How to Collect & Manage Security Deposits: Landlord's Guide

Whether you're a seasoned expert or new to the game, grasping the fundamentals of security deposits and their legal framework is paramount. 

In this article, we take a comprehensive dive into security deposit laws, how to manage security deposits, and what every landlord and tenant needs to know to navigate this often complex aspect of renting. 

To kick things off, let's take a closer look at what a security deposit actually is and how much landlords can charge.

Part 1: About Security Deposits

What exactly is a security deposit?

A security deposit is an upfront payment made to a landlord or property management company before moving into a rental property. This deposit covers potential damages caused by the renter, such as stains on carpeting, and can also cover missed rent payments. It's one of several possible moving expenses.

How do security deposits work?

The specifics of security deposits can vary based on your lease or rental agreement and local laws. Understanding these details can help landlords mitigate risks, and help tenants make an informed decision when signing a lease.

Paying a security deposit

Like the first month’s rent and other fees, the security deposit is usually collected before moving in. Prompt payment can help tenants secure their desired apartment or home. 

In some states, landlords and property management companies are required to place security deposits in a separate, interest-bearing account. They may provide a security deposit receipt indicating which bank holds the money and send monthly statements showing the current balance. 

However, you might not receive this information until a few weeks after moving in. The landlord or property management company cannot use your security deposit funds without a valid reason and cannot use it to cover routine cleaning and normal wear and tear expenses.

Surety bonds

Some landlords and property management companies offer surety bonds as an alternative to security deposits. A surety bond is an agreement between you, a surety company, and the landlord or property manager. 

The tenant pays a small percentage of the bond amount, and if rent is missed or repairs are needed, the surety company covers the costs and then seeks reimbursement from the tenant directly. Unlike security deposits, the amount paid for a surety bond is non-refundable.

Getting your security deposit back

If you pay rent on time and leave the rental property in good condition, tenants are generally entitled to receive the full amount of their security deposit back. However, security deposit deductions may be made for deep cleaning, repainting walls, replacing damaged flooring or appliances, fixing plumbing issues, or other necessary repairs. Additionally, landlords may deduct late rent payments or late fees, even if the tenant eventually pays in full.

If a landlord wishes to withhold a certain amount of the security deposit, generally they are also required to give the tenant an itemized receipt of the expenses. Tenants can contest the security deposit deduction in court if they feel the deductions were made unfairly. This is one of the reasons having a detailed move-in and move-out inspection report is essential. 

What factors can influence your security deposit?

A lot of states stipulate limits to how much landlords can charge for a security deposit. However, not all, and so setting the security deposit often comes up to the discretion of the property manager or landlord. 

Related: A Complete State By State Guide To Security Deposit Laws

Several factors can influence the amount you need to pay:

Credit Score

Individuals with lower credit scores may be considered higher risk for missing rent payments or paying late, leading to higher security deposit requirements. Some landlords or property management companies may also set a minimum credit score threshold, below which they refuse to rent. Improving your credit score by paying bills on time and reducing debt can help lower your security deposit.

Related: Tenant Credit Check: How to Read and Understand The Report

Background Check

Landlords typically conduct background checks and may refuse to rent to individuals with criminal histories or low credit scores. They may also charge higher security deposits based on the results of these checks.

Changes in Rent

If a landlord increases the rent, they might also request an increase in the security deposit in line with this rent increase. For example, the maximum security deposit limit is one months rent, and the rent increases from $1000 to $1050 per month, then they might request an additional $50 to cover a security deposit increase. 

In some cases, if your security deposit is in an interest-bearing account, the accumulated interest might cover a small deposit increase. However, it's more common for tenants to need to make an additional payment to match the higher security deposit requirement after a rent change.

Related: How Much Rent Should you Be Charging?

Are security deposits refundable?

Yes, security deposits are generally refundable. If the tenant fulfills the terms of the lease, pays the rent on time, and leaves the rental property in good condition, they should receive their security deposit back in full. However, certain conditions can affect the actual amount that is refunded.

Damage Repairs: Any damage beyond normal wear and tear, such as stains on carpets, broken fixtures, or holes in walls, can result in deductions from the security deposit.

Unpaid Rent and Fees: If there are outstanding rent or unpaid fees (eg. late rent fees), these amounts can be deducted from the security deposit.

Cleaning Costs: Some landlords may deduct the cost of cleaning the property if it is not left in a clean condition, as outlined in the lease agreement.

Related: What Can Landlords Deduct From The Security Deposit?

How much are security deposits usually?

