Security Deposit Policy
An ideal tenant always pays rent when it's due and cleans thoroughly before vacating the apartment so that after she is gone, you find only signs of normal wear and tear. But not all tenants are like that, and that's why landlords collect security deposits. They use the money to reimburse themselves for money owed by the tenant for unpaid rent, cleaning filthy apartments, and repairing damaged property.
Laws covering security deposits vary from state to state. Some states have exemptions that pertain to small landlords. Some states and communities specify that landlords must place security deposits in a separate account or say that landlords must tell tenants where their money is being held. Others stipulate that the money earn interest while you hold it. You should find out what state — and perhaps local — laws you must follow.
You can find out how much you can collect as a security deposit, when it must be returned, whether it needs to be placed in a separate account, and if you have to pay interest on the money by checking the landlord-tenant laws for your state at your library or a law library. Also check with the city housing authorities.
How much you can ask for a security deposit is also regulated in some locations. Typically a security deposit may not be more than two months' rent, but in some states it may be restricted to forty-five instead of sixty days. Other factors considered might be whether the tenant is a senior citizen, whether the apartment is furnished, whether the unit is rented on a month-to-month agreement, or whether the lease allows tenants to have pets.
You should look at local ordinances, too. They may include limits on security deposits and specify when the deposit has to be returned to the tenant — usually within fourteen to thirty days. Some local laws also require landlords to pay interest on the money while it's being held. A few landlords will do so anyway because they think it's the best way to handle the money.
Put It in Writing
Your lease or rental agreement should clearly state that a security deposit is the tenant's money and that they can get it back if they clean the apartment thoroughly before moving out, have not damaged the property, and don't owe back rent. Most tenants will want to get their money back and will try to make sure they have the unit in good shape, especially if you provide them with a specific list of things that should be cleaned.
When Tenants Come Up Short
If your tenant has trouble giving you the full security deposit before moving in, you can collect it in installments. Be sure you put the installment agreement in writing and have it signed.
How much of a security deposit should I ask for?
Your security deposit should be the highest amount allowable in your state or community. That will give you the most protection in case you have problem tenants. But in a tight rental market, reducing the security deposit a little, say, six-weeks' rent instead of two months, might give you the edge in filling your unit quickly.
You could have the prospective tenant give you half the first month's rent (or a holding deposit), plus the full security deposit, in return for a written agreement to collect the balance in a week or ten days. It means taking the unit off the market for the approved tenant for a specified time, but does not give the tenant the right to move in or store anything in the apartment until the balance is paid. A partial payment or “holding deposit” is not a good business practice and could possibly cause problems over misunderstandings about how the money will be used. So if you decide to take a “holding deposit” and the security deposit, be sure to specifically state in an agreement signed by both parties that the full security deposit will be returned should the tenant decide to move elsewhere, but that a fee will be deducted from the holding deposit (a prorated daily rent for each day the unit was off the market) and perhaps a small fee based on what it costs to advertise the unit again or for your time and labor. The agreement should also specifically state that the holding deposit will be applied to the first month's rent if the tenant's references and credit are satisfactory and the tenant moves into the apartment.
Last Month's Rent Not Included
Saying that a security deposit includes the last month's rent is a mistake, according to most experts. If you set it up this way, when your tenant intends to move out you will not receive the last month's rent. Then if the apartment is filthy or there is damage, you'll have to pay for repairs and cleaning out of your pocket. You'd have to go to court to recover those costs.