A security deposit provides landlords with financial coverage for tenant-related expenses and losses at the end of the lease period, therefore limiting the risk on their investment.
A sufficient and properly collected security deposit could be a landlord’s last lines of defense against damage caused by a bad tenant, assuming one somehow slips by a thorough background check, or the required renters insurance has been fully exhausted.
Most of the time, however, the security deposit is used to cover expenses caused by not-so-bad tenants and is an essential component of a profitable rental operation. Therefore, it’s important that every landlord collects a security deposit prior to allowing renters to move in.
If you are a first-time landlord, you might be asking yourself – how much should my security deposit be? what can I use it for?
If you already collect rent online, you might be wondering if you should do the same for the security deposit, or maybe you have a reason not to collect one at all and want to know if you should ever consider doing so.
In this article, we’ll cover everything landlords should know about security deposits, including the best way to collect them online.
What is a Security Deposit?
We’re pretty sure you know what a security deposit is, but just in case you are brand new to the renting world: a security deposit is a refundable, one-time payment made by a tenant prior to moving in, that a landlord can use to cover certain expenses that arise from the specific tenancy.
How Much Should My Security Deposit Be?
While there are state-specific laws that govern security deposit limits, landlords should set the deposit at an amount they are comfortable with, given the circumstances.
As long as you stay within the legal bounds, assess factors such as the condition and value of the property, qualification of your potential renter, your past experience as a landlord, and anything else that might be a factor when determining the security deposit amount.
Most commonly, security deposits are set equal to one month’s rent, with or without collecting the last month’s rent in addition, which acts as another form of security.
Depending on the circumstances, however, a security deposit could be as low as nothing or as high as two months of rent or more.
Keep in mind that the security deposit amount could have an impact on filling your vacancy. If you set it high, you might weed out bad tenants but at the same time turn off good tenants that don’t feel they have to shell out a large sum. This could result in a longer vacancy and should go hand in hand with setting your rent rate.
For example, if a potential renter is very qualified, passed a background check with flying colors, has excellent credit, has verified income to more than comfortably cover rent, a great employer and landlord references, you might consider lowering the security deposit. This is because the risk of such a renter not paying rent or damaging your property is low.
On the other hand, if a renter is barely qualified, or does not have enough of a history to show that he is a solid renter, you might consider asking for a higher security deposit to cover you for the uncertainty.
However, we don’t ever recommend that individual landlords completely forgo the security deposit, because the risk is too great. One incident of bad luck could take your investment from good to bad.
What Can I Use the Security Deposit For?
Similar to amount limits, each state has laws governing the use of security deposits, so we recommend checking those out before you actually use the deposit.
Most states, however, allow for the security deposit to be used in the following cases:
- Unpaid Rent
- Early Lease Termination (lost rent)
- Property Damage
- Specialty Cleaning (not wear and tear)
- Unpaid Bills
Best Practices for Using the Security Deposit
If you ever find yourself needing to use the security deposit, you should take the following steps to back you up in any potential tenant dispute:
- Spell out security deposit terms in the rental lease agreement
- Take photos of the entire property prior to move-in
- Complete a walk-through move-in checklist, have renters sign and date
- Take pictures of any issues in the property immediately after tenants move out
- Let your tenant know in writing or email about any damages and associated costs
- Keep all work order estimates, invoices and purchase receipts
When Do I Have to Pay the Security Deposit Back?
Again, each state has a different view on this, so doublecheck to make sure you are always doing things right.
As an example, some states require you to return the security deposit within 15 days of lease end, while others allow up to 30 days.
You should always inspect the unit immediately after move-out, and let tenants know of any damage you encounter as soon as you can. This will generally result in a quicker agreement so that you can use the necessary funds while reimbursing the rest of the security deposit within the required time frame.
How to Collect Your Security Deposit Online For Free
A security deposit is collected with the sole purpose of providing landlords with immediate financial protection, so collecting a personal check that bears the risk of bouncing by the end of the lease is no good. This is why most landlords ask for certified checks.
Collecting your security deposit online means the funds go directly to your bank account and sit there in the form of cash, offering you the same protection as certified checks without spending time at the bank. Doing so will also save your renters the time and money associated with issuing certified checks.
You can collect your security deposit online at no cost to you or your renters using Zuby, the free property management app. Beyond free online security deposits, Zuby offers many benefits to both landlords and renters.