Security Deposit: Everything Landlords Should Know

Security Deposit: Everything Landlords Should Know

When it comes to renting to new tenants, there’s a long list of requirements and regulations that a landlord has to keep track of. One of the most important is collecting a security deposit and the first month’s rent. Although this sounds straightforward, each state has different laws for how to collect, store, and return security deposits.

In this article, we’ll go over everything landlords need to know about security deposits.

1. What is a Security Deposit?

A security deposit is a one-time payment that a landlord, real estate owner, or property management company collects from a new tenant. These funds are held by the landlord or property manager for the duration of the lease. The amount of the security deposit is typically one month’s rent but can be higher, depending on the location of the rental property and state laws.

Before landlords collect a security deposit, it’s essential to check the state’s local tenant and landlord laws. Some states limit the amount a landlord can charge for a security deposit, whereas other states don’t set limits. Also, the amount could be limited based on the age of the tenant.

2. What is a Security Deposit in a Rental Agreement?

In a rental agreement, a security deposit acts as a kind of insurance for landlords and property management companies.

Collecting a security deposit is not required by law, but it can help protect landlords financially if a tenant leaves suddenly without paying rent or causes property damage.

A tenant is also more likely to avoid damaging the property if they know their actions determine if they receive their full security deposit back.

Landlords with student rental properties often add non-refundable fees in a lease agreement on top of a security deposit to cover cleaning and maintenance costs associated with high turnover.

3. Do Tenants Pay a Security Deposit Before Signing the Lease?

Security deposits are typically collected after the lease is signed and before the tenant moves in or takes possession of the rental. This should be a condition of the lease. If a tenant cannot pay the security deposit in full, the landlord or residential property management company can cancel the lease and rent to another prospective tenant that has been thoroughly screened.

4. What Can a Landlord Deduct From a Security Deposit?

The general rule is that a landlord or property manager can only withhold money from the security deposit for financial or material damages. Each state has specific laws regarding what a landlord can deduct from a security deposit. In New York, for example, a landlord can only use the security deposit to cover:

  • Unpaid rent or terminating a lease early
  • Damage to the unit caused by the tenant beyond normal wear and tear
  • Unpaid utility charges outlined in the lease
  • Costs of storing or moving the tenant’s belongings

It is recommended that landlords include terms in the lease requiring tenants to thoroughly clean the unit before moving out. It may also be helpful to send a move-out checklist of everything that needs to be cleaned, along with the cost per item if the landlord has to clean or repair the item instead. Any event that could lead to withholding a security deposit or terminating the lease should be detailed in the rental agreement.

5. How Long Does a Landlord Have to Return a Security Deposit?

Depending on the state of the rental properties are located in, a landlord is required to return a security deposit within 15 to 30 days after the lease has ended.

If there are any deductions, the landlord must provide a written explanation to the tenant, including an itemized list of why the security deposit is reduced.

If the security deposit is not returned, barring any legal reasons, the tenant can file a lawsuit in small claims court. The tenant is responsible for proving:

  • The tenant paid the security deposit to the landlord
  • The tenant caused no damage to the property beyond normal wear and tear
  • The tenant requested the return of the security deposit
  • The landlord refused the return of the security deposit

A landlord must prove that the tenant caused property damage that exceeds ordinary wear and tear. Additionally, the landlord must provide evidence of the cost incurred (or estimated to incur) to repair the damage.

Final Thoughts: Everything Landlords Should Know about Security Deposits

As a landlord, security deposits offer a safety net while renting out a property. However, the process for collecting security deposits and managing dedicated accounts to keep funds organized can create a demanding workload.

To help keep track of payments, landlords are using online applications to collect security deposits, rent, and fees. Online rent collection gives tenants the flexibility to pay their way and deposits payments directly into a bank account. To start collecting rent and security deposits online, create a free account with Baselane.

FAQs About Security Deposits for Landlords

What is considered a security deposit?

Generally speaking, a security deposit is often the same amount as the monthly rent. This payment is in addition to the first month's rent and other fees for applications and utilities. Security deposits can be paid using cash or a cheque. However, landlords can use an app to collect rent and security deposits online through debit and credit transactions.

What does it mean to put down a security deposit?

A security deposit is money collected by the landlord at the start of the tenancy. Most states have regulations for storing security deposits in an interest-bearing account. A good option for landlords in Baselane’s landlord banking products.

For example, states like Massachusetts and New Jersey require placing each security deposit in separate bank accounts. You can use Baselane’s landlord banking account to create virtual sub-accounts to deposit individual security deposits for each property.

Landlords must provide residents with a receipt that shows the bank where the deposit is held, along with the account's annual interest rate.

Do tenants get their security deposit back?

Security deposits can be refundable or non-refundable, depending on the terms of the lease.

In some states, a landlord can keep all or a portion of the tenant's security deposit if there is a legal reason.

Each state has a specific time limit for how long landlords have to return the security deposit or identify reasons for keeping it.

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Financial Technology, Real Estate Investing, and Property Management, Accounting and Tax, Finance
Saad started his career as a Certified Public Accountant (CPA) working for a top-tier accounting firm. He was responsible for helping audit alternative investment funds. He later worked at a hedge fund where he was responsible for preparing financial statements and implementing new technology. He also ran a successful private tax practice for five years.

After completing his MBA at Duke, Saad joined The Boston Consulting Group to do management consulting. At BCG his experience spanned several industries and growth projects across Pharma, Retail, and Technology companies. His passion for democratizing finances led him to Plaid, a fintech, where he worked with large Banks and Financial Institutions to make finances and money easier for all.
Security Deposit: Everything Landlords Should Know
Security Deposit: Everything Landlords Should Know