The amount of a security deposit can vary widely based on several factors, including location, type of rental property, and landlord policies. Generally, security deposits are within the following ranges:

1. One to Two Months’ Rent: In most areas, the standard security deposit is equivalent to one to two months’ rent. This means if your monthly rent is $1,000, your security deposit could range from $1,000 to $2,000.
2. State and Local Laws: Some states and municipalities have laws that limit the maximum amount a landlord can charge for a security deposit. These laws are in place to protect tenants from excessive upfront costs.
3. Credit Score and Rental History: Tenants with higher credit scores and positive rental histories may be asked for a lower security deposit, while those with lower credit scores or negative rental histories might be required to pay more.
4. Furnished vs. Unfurnished Rentals: Furnished rentals may require higher security deposits to cover the potential for damage to furniture and other provided items.
5. Pet Deposits: If you have pets, landlords may charge an additional pet deposit on top of the regular security deposit to cover potential damage caused by pets.
6. Luxury or High-End Rentals: High-end or luxury properties might require higher security deposits due to the value of the property and the cost of potential repairs.

How much the deposit is highly dependent on local and state landlord tenant laws. Some states do not allow pet deposits for example, while others enforce no restrictions at all on how much a landlord can charge.

Part 2: Security Deposit Laws

When it comes to security deposits, landlords need to be aware of both state and federal laws.

Federal Laws

Truth in Lending Act (TILA)

The Truth in Lending Act mandates landlords to disclose specific details to tenants regarding the security deposit, such as its amount, where it will be held, and the conditions for its return.

Landlords can find more information about their obligations under the TILA on the official website of the Consumer Financial Protection Bureau (CFPB): Truth in Lending Act (TILA) (pdf)

Fair Credit Reporting Act (FCRA)

The Fair Credit Reporting Act pertains to security deposits held by credit reporting agencies, requiring landlords to furnish tenants with certain disclosures, including FCRA rights notices.

For detailed information on landlord obligations under the FCRA, landlords can refer to the official website of the Federal Trade Commission (FTC): Fair Credit Reporting Act (FCRA)

Fair Housing Act (FHA)

The Fair Housing Act prohibits housing discrimination based on protected classes like race, color, national origin, religion, sex, familial status, and disability. Landlords cannot set different security deposit amounts or policies based on these protected classes.

Landlords can learn more about their obligations under the FHA on the official website of the U.S. Department of Housing and Urban Development (HUD): Fair Housing Act (FHA)

In addition to federal laws, landlords should also consider common state laws when determining their security deposit amounts, which we'll address below.

State Laws

In conjunction with federal regulations, landlords must also familiarize themselves with the specific statutes and guidelines governing security deposits in their respective states. These may encompass:

1. Maximum Amount: Numerous states impose restrictions on the maximum allowable security deposit landlords can collect from tenants.
2. Interest: Certain states mandate landlords to accrue interest on held security deposits over a specified duration.
3. Return of Deposit: States often enact laws dictating the timeline for returning security deposits post-tenant departure, along with delineating permissible deductions.
4. Record Keeping: Some states require landlords to maintain precise records related to security deposits, including how they are stored and where they are kept, interest, and itemized receipts for deductions.

Read: The Complete State By State Guide To Security Deposit Laws

It's crucial to recognize that, unlike federal mandates, state regulations concerning security deposits can vary significantly. Failure to adhere to these statutes can lead to severe repercussions, as discussed below.

Penalties for Non-Compliance

It's crucial to acknowledge that failure to adhere to federal and state regulations concerning security deposits can lead to penalties for landlords. These penalties may include:

1. Fines: Landlords may incur fines for breaching federal or state security deposit laws.
2. Mandatory Return of Deposit: In instances of non-compliance, landlords might be compelled to return the security deposit to the tenant, irrespective of any property damage.
3. Civil Lawsuits: Tenants retain the option to pursue civil litigation against landlords who fail to comply with security deposit laws, potentially resulting in legal action.

Part 3: Collecting & Holding Security Deposits

Landlords must exercise utmost caution to ensure compliance with regulations. Below, we've outlined essential steps for collecting and holding security deposits from tenants.

Collecting Security Deposits from Tenants

When collecting security deposits from tenants, landlords should follow these steps:

1. Clearly specify the deposit Amount in the lease agreement
2. Collect the deposit before the tenant moves in
3. The best way to accept the deposit paymment ios using an electronic transfer system, like Lanldord STidio’s rent collection software. This is the most secure transaction method and leaves a clear transaction record.
4. Provide a receipt for the deposit, detailing (if necessary) where the deposit is being held.

