As a property owner or manager, your primary goal is to protect your property from damage and a loss of value. When selecting tenants, a good deal of your time is spent on ensuring the people you rent to are going to take care of the property while living there. Unfortunately, it is not always possible to know what could happen. That’s where security deposits come into play.
A security deposit is a deposit of money to the landlord to ensure the tenant complies with lease terms. A landlord can withhold deposit for a variety of reasons, the most common are unpaid rent or utility bills, or documented damage to the unit or property.
Though the specific laws regarding security deposits vary from one location to the next, it’s a rather straightforward process. At move in, the tenant agrees to pay a specific amount of money as a security deposit. These funds are put into a separate account from any of the property’s operating funds. They are held by the owner of the property in case there is damage with the property down the road when the tenant leaves.
As you will see, there are a variety of factors to clarify with the renter before you sign the lease regarding the security deposit, including when they could lose these funds and why. If, for some reason, there is damage that is applicable, the property owner retains the security deposit or as much of it as is necessary to pay for that damage, to make repairs. It sounds simple enough, but where do property owners start with setting these rules?
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It’s important to learn what your state laws are regarding how much to charge for a security deposit. The amount should vary based on the cost to rent the unit. Many times, it is at least the same amount as one months’ rent. In some states, you may be capped at no more than two months’ of rent. Be sure to check with your attorney creating your property management lease if you are unsure what the rules are in your state.
Balancing the security deposit amount with the full move in costs is important to consider. I've seen rental advertising that state full 1st and last month + 1 month security deposit required at move in. Yes, that sounds great from the landlord's perspective, but if no one can afford to move in, you'll soon be out of business!
In some situations, you may have a qualified tenant with solid credit and work history that lacks the upfront funds to pay for the security deposit and the first months’ rent. In this situation, they may ask you for a security deposit payment plan. In most cases, you are not required to provide this opportunity. In the City of Seattle, you are.
If you offer it, the process is set up between the landlord and the would-be tenant. Both parties must agree on how much the security deposit will be, how much the tenant will pay towards it each month, and how long the payments will continue to reach the specific target amount. Be sure any installment plan for the security deposit you agree to is documented perfectly on the lease agreement. Also, note how much of a security deposit the tenant may need before they can move into the property. In some cases, you may still want to require a smaller initial deposit with the first months’ rent.
Should you offer a security deposit payment plan? This is very much an individual decision. Realize that if you do it for one tenant in a larger complex, you may need to provide the same type of opportunity to others. Set very specific rules for when this opportunity may apply, such as credit score qualifications, employment verification, and background checks, depending on what is allowable under law.
In nearly all states, it is a requirement that property owners and managers place security deposits in a separate account from any of the property’s other funds. These deposits need to be separate from any other type of expense or income and should be in an account designated for the property itself. In other words:
What about interest? Some state laws make it very specific that the funds from a security deposit must be placed into an interest-bearing account. In situations where this is a requirement, the interest earned on those funds is paid to the tenants when the deposit is refunded to them. Because of this, it tends to be beneficial to place those funds into a separate account from all other funds, with limited interaction with any type of deposit or withdrawal. At the time of the tenant moving out, you can clearly see how much, if any, interest accumulated in the account.
Pet deposits are somewhat different from a traditional security deposit. Like a security deposit, property owners and managers may request that a tenant provide an upfront security deposit if they plan to have pets on the property. Some states may not allow a separate security deposit designated for pets. Again, it is critical to know what the laws are within your state.
If you allow pets on the property – which is something you should decide in advance – then you may be able to require a pet deposit if the law allows. A pet deposit is designed to provide an additional level of funding that is put aside into an interest-bearing account, much like the security deposit. If there is damage created by the pet to the property at the time of the tenant moving out, the pet deposit can be accessed to pay for those damages.
Many property owners want to allow pets in their rental property because it can be an excellent incentive to draw in more interested parties in living in the home. However, pets, which usually includes just dogs and cats, can do significant damage to a property even if the owner is responsible and takes care of it. Waste accidents, scratching, damage to furnishings, and other risks are possible. If you decide to have pets, consider the value of this type of deposit.
The amount of a pet deposit will vary based on laws as well as on the type of pet and the rent of the property. In some cases, having a $200 to $300 pet deposit is enough to encourage pet owners to take care of their property to avoid damage.
All that said, I prefer charging Pet Rent rather than Pet Deposit, because the burden of proof is on the landlord to prove whether the damage was caused by the pet or the tenant.
When creating a lease with a tenant, you’ll include a great deal of information about the rules of the property. These rules include things the tenants cannot do. Damaging the property tends to be high on that list. In regards to refunding security deposits, you want to be sure your lease specifically outlines what these rules are and how they need to be managed.
The lease should outline when the security deposit can be refunded and when it cannot be. You should refund the security deposit as fast as you can, but always tell residents it can take up to 2 weeks after move out to receive their refund.
Any funds being withheld from the deposit must be itemized in a statement that is sent with the refund check. Common withholdings are unpaid rent or fees, closing utility bills, cleaning charges, and repair charges for damages. There are going to be times when you cannot refund the full security deposit or even any of it. The lease you have is there to protect you from disputes, make it clear what type of damage are beyond Normal Wear and Tear. For example, many property owners will require damage to walls, flooring, appliances, plumbing, and electrical – that are not due to normal wear and tear, to be repaired using the security deposit. It’s also important to have photo evidence, if possible, of any damage to help verify the damage from the tenant upon his or her move out in order to validate your claims.
The lease you sign with the tenant should provide comprehensive information about what happens when the security deposit is less than the damage done. Most leases will allow the property owner to pursue the tenant for those costs through legal means if necessary. It is up to you to determine if this is necessary, and it can be in some situations.
Understanding the rules of security deposits is critical to any property owner or manager. Be sure to check with state laws to know what the rules and restrictions are on requiring them, managing them, and enforcing them.
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