When you’re trying to find suitable tenants for your rental property, security deposits can give you the insurance you need.
There’s nothing easy about being a property owner. If you’re going to make money on your rentals, you need to make sure you’re protecting your investments at all costs. One way to do this is by finding the best possible tenants to fill your vacancies.
At the end of the day, however, you can never be positive that a tenant is going to live up to expectations. For that reason, it’s always a good idea to charge a rental deposit when a tenant moves in.
In this post, we’re going to tell you what you need to know about security deposits so that you’re making the right decisions. Each state has laws dictating what you can and can’t do, but there are also optimal ways to do it that make things easier for you and your tenants alike.
One major element of managing a rental is risk management, so keep reading and learn how to boost risk management with security deposits.
What Is a Security Deposit?
A rental security deposit is a set amount of money, paid upfront, from a tenant to a landlord. The landlord holds onto the security deposit for the duration of the tenancy. When a tenant leaves, the landlord gives back the security deposit, so long as there’s no damage to the rental unit.
To determine whether or not there’s damage, the landlord will perform a move-in inspection when a tenant moves in. When they move out, they’ll perform the same inspection to ensure that the apartment is in the same condition.
If all looks good, the landlord will give the tenant their deposit back. If there are property damages, however, a landlord can withhold some or all of the damage deposit to cover the cost of repairs. The security deposit acts as an insurance policy with the tenant knowing that they won’t get it back if they damage your property.
How Much and When?
Depending on where you live, you may have a limit on how much you can charge for a security deposit. Most places don’t have this, but you should never make your rental deposits more than a single month’s rent. If you do, you’ll deter good tenants from applying for your vacancies.
The security deposit amount should be clearly stated in your rental agreement and is usually paid when the tenant moves in, along with the first month’s rent. If the tenant can’t pay the security deposit, you can cancel the lease agreement and rent the unit to another applicant.
Regulations Around Rental Deposits
We’ve already discussed the limits that certain states impose on rental deposits, but there are other regulations as well. Some places require you to have a separate bank account for storing the rental deposit, so as not to combine these funds – technically not yours – to get mixed up with your personal funds.
States like Florida, Maryland, and Illinois require landlords to put security deposits into interest-generating savings accounts. They then have to tell the tenant how much interest is being earned on the rental deposit and, in some cases, pay the interest back to the tenant when the deposit is returned.
Some places also have laws that dictate when the rental deposit should be returned, how damages should be listed and reported, and how the deposits must be used.
Holding a Security Deposit
You can hold a security deposit for various reasons relating to both property damage and other losses of rental income that a tenant may cause. When it comes to property damage, a landlord has to spend a lot of money to cover up things like holes in the walls, cigarette burns, or wear and tear from pets.
If the apartment is returned to you in a less-than-ideal state, you can use a security deposit to pay for cleaning services. Whether it’s piles of trash, abandoned furniture, or stains, a tenant should never leave an apartment without cleaning up after themselves.
You can also use the security deposit when a tenant misses rent, is behind on bills, or breaks the lease. It is important to document any and all damages/losses in the event that the tenant attempts to dispute you keeping the damage deposit.
Returning a Security Deposit
Every state has a different deadline for returning security deposits. In Tennessee, you must return the deposit within 30 days of the tenant leaving the property.
If you’re keeping any of the deposit, you need to provide an itemized list of damages and how much they cost to repair. Including receipts and dates for when the damages were fixed helps to prevent any disputes from the tenant.
You can deliver the security deposit to the tenant in person, through email transfer, or by mail. The best thing to do is return it in the same format that it was paid to you at the start of the tenancy.
How Property Management Makes Tenant Relations Better
There’s no doubt that damage deposits are an important tool for landlords to protect their investments. If you want to ensure that your property is being looked after, however, it’s best to hire a property manager.
A property manager will use screening practices to ensure you always have ideal tenants. They’ll also collect damage deposits and rent every month, dealing with tenants who are late on rent or cause damage.
In the event that your property is damaged, a property manager will perform the necessary maintenance to rehab it. You’ll never have to worry about a tenant damaging your investment beyond repair.
Security Deposits Are the Way to Go
Now that you know how security deposits can help and how to properly use them, you can insure your rental property. To get help managing your property and its inhabitants, contact us today at Reedy & Company.
We’ve been helping Memphis property owners maximize their investments since 2002. To learn more about our services and how we can help you run your property, contact us today.