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 in the event the pie hits the fan.
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What is a Security Deposit?
A security deposit is money the tenant gives to the landlord when they gain tenancy to guarantee their compliance with the lease and 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 for them 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 it is also 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 towards the tenant’s debts.
How Can the Tenant 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 (this includes the first month of rent). Imagine your predicament when two weeks into your new tenant’s lease, you discover that their deposit and rent have bounced. Now you’re dealing with a potential eviction and absolutely no money to work with 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 Can the Security Deposit Be?
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 security deposit laws in your area. Most tenants are going to be accustomed to paying at least the equivalent to one month’s rent for their security deposit. Never charge less than the equivalent of one month’s rent for the security deposit; in the event that you need to use the security deposit, you’ll wish you had more.
Cleaning Deposits, Pet Deposits, and Damage Deposits, Oh My!
Some landlords break the deposit up into different categories, specifying a separate cleaning deposit, pet deposit, damage deposit, etc. ere is really no need to break the security deposit up into different categories, and doing so actually just adds a constraint on the landlord. For instance, if you specify a $200 cleaning deposit, a $200 damage deposit, and a $200 pet deposit, you’ll be up a creek without a paddle when when your tenant’s pet ruins the carpet throughout the home 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.
When Should You Accept the Security Deposit?
Always require that the security deposit be paid in full along with the rent prior to the tenant obtaining occupancy. Allowing a tenant to pay their security deposit in installments after they have gained occupancy is never a good idea for a few reasons:
- Any financially responsible person should be able to afford the move-in amount required for the property. If they can’t afford the security deposit, you may want to reconsider your screening criteria.
- It sets a bad precedent from the very beginning that you are the type of landlord who is wishy-washy and will negotiate on important matters. Don’t negotiate on important matters! Have a policy and stick to it. Be firm from the beginning. You won’t lose out on any good prospects because of it.
- There is a good chance your tenant won’t make the scheduled installation payments as agreed to because as stated above, any financially responsible person wouldn’t have to make their payment in installments in the first place.
What is the Difference Between a “Deposit” and a “Fee”?
The difference between a deposit and a fee is simple: A deposit is refundable, and 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 since a non-refundable fee takes 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?
One common fee landlords charge in addition to the security deposit is the pet fee. A pet fee is charged in addition to the security deposit and is different than a pet deposit in that the pet fee is simply an amount paid up front 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. Or instead of a pet fee, some landlords will require a double deposit for added security if a tenant wishes to have a pet on the premises. You should require whatever you feel most comfortable with that is legally acceptable in your area.
Are There Any Specific Laws I Need to Know About the Security Deposit?
Each state has different specifics when it comes to the security deposit, so it is important that you research your state and local laws for guidance. In Washington, according to the Residential Landlord Tenant Act, in order for the landlord to collect a security deposit, they must:
- Have a written rental agreement.
- Specify the terms of the security deposit and which part, if any, is non-refundable (for professional carpet cleaning when the tenant moves, for example).
- Deposit the security deposit into a trust account designated specifically for security deposits by the landlord at a financial institution.
- Provide to the tenant in writing the name and address of the financial institution where the security deposit will be held during the tenancy.
- Provide to the tenant a receipt of monies paid as the security deposit.
- Detail the circumstances of how the security deposit can be withheld.
- Provide a written (detailed) description of the condition of the rental and its cleanliness at the time of move-in, including damages. The description (also called the Move-In Condition Report or Checklist) must be signed and dated by both the landlord and the tenant, with a copy provided to the tenant at the beginning of their tenancy.
- At the end of the tenant’s tenancy, provide a written statement to the tenant detailing any deductions, along with the remaining refund, to the tenant’s last known address within 14 days of vacating.
Wrapping it Up
Alexander Graham Bell once said, “Before anything else, preparation is the key to success.” We believe this quote to be exceptionally true in regard to rental property investing. If you want to run your rental business like a business, then treat it that way from the start and prepare for the future. Not only will it help you save time as you begin managing tenants, it will also help you keep a level head and make your landlording as stress-free as possible. Don’t be a retroactive landlord, simply responding to life as it is thrown at you. Be a proactive landlord and prepare for the journey you are about to take.
[This article is an excerpt from Brandon Turner’s The Book on Managing Rental Properties. For more advice on creating a stress-free rental business, be sure to check out the full book here.]
Any questions about rental security deposits? How do you handle them in your business?
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