Collecting a security deposit is one of the many crucial steps to moving in a new tenant. Security deposits are extremely important because they hold tenants accountable for any serious damage that may occur to your property while they’re renting, and it provides an incentive for them to treat your rental kindly. However, there are many steps to take when a tenant moves out, and you may find yourself wanting some guidance in regard to returning those funds. Here are some of the most common questions you may want to ask while giving a renter their security deposit back.
When can you keep a security deposit?
It is always best to operate as though you will fully return your tenant’s security deposit. This money is meant for damages that go beyond normal wear and tear. You should not withhold a security deposit for things like minor wall scuffs, frayed carpeting, or fading paint. These are just signs of an aging property, not your tenant’s negligence.
However, sometimes there is damage that goes beyond these minor occurrences. For example, if you see structural damage, large holes in the wall, or the tenant has unpaid utility bills, you may start to consider keeping some or all of the security deposit. Be careful, though; there are very specific rules that dictate when a security deposit can be withheld. Although these laws vary from state to state, there are 5 common instances where you can hold onto a security deposit.
- Significant damage to the property
- Cleaning costs associated with significant damage
- Nonpayment of rent
- Tenants breaking their lease
- Unpaid bills and utilities
Keep these in mind when assessing your property. However, remember that these rules are not consistent and may be different for your area.
How soon must you return a security deposit?
Each state sets out a different number of days that you have to return the deposit after a tenant moves out. Make sure you are fully informed of the laws in your area so you don’t miss anything, because if the deposit is not returned in time, a tenant has the option of legally pursuing you for the money and the landlord could lose the right to withhold any funds at all.
State laws also lay out exact timelines for the following procedures:
- Telling tenants how much their deposit is
- Sending tenants an itemized list of deductions from the security deposit
- Returning whatever is left of the security deposit
- Returning interest that may have been gained on the deposit while in your account
Should you keep the security deposit separate from other funds?
Absolutely. You should always operate as though you will return the deposit in full, so if you keep that money separate from other funds, accessing it and returning it in the correct amount becomes much easier.
Many states require that landlords pay interest on the sum while they oversee it. This process of calculating interest and returning the correct amount could be difficult if that money is not put aside from other funds. Keep the deposit in a separate checking account. That way, your books will remain straightforward, and you can easily issue deposits from the proper place.
Also, try not to keep deposits in savings accounts. Transferring money between a checking and savings account can sometimes be tricky, and doing so can create extra work for you. Keeping these accounts in a separate, federally insured bank account also may be a requirement in your state, so be sure to check local regulations.
Make sure you are very clearly communicating with your tenants about exactly what they should do to get their security deposit back. Many issues with returning a security deposit arise from misunderstandings about their landlord’s expectations for the property after they vacate it, so make sure those potential problems are ironed out before they come up. It may be easier to take pictures before and after of the property so it is easier to see exactly how the rental should look after move-out.
Hopefully this guide will answer some of the most common questions you would come across when returning your tenants’ security deposits. Remember to be overly clear in your expectations, check local laws, and expect to return the deposit in full. If you follow those steps, you are well on your way to a smooth security deposit return.