Being a landlord comes with the risk of a tenant not paying you or damaging your property. One of the ways you can reduce this risk is through a security deposit. As with any other part of the rental business, there are rules and best practices when it comes to security deposits. We’ll discuss security deposits, what they are, what they’re used for, and how to know what to charge.
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What are security deposits and how do they work?
A security deposit is additional money that the landlord collects from the tenant and holds for potential charges. These charges might include unpaid rent, property damage, or legal costs. Some landlords collect additional deposits for pets to offset the likelihood of a pet causing damage or forcing additional cleaning.
Your Lease Agreement should specify the amount and use of the security deposit. At the end of the lease, you probably want to send the tenant a Security Deposit Return Letter to document that you’ve returned their deposit.
If you withhold money from the deposit, you are generally required by law to give the tenant notice of the charges within a certain number of days after they move out. This requirement varies by state or local jurisdiction.
How is a security deposit calculated?
Many security deposits are equal to one month of rent. Some landlords will charge an additional month based on the tenant’s credit history or if there is other risk involved. For example, landlords in areas with strong tenant protections often charge higher security deposits due to the time and cost of removing a tenant.
You may see some landlords charging no security deposit or only a nominal amount. Large landlords can spread the risk of loss across their units. They also often use a low deposit as a marketing tool. A low deposit may not be suitable for a small landlord who is unable to take on the additional risk.
The Lease Agreement should state the dollar amount of the security deposit. If the deposit is equal to one month of rent, you should state this as well. This makes it easier to raise the security deposit if you renew the lease at a higher rent.
Is there a limit to how much can be required for a security deposit?
There are practical and legal limits to the amount of a security deposit. Practically, if you charge more than similar properties, it will be harder to find tenants. Some state and local governments have legal limits on the amount of the deposit. For example, the limit in New York is one month of rent and the limit in California is two or three months depending on whether the property is unfurnished or furnished.
You should check for what counts as a security deposit in your area. If you want to also charge the last month’s rent, this may or may not count as a security deposit or towards the limits on security deposits. It also varies as to whether pet deposits count as security deposits or towards the deposit limits.
Regarding pet deposits, you may also be restricted on charging a pet deposit if the tenant wants to add a pet during the lease. If the lease is silent on pets, you generally won’t be able to add a deposit. If it says no pets, you can negotiate a deposit with the tenant and sign a Pet Addendum to waive the no pets rule. Another way to handle it in the original lease is to specify a pet deposit if the tenant had pets, have them sign that they don’t have pets, and then collect the predetermined amount when they get a pet.
What can a landlord use a security deposit for?
The landlord generally can’t touch the security deposit money during the lease. In most states, the deposit money belongs to the tenant, and the landlord must hold deposits in a separate bank account. The landlord may be able to apply the deposit towards damage or missed rent during the lease and then have the tenant repay the deposit. Many landlords have allowed tenants to put their deposit towards rent during COVID-19.
At the end of the lease, the presumption is that the tenant gets their full deposit back. The deposit is for damage beyond reasonable wear and tear. For example, you can charge a tenant for a stain in the carpet but not to replace a carpet that is worn from normal aging. If the tenant is behind on rent or other charges, the deposit may also be used towards those charges.
Some jurisdictions may have restrictions on whether you can use the security deposit for missed rent, property damage, or other specific charges. You may also lose your right to withhold the deposit if you don’t provide timely notice of charges. In those situations, you will need to return the security deposit and pursue any amounts the tenant hasn’t paid through collections or small claims court.
Speak to a Rocket Lawyer On Call® attorney if you are not sure about withholding a security deposit or if you have other pressing questions about your rights as a landlord.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.