Everything You Need To Know About Security Deposits
Security deposits have been a longstanding norm in the rental business industry.
They provide landlords with another layer of protection in the event of property damage or unforeseen issues with tenants.
Security deposits cover potential damage to your property, certain cleaning costs, missed rent payment, or other kinds of unpaid bills.
In this article, we’re going to look at the details of what security deposits cover in depth. Whether you're a property owner or a manager at a property management company, understanding how security deposits work is essential.
What is a Security Deposit?
In the same way you require tenants to pay one month’s rent before moving in, you also have them pay the security deposit. You should always let your tenant know all the fees they need to pay prior to the move-in date. It’s critical that you receive the security deposit and first month’s rent on time because these fees signify that someone is actually going to move into the property.
What happens next? Landlords typically put the deposit in an interest-bearing account. This occurs shortly after a tenant’s move-in date. It should be noted that, in states like Massachusetts and New Jersey, you must give tenants a receipt showing where the deposit is and the account’s annual interest rate.
Security deposits can sometimes also be held in surety bonds, and many states have requirements for security deposits to be held in a bank account that is separate from the landlord's other funds. Be sure you understand what state laws dictate about how and where the security deposit amount should be stored.
As a landlord, you shouldn’t expect to keep a security deposit. It will be returned to tenants as long as they follow the lease terms. Only in certain circumstances will you have the right to spend the security deposit.
What Does a Security Deposit Cover?
So, with all of that being said, what are the circumstances where you keep the security deposit?
Let’s start with property damage. The primary purpose of a security deposit is to cover a tenant’s damage to your rental unit above and beyond normal wear and tear. For example, here are a few instances where you keep the security deposit:
- Numerous or large holes in walls
- Large stains, holes, or burns in the carpeting
- Damaged appliances, windows, or doors
Things like faded paint, regular wear on carpeting, faded flooring, and dents in the walls from door handles cannot typically be covered by the security deposit.
Essentially, serious damage is the only type of damage that counts. Minor issues or things that don’t work as well as they used to probably won’t fit the bill.
Security deposits also cover missed rent payments. This is very straightforward. If someone doesn’t pay part or all of their monthly rent (or the final month's rent), you can put the security deposit toward it.
Thirdly, security deposits can help cover cleaning costs. Like property damage, though, there are stipulations here. Security deposits can be utilized if a tenant leaves excess trash behind or leaves furniture that you now have to pay to get removed. Regular cleaning wouldn’t allow you to use the security deposit.
Fourth, security deposits can be kept if a tenant breaks their lease. This will depend on state laws and the terms of the rental agreement. Often, though, if a tenant needs to break their lease and move out early, you will be entitled to some or all of the security deposit.
Lastly, unpaid bills could be another reason you keep the security deposit.
Like unpaid rent, if a tenant owes you money for utilities or other bills, you can withhold funds to cover them.
Returning the Deposit
Now let’s look at the flip side. If your tenant held up their end of the bargain, you need to return the entire security deposit. Again, each state has its own rules about how long a landlord has to return a tenant security deposit after the lease agreement ends. There can be penalties if the landlord fails to supply the deposit refund without justification for withholding funds.
In some states, for example, a landlord must return a security deposit within 14 business days from the closure of the term. Furthermore, if any deductions have been made from the deposit, the landlord must give the tenant an itemized list explaining the reason for each deduction and the exact amount spent. Some states allow for up to 30 days before the security deposit must be given back to the tenant.
Remember that you must have a specific reason for withholding some or all of the security deposit. If you wrongfully spend a security deposit or do not follow other parts of state law (such as sending the deposit within the required time limit), you may be liable if a tenant takes legal action in small claims court. For example, some states will award tenants the amount of the security deposit, the court costs, and up to $250 in penalties if you are found to be guilty of wrongfully spending the deposit.
Conclusion
Security deposits are a very important part of the leasing process. You need to do your research and make sure you know why to withhold. Different states have different laws, so make sure you abide by those.
All in all, security deposits are a backup in case of unfortunate events. They aren’t something you should include in your budget or expect to spend. If you follow the guidelines laid out in this article, you shouldn’t have any problems!
