A security deposit is money paid by a tenant to the property owner before the tenant moves in and occupies a unit in the owner’s rental income property.
The purpose of the security deposit is straightforward: It assures the investment property owner that the tenant will pay rent on time and will keep the rental unit in good condition.
When the tenant terminates the rental agreement and moves out of the unit, if there is no rent money owed or any damage to the unit, the security deposit is returned to the tenant plus interest—as dictated by state law–but typically only for the number of months that the rent is paid in full and on time.
Okay, here is a list of seven things about security deposits real estate investors should know the next time they rent their rental income property.
- Security deposits should be kept in a special escrow account.
- Rent collected in advance of the first month is not considered part of the security deposit agreement.
- Security deposits typically cannot be held for normal wear and tear to the unit.
- Security deposits can typically be held to pay for damage to a rental unit caused by the tenant, a family member, or a guest.
- Security deposits can typically be held for unpaid rent.
- Security deposits can typically be held to pay for the replacement of any property that may have been taken by the tenant.
- Security deposits can typically be held to pay for any necessary cleaning required to restore the unit to its condition before the tenant took occupancy (excluding ordinary wear and tear).
Security deposits are a valid way for real estate investors to create a tenant’s interest in the property. Obviously, a tenant that has a portion of his or her money tied up in the property tends to be more motivated to be responsible and to keep things in reasonably good condition.
A smart rental income property owner will always ask for it.
