rent, late fees, or other fees are calculated automatically.

Some of the best rent collection apps allow you to add multiple bank accounts to manage security deposits and rent payments.

4. Collect security deposits and rent payments separately

There are two critical reasons to collect separate payments after signing the lease. These reasons are:

  • It makes it easier to organize payments. You know exactly what the tenant has paid, and you can keep track of rent payments and security deposits easier.
  • State laws regulate how to handle security deposits. In most states, you need to keep security deposits in separate bank accounts. If you collect rent online, you can transfer the deposit amount into the appropriate account. Or the rent app can be set up to transfer security deposits automatically.

5. Only collect security deposits after signing the lease

Landlords must always act in line with the law and local regulations. This means that tenants should only pay rent and the security deposit when they sign the lease. However, it makes sense to hand over the keys only when the rent check has cleared. Savvy landlords usually only accept money orders, cashier’s checks, or online payments to collect security deposits.

Using smartphone for money transfer and banking. Closeup of male touching smartphone screen for using app at table.

When to Return the Security Deposit

It’s vital to remember that security deposits don’t become part of a landlord’s assets. The money is a financial guarantee that tenants return the rental accommodation to a move-in condition, minus regular wear and tear.

If the tenant has fulfilled all parts of the lease agreement, they are due the deposit in full, plus any interest. States have their own landlord-tenant laws on when and how to return security deposits.

Under what circumstances can landlords hold back part or all of the security deposit? Here are five reasons why a tenant may lose their security deposit:

  • Damage to the property. This could include broken appliances, large holes in walls, burns in the carpet, or ripped upholstery. However, it can’t include faded paint, worn carpets, or anything else connected with regular use.
  • Cleaning costs. If you have to clear out excessive amounts of trash or pay to remove furniture, you can use part of the security deposit to cover expenses. But you can’t include regular cleaning to turn over a rental unit.
  • Lease violations. Depending on the agreement, you can hold back a portion or full amount of the security deposit for serious lease violations.
  • Nonpayment of rent. If you have to evict a tenant for not paying rent, you can use the security deposit to cover costs.
  • Unpaid bills. You can deduct the amount for any bills that the tenant hasn’t paid.

Security Deposit Tips for Smart Landlords

Collecting security deposits and keeping them safe is a vital part of a landlord’s job. The security deposit helps to ensure good tenant behavior. Also, if there are issues with lease violations or property damage, landlords know they can cover their costs.

There are many ways to collect security deposits. Many landlords see the benefits of using online apps to simplify collecting security deposits and rent payments.

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