Landlording & Rental Properties

The Landlord’s Guide to Rental Property Security Deposits

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Of all the precautions a landlord can take—besides adequately screening tenants—requiring a security deposit is one of the most important. In addition to motivating the tenant to comply with their obligations, the security deposit can be used to cover the tenant's negligence.

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Security Deposits Explained

A security deposit is money the tenant gives to the landlord to guarantee their compliance with the lease as well as the state and local laws regarding their tenancy. It is also their guarantee that they will return the property to its original move-in condition, minus any reasonable wear and tear, when it comes time to move out.

Contrary to what some may think, the security deposit is the tenant’s money, not the landlord’s. Many dishonest landlords simply consider the security deposit extra income, never intending to give it back to the tenant when they move out.

That is not only wrong, but illegal.

The purpose of the security deposit is not to line the landlord’s pockets, but to encourage positive behavior on behalf of the tenant. If the tenant does not live up to their end of the bargain, the landlord has the security deposit to use toward the tenant’s debts.

Related: The Landlord’s Itemized List of Common Security Deposit Deductions

How the Tenant Should Pay the Security Deposit

When accepting a security deposit from a new tenant, always get the deposit in guaranteed funds. Never allow a new tenant to write a personal check for the move-in money, including the first month of rent. Imagine your predicament when, two weeks into your new tenant’s lease, you discover their deposit and rent check have bounced. Now you’re dealing with a potential eviction—and absolutely no money except your own hard-earned cash. Avoid this situation altogether by simply requiring all move-in funds be made with a money order or cashier’s check.

How Much Should You Charge for a Security Deposit?

The landlord sets the amount to be charged for the security deposit for each individual property. Since the security deposit is there as a safeguard for the landlord, it is wise to require as much as your market will allow and is legally permitted in your state and local jurisdiction. Some states have a statutory limit for the maximum a landlord can charge, so be sure to research the laws in your area.

Most tenants are accustomed to paying at least the equivalent to one month’s rent for their security deposit. Never charge less than that—because in the event that you need to use the security deposit, you’ll wish you had more. It’s as simple as that.

Should I Use Security Deposit Categories?

Some landlords break the deposit up into different categories—a cleaning deposit, pet deposit, damage deposit, etc. However, there is really no need to break the security deposit up like this. Doing so only constrains the landlord.

For instance, if you specify a $200 cleaning deposit, a $200 damage deposit, and a $200 pet deposit, you’ll be out of luck when your tenant’s pet ruins the carpet and you only have $200 to apply toward the damages. For this reason, simply refer to the deposit monies as the “security deposit” in general so you can apply it toward any debts incurred by the tenant.

Related: How to Run a Tenant Background Check

Security Deposit Red Flags

Always require that the security deposit be paid in full along with the rent prior to the tenant obtaining occupancy. If the tenant can’t pay the full deposit for any reason, that is a red flag. Be firm and don’t negotiate the terms.

Scenario 1: Lack of emergency funds

If the tenant can’t afford the security deposit upfront, you may want to reconsider your screening criteria. Don’t bother with installation payments—there’s a good chance that they won’t make the payments on time. Not being able to pay this amount could mean lack of emergency funds.

The tenant may say a security deposit refund is coming from their previous landlord. They plan to use this to pay you. But don’t count on that. You may face rent collection issues at some point. Waiting for a deposit leaves you in worse shape than if you had let the rental go vacant.

Scenario 2: Not wanting to part with their money

If the tenant has the money for a deposit but won’t pay it, that is even worse. Don’t bother finding out how much money is in their account; simply decline their application. They are worried they won’t get the deposit back, so they do not want to part with the money. They already know—based on past experience—that you’ll have to keep their deposit.

Related: What Landlords Should Know Before Evicting a Tenant

The Difference Between a “Deposit” and a “Fee”

A deposit is refundable, whereas a fee is not. If the landlord charges the tenant a non-refundable fee, it must be specified in the rental agreement and cannot be referred to as the deposit. Most experienced landlords understand the value in keeping non-refundable fees to a minimum. They take away the incentive for the tenant to uphold their obligations.

For example, if the tenant is being charged a $200 cleaning fee at move-out, what motivates them to clean themselves since they are being charged for it anyway?

