Landlord Basics: The Security Deposit

By E-Renter Tenant Screening
Posted on May 23, 2013 under Landlord and Tenant FAQs, Landlord Paperwork and Forms, Rents and Deposits | Be the First to Comment

One of the biggest issues landlords and tenants seem to have is the handling of the security deposit. Smart landlords require them—and all landlords should. Here are some basic points about security deposits you should know and be ready to share with your tenants whenever questions arise.

The security deposit is:

• Money collected up front to compensate for damages. At the termination of the lease, any repairs, cleaning fees or other expenses incurred to take care of damages outside ordinary wear and tear will be taken out of the tenant’s prepaid security deposit.
  
• Money collected up front to compensate for failure to pay rent, fees and late charges. In case a tenant fails to pay rent, fees or late charges, the landlord may get compensation from the security deposit.
  
• The best way to prevent financial squabbles between landlords and tenants. Once the tenant has moved out, it’s nearly impossible to chase him or her down to collect for lost rent or damages.

The security deposit is not:

• The last month’s rent. You should not allow a tenant’s security deposit to be used as the last month’s rent. They are two separate categories. Tell all tenants that they need to pay their last month’s rent, and after they are all moved out, you will conduct an inspection and walk-through to determine whether there are any damages to the property, and how much, if any, of their security deposit they will receive back.
  
• A savings account. Some states, such as California, require landlords to pay interest on security deposits held for at least a year, but most do not. California landlords may elect to hold the security deposit in an interest-bearing account or pay the interest established by a state commission. However, most states do not have the interest-paying requirement, and therefore, landlords may return all, a portion of or none of the security deposit to the tenant without any additional interest. Check your local and state laws.
  
• The landlord’s money. It is your tenant’s money, which you are holding as a small insurance policy against the possibility of loss due to damages or unpaid rent, fees or late charges. Smart landlords deposit tenants’ security deposits into separate accounts which they do not use for business expenses.

By the Way: It’s not up to the tenant to determine whether he or she has caused any damage. Checklists and photos of the rental unit on move-in day and move-out day are a great way to document any needed cleaning or repairs.