Collecting Security Deposits

Many landlords do not collect a security deposit from their tenants. What a mistake! While each state is different, many states let you hold up to 1 1/2 months rent for a security deposit. This money is intended to be held to pay for any damage to your property while occupied by your tenants. Though some repairs such as repainting, cleaning carpets, and scratches on the floor are considered normal wear and tear, other damage caused by your tenants such as broken windows, doors or light fixtures, large holes in walls, stair rails, and appliances should be deductible. Also, a security deposit could be used to pay any bills unpaid by the tenant such as electric, oil or water.

You may feel that dealing with a security deposit is not worth the effort or may deter some tenants from renting your property. But you won't feel that way when your tenant leaves your property a mess and doesn’t pay the last months rent. A security deposit is your protection that your tenants will keep your property in good condition and you won’t get stuck with any unnecessary bills.

A security deposit should be collected before any tenant takes possession of your property. After they move in, it can be very difficult if not illegal to collect it. A good time to collect the security deposit is when the tenants are signing the lease.You can insist that all or a portion of the security is due and any remaining amount must be paid before the keys will be provided. Make sure that if you get a check for the deposit, that the check clears before the new tenants take possession. Once you receive the security deposit, you must deposit it at a bank or savings and loan and keep it there for the duration of the lease term. Most banks have a standard account for this where the money is in your name for trust of the tenant. You must supply a W9 form with one of the tenants social security numbers so someone will be responsible for paying the taxes on any interest earned.

Once you set up the account, you do not need to do another thing until the lease term is up and the tenants leave the property. You may have situations come up during the lease term where you need to collect additional money from the tenants for fines you incurred or missing rent. If possible, you want to try to collect this money from your tenants directly and do not use the security deposit. It is a good idea to have as much of the full deposit as possible when the lease is up in case there are major repairs or missing rent.

This can especially be the case if you are renting to students or unrelated persons because one or more can move out before the others and you will have to find them in order to collect missing rent.

A few weeks before the lease ends, make an appointment with your tenants to inspect the property. Explain that you want to pre-inspect the property for damage so they can be prepared for likely charges. Give the tenants a list of items that they will be charged for and an opportunity to make repairs themselves. This is also a good time to go over the procedure for returning the keys, when you expect them to leave and collection of any remaining deposit. Off Campus Network provides a checklist to for you to go over with your tenants.

After the tenants have moved out, do a final inspection of the property. Make an itemized list of repairs that they will be charged for. Then prepare a simple deposit return form itemizing these deductions. This should be returned to the tenants with their remaining deposit. You should provide them with a form even if none of the deposit is to be returned. This way you will not hear from the tenants later that you owe them money.

There are many tricky situations with deposits when dealing with students or unrelated tenants. Make sure you write down and save exactly how much money you received from each tenant. Also, make an agreement at the beginning of the lease as to who will get the deposit at the end of the lease or if charges will be split equally and a separate check will be distributed to each tenant. Also, you may have a situation where some of your tenants stay for several years and others do not. Make sure you have an agreement on who will be responsible for damages if any of the tenants leave. It is probably a good idea to have the new tenants pay their new deposit to the tenants that are leaving and have them discuss any damages.