5 Things You Should Know about Security Deposits
Any investor who owns rental income property, and thus, rents to tenants, has to deal with security deposits. It seemed like a good idea, therefore, to discuss at least five issues that you may want to address about security deposits in your next rental agreement.
1. Amount of the Deposit – Many real estate investors prefer high security deposits along with first and last month’s rent. You may find, however, that your tenant segment doesn’t (or can’t) meet this requirement. Therefore, you might want to see what other rental property owners in your area are doing, and tailor your security deposit policy accordingly.
2. When the Deposit is Payable – Real estate investors usually prefer to make the deposit payable in advance. It’s commonly accepted that you would just be asking for trouble if you allow tenants to pay their deposit piecemeal over several months. The popular notion is to collect the deposit up front, before the tenants move into the unit.
3. Interest on the Deposit – Though some local and state laws require landlords to pay interest to their tenants for security deposits, some real estate investors pay interest to their tenants even if the law doesn’t require it. It might not be a big issue when interest rates are low, but it can otherwise comfort tenants who have to pay larger deposits.
4. Forfeiture of the Deposit – The important thing here is to make sure your tenants understand your deposit forfeiture policy before they take possession of your unit, and likewise, perform a thorough property walk-through inspection with your tenants as soon as they completely vacate the unit. Be sure to conduct a final walk-through as soon as possible (never let too many days pass between the date tenants move out and the date you inspect), always perform this final inspection with the tenants present, and be sure to have your inspection sheet with you (the one prepared when the tenants moved into the property) so you can compare the property item by item.
Also, when signing the rental agreement, tenants should understand that the security deposit does not limit their liability for rent or damages. If their actual damages exceed the deposit, they must pay the higher amount.
5. Return of the Deposit – It’s best for your image that you return security deposits with interest back to the tenants as soon as you know the correct amount; perhaps at the end of the final walk-through. Any needless delay returning deposits simply sours tenant relations and may subject you to legal penalties.
Author: James Kobzeff, January 5th, 2009
