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.
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.
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.
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.