One of the first transactions that will likely take place between you as a landlord and a new tenant is for you to collect a security deposit. Typically, this amount will cover expenses that come up at the time of move-out, such as for cleaning and repairs to the rental unit, though in some cases it will cover unpaid rent as well. Most landlords collect a security deposit in addition to the first month’s rent at the time of move-in. Some landlords collect the last month’s rent as well or in lieu of a separate security deposit, though this is not always advisable. Different states have their own rules related to security deposits, such as limits on how much the deposit can be and when the deposit must be returned. In some cities, particularly those with rent control laws in place, additional requirements such as paying interest on security deposits may apply. Whatever the terms of your security deposit requirement are, it is important to state them clearly in your written lease or rental agreement.
What Can Security Deposits Be Used For?
In general, landlords can use security deposit funds to offset costs associated with a tenant’s failure to abide by the terms of their tenancy. This can mean using the security deposit to cover unpaid rent, repairs, cleaning, or any other work that needs to be done in order to return the rental to the state it was in before the tenant took possession. Keep in mind that you cannot deduct from the security deposit for normal wear and tear to the rental unit. In other words, while you can generally use a security deposit to repair things like a large hole in the wall or a broken window left behind by a tenant, a carpet worn down by normal use or faded wallpaper are likely not things that a tenant should be held responsible for.
Sometimes tenants will request to use their security deposit to cover the last month’s rent, though this is not legal in all states. If it is permissible under the law where your rental unit is located, this still may be an unwise choice for you as a landlord. For example, if you have raised the rent at some point during the tenancy, the security deposit will not cover the full amount of rent if it was originally equivalent to one month’s rent. It may also be a bad idea in the event that a tenant’s damage to the property exceeds the amount of the last month’s rent. In either case you may be faced with the choice of taking your tenant to small claims court or simply absorbing the losses.
How Much Should a Security Deposit Be?
State laws vary with regard to how much you can charge for a security deposit, so it is important to check the current requirements in any location where you own rental property. In states with limits on the deposit amount, the limit is usually equal to one or two months’ rent for most tenants, though market conditions may dictate charging a lower deposit than the maximum, especially if the monthly rent amount itself is already relatively high. On the other hand, you may consider charging on the higher end for a tenant with a less desirable credit history, or in any other situation where you have a concern about the possibility of unpaid rent.
Where Should a Security Deposit Be Kept?
Some states require security deposits to be kept in a special trust account set up specifically for that purpose. In these jurisdictions it is a good idea to clearly document how much each tenant has contributed to the account and when. This makes it simpler to ensure that the appropriate amount is easily returnable to a tenant when the time comes. Again, be sure to check applicable laws to confirm whether you are required to pay interest on the security deposit during the time it is in your possession. Most states’ rules do not require a separate account or interest payments on security deposits, but it is important to keep current on the laws pertaining to security deposits anywhere that you own property, as they can differ by city and state.
Can You Increase a Security Deposit?
If you wish to increase a tenant’s security deposit, you will generally be bound by the same rules that govern other changes you might want to make to the tenancy, such as increasing the rent. This means that for a fixed-term lease, you will usually need to wait until the end of the lease or until the lease becomes month-to-month. For a monthly rental agreement, in most cases you would need to give 30 days’ notice before increasing the security deposit.