1. Money
You can opt-out at any time. Please refer to our privacy policy for contact information.

The Basics of the Security Deposit

What It Is and Why You Must Require It From Your Tenants

By

Requiring a security deposit from your tenants is an essential protection for every landlord. A security deposit is exactly what it sounds like. It gives landlords a sense of security. If a tenant causes destruction or does not pay their rent, the landlord can use the money from this deposit to cover these expenses.

What Is a Security Deposit?

A security deposit is a sum of money that you collect from a tenant in addition to the first month’s rent. It is a one-time refundable fee.

How Much Should You Ask For?

Every state within the United States allows a landlord to collect a security deposit from a tenant. The maximum amount you can collect depends on the location of your rental property.

Some states, such as Illinois and Texas, have no limit on the maximum amount of security deposit you can collect. Other states allow landlords to charge tenants a maximum of anywhere from one to three months’ rent as a security deposit.

In addition to knowing the rules of the state where your rental property is located, you should always check with the city or county where your rental property is located to make sure they do not have other limits on security deposits in place.

Remember, these are the maximum amounts you can charge tenants. If the other landlords in your area are charging a one month security deposit for comparable units and you charge a two month security deposit, you may quickly lose the interest of prospective tenants. If your vacancy sits on the market for an extra month because you are charging a security deposit of two months’ rent instead of one month, it becomes a wash anyway because you have already had to pay for all of the vacancy costs for the month you were not able to get it rented.

When Should You Collect It?

You should always collect the entirety of the security deposit before the tenant moves into the rental. If a tenant is not able to provide the full amount up-front, either you should not allow them to move-in until they do or you should find another prospective tenant who is able to provide the security deposit. This is assuming that the other tenant has been thoroughly screened as well.

If you allow a tenant to move-in without paying the security deposit, you are putting yourself at risk. The most likely scenario is, you will never receive the security deposit, or the entirety of the security deposit, which leaves you at a financial liability if the tenant causes damage or stops paying their rent. You will have no cushion to pay for any of these expenses.

How Do You Store It?

Again, each state is different. Some states do not have any rules regarding where you must store the security deposit. Other states require you to put security deposits in a separate interest bearing account. Certain states will also require you to give the tenant written notice within 30 days of move-in to inform them what bank their deposit is being held in and the annual interest rate. Some will go a step further and require you to annually report the interest that has accumulated on the security deposit to the tenant.

When Must You Return It?

Each state has a specific law about when you must return the security deposit. Some require it to be returned no more than 15 days after the lease has ended. Other states give you up to 30 days to return the deposit or to give a tenant written notice as to why it was not returned.

What Is It Used For?

Hopefully, you will not have to use the security deposit at all and can simply return it to your fantastic tenant in full when their lease is up.

Unfortunately, it is not always that simple. A security deposit is a kind of insurance for landlords. It protects you when there is a breach of contract, the contract being the lease with your tenant. Although you are allowed to sue a tenant for the money they owe you, even if you are awarded the judgment against them, it is often impossible to actually collect this money. The security deposit offers you some buffer to soften the blow of the lost money.

You cannot keep a security deposit whenever you feel like it. Each state has certain laws regarding when you are legally allowed to keep a tenant’s security deposit. Common examples include damage to the apartment in excess of normal wear and tear and nonpayment of rent.


Next: 5 Reasons You Can Keep a Tenant's Security Deposit
  1. About.com
  2. Money
  3. Landlords & Property Investments
  4. Landlord 101
  5. What Is a Security Deposit and Why Must You Require It?

©2014 About.com. All rights reserved.