When collecting rental security deposits, there are rules and regulations you’ll need to abide by that impact how much you can collect and how it needs to be stored during the lease term. To reduce the chances of improperly handling your tenant’s security deposits, we outlined the important factors to be aware of as a landlord.
When collecting rental security deposits, all you have to do is set the amount, have tenants provide it prior to moving in, and then store it in a bank account to be used or returned in the future, right? Well, not exactly. There are rules and regulations you’ll need to abide by that impact how much you can collect in a security deposit and how it needs to be stored during the lease term.
To reduce the chances of improperly handling your tenant’s security deposits, we outlined these important factors to be aware of as a landlord.
What Is a Security Deposit?
A security deposit is a sum of money that landlords can request from their tenants prior to moving in. Tenants are usually given back this fee once they’ve moved out, unless they’re behind on rent payments or have caused damage to the property that’s outside of normal wear and tear. In that case, you are able to retain a portion of the deposit fee with a justifiable reason as to why.
Upon receiving the security deposit, you will need to provide your tenants with a security deposit receipt displaying the name and address of the financial institution used to store the fee, the amount that’s been deposited, the recipient, and the address of the rental property.
How Much Is a Rental Security Deposit?
Local landlord-tenant laws impact exactly how much you can charge for a security deposit fee. Landlords can charge anywhere from one to three months’ rent for a security deposit, with the price cap varying per state. There are also restrictions on how much military personnel can be charged, as well as different price caps for fully-furnished rental properties.
Another factor to consider is whether or not the security deposit you’ve set is affordable for your designated area. If you already have a higher rent price and require tenants to pay a security deposit worth two months’ rent, then this can deter tenants from submitting an application due to costly fees. To avoid this, you can request a security deposit that equals one month’s rent payment and invest in reliable and thorough rental background checks to find quality tenants that will take care of your property — removing the need to upcharge in security deposit fees.
Purchase an Avail Rent Analysis Report to get insights on how much landlords with similar properties are charging in rent near you.
Does a Security Deposit Have to be in an Interest-Bearing Account?
Landlords are usually not required to store security deposits in an interest-bearing account through the duration of the lease term, unless stated otherwise by local ordinances. However, in many states, this fee does need to be kept in a bank account that is not their personal account to avoid “commingling”, which is defined as the act of storing a security deposit in the same account as other rental fees, such as rent and application fees.
If you decide to store the rental security deposit in a neutral location, like an escrow or savings account, then the interest that accrued over time from bank fees will be your responsibility to cover.
Platforms like Avail allow landlords to collect rental fees — like rent payments, pet fees, and security deposits — in a way that’s both legally-compliant and secure for both parties. Any bank account you’ll be using to store security deposits can be easily set up to help you keep track of any outstanding or future payments.
What Can a Landlord Deduct From a Rental Security Deposit?
When tenants cause damage to the property that’s outside of normal wear and tear, the landlord is legally allowed to deduct expenses to cover the repairs from the security deposit. Examples of severe damage include:
- Tears, holes, and burn marks on the carpet
- Broken windows
- Excessive holes on the wall from home decor
- Damaged appliances (stove, fridge, dishwasher, etc.)
- Damage caused by pets
If allowed by the state, a landlord can also keep a portion of the security deposit if a tenant is behind on rent payments. Allowing tenants to use their security deposit for rent can reduce the amount they owe until they’re able to improve their financial situation.
However, any deductions from the security deposit must be provided to tenants through an itemized list explaining the reasoning for the deduction and the cost of each expense.
How Long Does a Landlord Have to Return a Security Deposit?
Landlords have anywhere from 14 to 45 days to return both the security deposit fee and any accrued interest to the tenant after they’ve moved out. The time frame varies depending on which state you’re located in, so it’s important to be familiar with your local landlord-tenant laws prior to the end of the lease term.
Withholding a tenant’s security deposit past the allotted time can result in a lawsuit, since it’s illegal to keep a security deposit from a tenant without justifiable reason. If you are planning on withholding part of the security deposit, your tenant will need to be notified as soon as possible.
Collect Security Deposits With Avail
The key to collecting security deposits is being aware of local laws set in place, having a set process to collect and store rental fees, and leveraging landlord software to keep track of all the security deposits your tenants submit. Avail allows you to not only collect rent payments online but also additional fees the tenant will be responsible for covering.
To securely and legally collect security deposit fees from your tenants, create an account on Avail to get started.