The pet fee

One common fee landlords charge in addition to the security deposit is the pet fee. A pet fee is different from a pet deposit—it’s simply an amount paid upfront to the landlord for the privilege of having a pet on the premises. The pet fee is then the landlord’s to do with as they wish. In the event the tenant’s pet ends up damaging the property in any way, the expense would come out of the tenant’s deposit.

Instead of a pet fee, some landlords require a double deposit for added security. They may also charge additional pet rent. Choose whatever you feel most comfortable with that is legally acceptable in your area.

Security Deposit Laws

Each state has different specifics when it comes to the security deposit. Research your state and local laws. In Washington, for example, landlords must meet these criteria. (Note the list isn’t extensive.)

  • Have a written rental agreement.
  • Specify the terms of the security deposit and which part, if any, is non-refundable. (You may require professional carpet cleaning when the tenant moves, for instance.)
  • Deposit the security deposit into a trust account designated specifically for security deposits by the landlord at a financial institution.
  • Provide a written description of the rentals cleanliness and condition at the time of move-in. The description (also called the Move-In Condition Report or Checklist) must be signed and dated by both the landlord and the tenant. Provide a copy to the tenant at the beginning of their tenancy.

If you want to run your rental business like a business, then treat it that way from the start. Not only will it save you time as you begin managing tenants, it will also help you keep a level head and make your landlording as stress-free as possible.

Questions? Comments? 

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Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Rick Santasiere Real Estate Broker from Granby, CT
    Replied almost 4 years ago
    Great post Brandon. Love the “wrap up.” Most of us (in the beginning) fly by the seat of our pants because we are so “driven” to take “action.” Which ends up costing us time (and sometimes $$) in the long run.
    Todd Michaels Investor from Chicago, IL
    Replied almost 4 years ago
    We actually stopped doing Security Deposits and instead do a move-in fee which is equal to half a months rent. In Chicago, you are required to hold the security deposit in an interest bearing account, and each security deposit needs to be in a separate account (not 100% sure this last part is an absolute). Too much of a hassle, plus some tenants get use to the “use my security deposit as rent for my last month in a unit”. We only have a couple of units, both in solid “B” areas, so we don’t expect or had any issues with tenants causing any damage beyond normal ware-and-tear. We have been happy with the move in fees so far, and haven’t heard any complaints from tenants either, move in fees are also what all of our other landlords friends (we have 2 other couples who are self-managed landlords) in Chicago have started using as well. They also have “B” grade units.
    Darryl S. from Small Town, Tennessee
    Replied about 3 years ago
    Brandon I recently had a lady sign a lease and put down a full security deposit amount of $800.00 She was to pay the first months rent before she moved in, in 5 weeks. Right after she paid the deposit and signed all the paperwork she was killed in an automobile accident. I did not know this for a couple of weeks…….her boss where she worked called me after cleaning out her desk and finding a copy of the lease paperwork. Her son called me right after that asking about getting the security deposit. Now the complicated part the ladies sister has called me and says the lady was divorcing the husband and apparently she was the passenger in his truck when he wrecked and she was killed! I know weird right? I asked the son if their was a probate being done and who the attorney was, (I was thinking that I could simply send it to the attorney) but he says that they were still married and the funds go to his dad? How do I verify that and protect myself? I was able to rent the property to a very well qualified tenant that moved in the day that she was too move in so it is not a question of NOT sending it back to her heirs but it is a delicate situation and I could use some advice. I am sure that someone here has had to deal with this before? Any advice?
    Dennis
    Replied about 3 years ago
    Great Article: I would like to put my two cents in here about deposits! We own a 55 plus complex that we had built to our specifications. We have our life savings tied up in these units so we guard them with a passion. I never hear much talk from property providers on this- but we do not charge a so called ( security ) deposit- we charge a full months rent as a ( cleaning ) deposit, and a portion of that is ( non- refundable ) used to have a professional cleaning company come in to have a deep cleaning of each unit done at the close of a tenancy. We have learned that over the thirty years of being in this business- Our tenants definition of clean and ours is usually very different. So when a tenant does move in- the unit has been sanitized and all windows- walls – shower glass doors- floors – appliances ect have been put back in a clean state. We address this in our rental agreement and disclose our conditions about this at the very for front prior to signing- If a tenant does like ours terms- of course they are under no obligation to rent from us. But if they decide to sign the cleaning deposit discloser- we reserve the right to charge any amount required to put the unit back into top shape again- of course minus ( normal wear and tear) with of course copies of receipts from a cleaning company -ect.