One of the most important things that you should do before the start of any tenancy is to collect a security deposit. While it isn’t required by any U.S. law, a security deposit protects your property investment in the event of damage and other tenant-related issues.
What are security deposits?
A security deposit or rental bond is a sum of money that is collected from the tenant/s before they begin their occupancy of the rental unit. It is a one-time payment that is refundable – either wholly or partly – and is typically paid with the first month’s rent.
Often referred to as a “damage deposit”, the security deposit is designed to protect the landlord if the tenant damages the property or breaches the terms of their lease agreement. In some states like Nevada, a portion of the security deposit is automatically deducted and used to clean the property when the tenant moves out.
What does the law say about security deposits?
While landlords are not legally required to collect security deposits from their tenants, they are allowed to do so. Landlords have the discretion to act in their best interests. If they believe that a security deposit would best protect their real estate investment, then they have the authority to collect such an amount from their tenants.
It’s important to note that although a security deposit isn’t required, many property managers recommend collecting it. This is because tenants are more likely to act responsibly if they know that their behavior will determine whether they will receive their security deposit at the end of their tenancy.
How much should the security deposit be?
The maximum amount of the security deposit depends on the rental property’s location. For instance, in Illinois and Texas, there is no limit to how much landlords can collect from their tenants. On the other hand, in Connecticut, landlords can’t collect a security deposit that is more than the equivalent of two months’ rent. In most states, however, landlords are allowed to charge their renters a maximum of one to three months’ worth of rent.
Florida’s landlord-tenant laws set no cap on how much landlords can charge their tenants. This means that if your rental property is in Florida, you can charge any amount of your choice. Keep in mind that it still has to be a reasonable amount, otherwise you may deter prospective tenants.
What are the requirements for security deposits?
Each state has its own rules regarding security deposits. Let’s take a look at some of them:
#1 Storing security deposits
When it comes to storing security deposits, landlord-tenant laws differ by state. For instance, in Massachusetts, landlords are required to store the money in a separate bank account. On the other hand, in Florida, landlords can store their tenant’s security deposit in three ways.
First, landlords can post a surety bond. Second, they can store the money in a dedicated bank account that accrues interest. The interest must be paid to the tenant when their lease expires. And third, the landlord can store the money in a separate, non-interest-yielding bank account.
#2 Giving written notice
Statewide laws require Florida rental property owners to notify their tenants within thirty days of receiving their security deposit. The notice should include information such as:
- The name and address of the bank where the tenant’s security deposit is stored.
- The interest rate (if stored in an interest-yielding account)
- How the security deposit is being stored (e.g., in a separate account or with other funds)
The same requirements apply if the landlord decides to transfer the funds to another financial institution.
#3 Returning the security deposit
Typically, landlords and property management companies conduct a walk-through inspection of the property before the tenant moves out. This allows them to evaluate the property’s condition and compare it to its original state. If excessive damage is found, the landlord may hold the tenant liable and deduct the costs for repairs from their security deposit. Examples of property damage include:
- Chipped countertops
- Broken bathroom tiles
- Stained carpets
- Holes and dents in the wall
- Drawings and unauthorized painting on the wall
Keep in mind that landlords are required to prepare an itemized list of repairs supported by their corresponding receipts. Otherwise, the landlord may not be able to use the security deposit to cover the damages.
If the tenant followed the terms of their lease and did not cause any damage to the unit, the landlord should return the amount in full.
#4 Keeping the security deposit
Aside from property damage, landlords can keep a portion of the security deposit for the following reasons:
- Unpaid utilities. If the tenant missed paying their utility bills (e.g., water, electricity, gas), then the landlord can deduct the amount from their security deposit.
- Move-out cleaning costs. Some states allow landlords to use a portion of the security deposit to cover the costs of cleaning the unit upon move-out. However, it is best to check with your property manager to ensure that your state allows this practice.
- Lease termination. If the lease has to be terminated early because the tenant violated the terms of their lease agreement, the tenant may lose their right to retrieve their security deposit.
When should you collect the security deposit?
The security deposit should be collected in full before the tenant moves into the unit. This requirement should be clearly stated in the lease agreement so that if the tenant fails to pay the security deposit, you can legally cancel their lease. You can then offer the property to another prospective tenant.
Remember, allowing a tenant to move in without a security deposit puts your investment property at risk. Although security deposits won’t make you any money, they will protect you in case your tenant fails to pay rent, destroys the property, and so on.
Do you need help with the security deposit collection?
At Luxury Property Care, we understand how important it is to collect security deposits. From drafting loophole-free lease agreements to inspecting the unit for property damage, we will stay on top of things to ensure that your property is protected. We’ll collect the security deposit from your tenants so that you’ll always have something to fall back on.