Security deposits — your property manager knows what they are, but do you? Even if you leave your investment property in the hands of a property management firm, you should still understand what a security deposit is for. As the landlord, you should be fully aware of your financial obligations to your tenant, otherwise, you’ll find yourself facing a lawsuit. To help you better understand this topic, keep reading this guide on everything you need to know about security deposits.
What is a security deposit?
A security deposit or a rental bond is an amount that is collected by the landlord at the beginning of the lease agreement. When a tenant surrenders their security deposit, it is understood that they will allow the property owner to use it to cover the unpaid costs when they move out. With that said, the property owner is not allowed to use the security deposit during the period of occupancy.
What does a security deposit cover?
A security deposit covers several issues that are discovered once the tenant moves out.
#1 Documented Property Damage
Property damage isn’t uncommon. When the tenant moves out, the property investor can use the security deposit to cover the costs of repairs. It’s worth mentioning, however, that it does not include normal wear and tear. The landlord can use the security deposit to patch up holes, but they can’t use it to replace the countertops due to scratches that can barely be seen. They also can’t use it to buy lightbulbs and other items that would naturally “fail” after some time.
Furthermore, the security deposit shouldn’t be used for undocumented damage. The landlord needs to prove that the damage was caused by the tenant. To do this, they need to review the move-in inspection report to compare the unit’s current condition to its condition prior to occupancy. Hence, you should consider hiring a property management company to ensure that the necessary inspections are conducted.
#2 Unpaid Rent
In the event that a tenant violates their lease agreement due to the non-payment of rent, the property owner can still recover the amount the tenant owes, even if the tenant was evicted. However, a current tenant cannot tell their landlord to use their security deposit to pay for their rent in full or in part. The security deposit can cover rent in the event that the tenant ups and leaves. If the funds are more than the amount that is owed, the landlord needs to return the balance to the tenant.
#3 Cleaning Fees and Key Replacements
If the tenant trashes the rental unit, the landlord can use the deposit to cover the costs of professional cleaning services. It’s important to note that this applies to excessive dirt. An example would be drawings on the walls by the tenant’s child. If this were to happen to you, you would be allowed to use the funds to repaint the walls.
Is the security deposit the same as the last month’s rent?
Listen up, because this is a common slip-up among landlords. To make sure that you don’t pay for repairs out of pocket, you should not call the security deposit the “last month’s rent”. If you do this, the amount can only be used to pay for any unpaid rent. The financial responsibility will be on you and your property managers.
To illustrate, consider this situation:
Let’s say you’re about to welcome your tenant into the unit. You want to collect an amount that would cover the costs for repairs, as well as the last month’s rent in case they terminate the contract early. Instead of calling it the “last month’s rent”, you should call it the “security deposit”. That way, you can decide how to use the security deposit should the need arise.
When is the security deposit collected?
The security deposit is usually collected by the landlord or the property management company when the tenant signs the lease agreement. The tenant can make the payment in check or ACH (electronic payment).
When is the security deposit returned?
The security deposit is usually returned 30 to 60 days after the tenant has left, however, it depends on state laws. That’s why you should always consult your property manager. However, landlords can deduct the security deposit to pay for unpaid rent, repairs, and other deductions. In that case, the landlord does not need to return it in full. If you fail to return the security deposit in a reasonable time, your tenant can pursue legal action against you.
What is a security deposit payment plan?
There are instances wherein the tenant cannot afford to pay the security deposit upfront. When this happens, you should consider setting up a security deposit payment plan. In this situation, the would-be tenant would have to pay an agreed-upon amount per month across an agreed-upon period. Keep in mind, however, that if you offer this arrangement to one tenant, you should offer it to others, otherwise you could face discrimination charges. If you aren’t sure if you should offer a security deposit payment plan, set a meeting with a property manager today. They can determine whether or not it’s a safe move for your investment.
Where is the security deposit deposited?
In almost all states, the security deposit should be deposited in a separate account. In other words, it shouldn’t be deposited in the property owner’s personal account. The specific laws on where the amount should be deposited vary by state, so it’s best to consult your property manager or lawyer. In general, if the amount is deposited in an interest-generating account, the interest should be returned to the tenant, along with the balance, when the rental period ends.
If you’re a first-time landlord, understanding the dos and don’ts of security deposits can be challenging. Fortunately, that’s where we can help. At Luxury Property Care, we’ve helped hundreds of real estate investors manage their residential rental properties in South Florida. Through our practices, you can rest easy with the knowledge that your tenants are properly managed.