Learn how landlords can use security deposits to protect their rental property investment, and key regulations to understand.
On the surface, security deposits seem rather straightforward — landlords collect a set amount when a new tenant signs a lease, then return the deposit (less any expenses) when the tenant moves out. However, there are several rules dictating how these deposits are managed, used, and returned. Here are the most important factors landlords need to consider when collecting security deposits.
Security deposit amounts have been rising across the country in recent years, but many states cap the amount you can collect. These can vary significantly: For example, Massachusetts sets the limit at one months’ rent, Nevada at three month’s rent, and Wisconsin has no limit at all. Landlords who own rental units in multiple states should tailor their security deposit terms to remain compliant with these laws.
In many states, landlords must open a separate bank account dedicated to security deposits to avoid commingling them with personal funds. In addition, some states — such as Florida, Illinois, Maryland, and others — require landlords to place security deposits in separate interest-bearing bank accounts. They must then disclose the interest rates to their tenant and provide documentation showing the amount of the deposit, the date it was received, and the interest rate that the deposit will generate. In some cases, landlords must pay back the interest to tenants.
When it’s time for the tenant to move out, states have specific laws regarding the timeframe in which a deposit must be returned, how any deductions must be itemized and reported to the tenant, and how deposits can be used. We’ll go into detail about these restrictions later in this article.
Landlords spend a significant amount of money to prepare a property for their tenants, from repainting walls with a fresh coat, to cleaning costs, to ensuring that electrical and plumbing are maintained. Security deposits can be used to cover costs for repairs or damages caused by the tenant beyond normal wear and tear — such as cigarette burns, multiple or large holes in the walls, or broken items. The nature of these damages and how much they cost to repair should be clearly documented to minimize disputes between tenants and landlords.
Security deposits can also be used to cover cleaning costs to restore the property to the same condition as before the tenant moved in. This can include removal of trash or abandoned furniture, cleaning grime or stains, or smoke damage from cigarettes. As is the case with damages, these costs must be documented and explained in writing in case of questions or challenges from tenants.
As inflation causes rent prices to rise, tenants are becoming increasingly “rent burdened,” which means they spend more than 30% of their income on housing costs. Late or partial rent payments are always a concern for landlords. If tenants owe any rent payments at the end of the lease, landlords are generally allowed to deduct that amount from the security deposit.
In long-term rental properties, tenants are often required to pay for utilities. In cases where tenants fail to make these payments, security deposits can be retained to cover the costs. Landlords should make sure this obligation is clearly stated in their lease agreements, maintain documentation of tenants’ non-payment, and keep receipts for payments made using security deposits.
Tenants who break their lease may be required to pay a penalty or cover the costs of lost rent if the landlord is unable to find new tenants quickly. Tenants can choose to use the security deposit to make that payment if their reason for terminating the lease has nothing to do with the condition or safety of the property they are renting.
Security deposits provide landlords with the coverage they need to manage certain expenses at the end of a lease. With a comprehensive understanding of what security deposits can be used for in their state, rental property owners can protect their investments from unexpected costs.
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