Becoming a rental property owner can be a profitable investment, but that doesn’t mean it does not come with risks. As a landlord, you will have to protect your investment property through multiple means, such as screening tenants, obtaining the right insurance policy, and requiring a rental bond or security deposit.
What are Rental Bonds?
A rental bond is the sum of money that a landlord or property management company takes from the new renter at the start of their tenancy. Commonly referred to as a security deposit in the United States, it is a one-time payment that is added to the tenant’s advance rent.
Security deposits are often required by property owners, as it protects the investment property should a tenant violate the terms of their lease. For instance, property damage that is discovered during the move-out inspection may be covered by the security deposit. Similarly, it protects landlords from tenants who skip out on rent.
Simply put, a security deposit safeguards real estate investments from the inevitable. No matter how strict your screening procedures are, as a landlord, you are bound to encounter a handful of bad tenants. The good news for tenants is that security deposits are refundable. If they take excellent care of the apartment, there’s a chance that they’ll get 100% of the security deposit back.
How Much is the Security Deposit?
There is no specific amount for the amount of security deposit that can be collected. The maximum amount depends on where the rental property is located. For instance, in Texas, there are no laws that limit the amount of the security deposit. However, in Connecticut, the maximum amount should be equal to two months’ worth of rent. This limit is further reduced if the tenant is over 62 years of age.
In general, if your rental property is in Florida, you will not have to worry about any statutory limits. Florida State does not have specific laws on how much you can collect as a security deposit. However, remember to check city and county laws. Even if there aren’t any state laws on the matter, cities and states may still implement local ordinances on the maximum amount that can be collected.
Keep in mind that legal limits aren’t the only basis for determining the proper amount for the security deposit. Observe the local real estate market to find out how much other landlords are charging. If you charge too high, you may end up losing prospective tenants. As a result, you will face longer periods of vacancies, as tenants will prefer properties that require lower security deposits.
Another factor to consider is your tenant’s credit score. You or your property managers will gain access to this information during the tenant screening process. The lower their credit score, the riskier the tenant is going to be. If they failed to pay promptly in the past, they will likely fail to pay promptly in the future.
Are Security Deposits Required?
No law requires landlords to collect security deposits, but it would be wise to do so. Tenants are more likely to follow the terms of their lease if they know that their money is at stake. Since tenants are entitled to receive their full security deposit when they legally move out, they will have to ensure that the property is well-taken care of.
Although security deposits are not required by law, landlords are required to deposit the money in a separate bank account, should they decide to collect the amount. Landlords are not allowed to store the money in their personal accounts. In some states, landlords are required to provide a tenant with a receipt for the security deposit within thirty days after moving in. The receipt must specify which bank the deposit is being stored, as well as its interest rate.
When Should the Security Deposit Be Returned?
Each state has different laws concerning the due date for returning deposits. Some require the landlord to release the security deposit fifteen days after the lease ends, while others grant as much as thirty days. Florida law states that landlords must return the security deposit fifteen to sixty days after the tenant has vacated the property.
If the landlord decides to keep the deposit, he/she should provide the tenant with a written notice explaining why it will not be returned.
When Can Landlords Keep the Security Deposit?
Landlords cannot keep a security deposit simply because they want to. Each state implements its laws regarding the instances in which a landlord can legally keep or deduct a certain amount from the tenant’s security deposit. Valid reasons for deducting money from a security deposit include:
- Non-payment of rent, bills, and other fees
- Damage to the property caused by the tenant’s negligence
- Failure by the tenant to return the property’s keys
- Failure by the tenant to clean the property upon move-out (to cover the cleaning expenses)
- Failure by the tenant to replace damaged appliances, furniture, etc. that came with the property upon move-in
All states allow landlords to deduct a certain amount from the security deposit, but this comes with limitations. Typically, property owners cannot make deductions for normal wear and tear. “Normal wear and tear” has a broad definition, but generally it refers to damage caused by time and age. This includes issues such as faded wallpaper, minor dents in the wall, faulty lightbulbs, and so on.
It is important to note that landlords must prepare an itemized list of expenses along with their corresponding receipts. If there is a valid reason to keep part of the deposit, you must provide your tenant with a written explanation. For example, if the security deposit was $1,200 and you calculate $500 worth of damage, you will have to return the $700 along with a detailed explanation as to why you kept the $500.
Since security deposits are concerned with the law, you must seek professional advice from an attorney or a property management firm. The experts at Luxury Property Care are prepared to answer your specific questions regarding security deposits. If you need help determining how much you should charge your tenants, we would be glad to offer our professional property management services, as well.