How Much Can Landlords Charge for a Security Deposit?

The permissible amount landlords can charge for a security deposit varies based on state and local regulations. Generally, the acceptable amount to charge for a security deposit varies between 1 to 2 months rent. Some states impose limits on the maximum deposit amount, while others allow landlords to charge a certain percentage of the rent.

Landlords should familiarize themselves with their state's laws around security deposuit limits.

Read our full security deposit state by state legal guide to learn the security deposit laws for you state.

Holding Security Deposits

After collecting the security deposit, landlords must determine how to store it. Options include:

1. Holding the deposit in a separate, interest-bearing account.
2. Holding the deposit in a separate bank account without interest.
3. Posting a bond with the state..

The Importance of Providing a Receipt

While not a legal requirement for every state it is a best practice to furnish tenants with a security deposit receipt when the deposit is collected. The receipt should containing the following details:

• Deposit amount
• Date of receipt
• Recipient's name
• Purpose of the deposit

Supplying tenants with a receipt for the security deposit can safeguard landlords in the event of disputes.

Handling Multiple Security Deposits from Co-tenants

In cases where multiple tenants share a lease and pay rent, landlords may collect a security deposit from each tenant. It's essential for landlords to:

• Keep meticulous records of each tenant's deposit.
• Ensure the correct return of deposits to respective tenants upon lease termination.
• Inform each tenant of their deposit-related responsibilities and furnish them with a receipt for their deposit.

Part 4: Returning Security Deposits

Returning the security deposit isn’t rarely as simple as handing your tenant a check as they leave the premises. Before returning the deposit you need to carry out a thorough property inspection and calculate how much, if anything, needs to be deducted from the deposit and create an itemized receipt of these deductions.

How to Determine Deductions from the Security Deposit

Upon a tenant's departure from a rental property, it falls upon the landlord to assess any deductions warranted from the security deposit. This evaluation should be conducted promptly, typically within 14 to 30 days following the tenant's move-out.

1. The landlord should conduct a comprehensive move-out inspection of the property, documenting any damages or cleaning requirements. 
2. Any costs associated with repairs or cleaning should then be subtracted from the security deposit. 
3. Landlords should calculate any outstanding rent payments and fees that may need to be deducted from the deposit.
4. The landlords should create an itemized list of deductions and return the remainder of the deposit, along with the receipt within the legally allowed timeline (as specified by your state).

In cases where the property remains undamaged, and there are no outstanding rent payments, the landlord should refund the entire security deposit to the tenant.

Learn more about landlord tenant laws with our comprehensive state by state guides to landlord tenant laws

What Damages Can Be Deducted from the Security Deposit?

Not all damages or cleaning expenses can be subtracted from the security deposit. Landlords are only permitted to deduct damages caused by the tenant that were not present at the start of the tenancy and that go beyond normal wear and tear. Common damages eligible for deduction include:

• Damage to walls, floors, or ceilings
• Stained or torn carpets
• Broken or missing light fixtures
• Damage to appliances or fixtures
• Excessive cleaning costs

How to Document Damages

Effectively documenting damages is crucial for making deductions from the security deposit. This can be achieved by:

• Taking photographs or videos of the damages.
• Making detailed notes about the condition of the property during the tenant's move-out and comparing to the property move-in inspection you carried out when the tenant moved in.

How to Return the Security Deposit

Upon determining the deductions, the landlord is tasked with returning the remaining portion of the security deposit to the tenant. Typically this needs to be done within 14 to 30 days following the tenant's move-out - though each state has different rules regarding thos timeline.

Additionally, the landlord should furnish the tenant with an itemized list of deductions, accompanied by supporting documentation such as photographs or receipts.

How to Handle Disputes over Deductions

Occasionally, tenants may contest the deductions made from their security deposit. In such instances, landlords should be ready to present evidence of the damages, such as:

• Photographs
• Receipts

This is why documenting everything is absolutely essential. 

If the dispute remains unresolved between the landlord and tenant, it may be necessary to escalate the matter to small claims court for resolution.

Final Words: Property Management Software and Deposits

Leveraging property management software like Landlord Studio streamlines the process of collecting and documenting security deposits, ensuring compliance with legal requirements. 

With features enabling online deposit collection, landlords can maintain a clear record of transactions, and the ability to store crucial documents such as receipts, bank details, and move-in/move-out inspections enhances organization and compliance. 

By utilizing such tools, landlords can effectively manage security deposits, mitigate risks, and uphold regulatory standards with ease.

Learn more about collecting rent and security deposits online with Landlord Studio.

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