Did you know that your security deposit policy and handling security deposits could make or break your rental business? Security deposits are marvelous tools that address a variety of problems faced by landlords and tenants alike.
Security deposits incentivize landlords and tenants to stick to duties they agree to (maintenance and care being primary). They also have the off-script effects of being a built-in insurance buffer for tenants and an extension to tenant screening for landlords.
These positive elements make them near-necessities, but landlords must know the rules to collect security deposits. Learn everything you need to know in this quick guide.
Security Deposit Collection and Handling Laws
The important law relating to security deposits is that as of August 7th, 2023, landlords may only collect a deposit equal to two months' rent. Landlord-tenant law imposes no further rules about where to keep and how to manage deposits. However, there are useful guidelines and best practices.
If you want to minimize confusion and disputes, implement these simple practices:
- Conduct a detailed inspection before collecting a deposit
- Keep the security deposit in its own separate, interest-bearing bank account
- List tenant and landlord responsibilities expressly in the lease agreement
- Discuss your approach to dealing with rental property damage at the lease's outset
When to Return a Deposit
In the best cases, your tenants will leave your property in pristine condition. The default rule is that you have one month to return the deposit to them. However, you can extend this to two months by inserting such a term into the lease agreement.
When Security Deposits Can Be Withheld
Security deposits can be withheld if tenants breach the lease agreement. These breaches have to be quite specific before you can withhold a deposit.
Causing property damage is the first type of breach. This can be in the form of the tenants damaging the structure or furniture.
It also extends to such damage caused by their guests and even to cases where trash gets to a level where it causes an infestation. Normal wear and tear does not count as property damage. Unpaid rent and utilities constitute the other type of breach.
If any such breach occurs, record it as soon as you can. Inform the tenant of the breach and give them an opportunity to cure the breach before the tenancy ends.
If the tenancy ends and the breach is still enforceable, you must give the tenants an itemized list of deductions. You can claim extra costs from them in small claims court if the deposit does not cover all property or financial damages.
Security Deposits Protect Everyone
Security deposits help landlords and tenants in several ways. They incentivize tenants to keep the property in good order, pay their rent timeously, and supplement tenant screening for the landlord. They also give tenants a "buffer" if some unfortunate event makes payment difficult or damages the property.
Understanding the laws and best practices applicable to deposits can help you avoid disputes with your tenants. It can also strengthen tenant-landlord relationships and have a positive impact on your business.
PMI Little Town is all about building good relationships; we have almost two decades of experience in it! Benefit from our expertise and insights by reaching out to us today.
