A security deposit is money a smart landlord collects from a tenant before use and occupancy of a rental unit to insure that the tenant will pay rent on time and keep the rental unit in good condition. A security deposit is not rent and cannot be used for rent during the course of occupancy; conversely, rent collected in advance of the first month is not considered part of the security deposit agreement.

The idea behind the deposit is that a tenant with money tied up in the property will more likely be responsible and in turn keep the surroundings in reasonably good condition. In other words, the security deposits help the landlord to create some interest in the property for a tenant.

How much of a security deposit a landlord can collect and how the security deposits are to be returned to the tenant are typically regulated by state law, which do vary.

In this case, you would be wise to check with your state authorities to determine if they have a set amount that you can collect and a set time in which you must return either the entire amount or an itemized statement explaining why you might be taking deductions from the security—most states typically will allow you to keep some amount of the deposit for damage (other than normal wear and tear) caused to the rental unit by the tenant, a family member, or a guest, unpaid rent, the replacement of any property taken by a tenant, and any necessary cleaning required to restore the unit to the condition in which the tenant took occupancy.

Typically, deposits are accessed by the landlord after a tenant vacates the premises. There are, however, also cases when you (the landlord) do not have to wait for the tenant to evacuate the premises before using part or all of a tenant’s security deposit. For example, if a tenant breaks a window and doesn’t pay to have it fixed.

Should a tenant ask you to apply a portion of the security deposit toward the last month’s rent you can elect to do so though it’s not a good idea. You would not want to discover later that the tenant left your rental unit a mess or removes items he or she has no right to take without sufficient funds to cover the expenses for repairs or replacement.

Here’s the bottom line.

The purpose of collecting security deposits (for you the landlord) is to protect your investment from unruly tenants by keeping the tenant responsible. You do not want to raucous tenants ruining your property. So consult your state authorities and determine what you can do legally to enforce your rights with security deposits, and then take advantage of every opportunity you are given to protect yourself with a rock-solid security deposit agreement.

In an article posted today on my real estate news blog by The Wall Street Journal, A.D. Pruitt reports that “some of the country’s top office-building owners reported they are cutting rents and increasing tenant incentives to keep buildings filled during one of the worst commercial real-estate markets in decades.”

According to the author, “The office market is getting pounded by the economic downturn as businesses shed workers and put off leasing decisions. In the third quarter, companies vacated 19.6 million square feet of space throughout the country, the equivalent of more than six Empire State Buildings, according to Reis Inc…The pain starts hitting when leases expire. In tough markets, landlords typically have to spend a lot to retain or attract tenants through brokerage commissions or incentives such as free rent or interior construction. The cost of attracting tenants is a factor that is cutting into funds from operations.”