What Is a Security Deposit?

Leasing an apartment for the first time includes several factors every property manager, landlord, or investor must keep in mind to avoid problems with their tenant. One of the most vital factors to consider for property managers is the security deposit. Security deposits can help you cover any damages or unforeseen circumstances that may have affected the property or yourself.

However, it's important to note that the security deposit money laws mostly depend on each state's rules and regulations. While security deposits may seem complicated to understand, we're going to make sure you get as much information as possible here so that you can make the most out of your rental property.

Overall, this security deposit guide covers its basics, including the main question ("What is a security deposit?"), as well as what it covers, and how the property owner may request it from their tenant.

What Security Deposits Involve

Definition

In essence, a security deposit is a sum of money that tenants give their landlords or property managers. Keep in mind that the tenant's security deposit must be paid in addition to advanced monthly rent and other factors.

The Purpose of a Security Deposit

Property managers can use an entire security deposit to cover unforeseen circumstances that affect them or their property. You may think of security deposits as insurance against some tenants.

Some of the most common damages that property management companies can cover with security deposits include the following:

• Property wear and tear
• Unpaid rent
• Unpaid utilities
• Abnormal cleaning costs

We're going to dive deeper into these conditions later in this guide, but it's important to note that the security deposit's terms and conditions may be established within the property manager's lease agreement. Overall, the conditions may vary from landlord to landlord.

Security Deposit Amount

The money paid for a security deposit mostly depends on the local state laws. Most states allow the landlord to charge their tenant any amount of security deposit as desired (as long as it's reasonable). Still, most state laws cap the security deposit amount at the price of one month's rent.

In some states, the landlord may charge up to three months' rent to cover damage or other repairs, but it depends on the case. Additionally, the landlord may charge their renter a particular amount for their security deposit depending on what they find in their rental application, employment history, and others.

Security Deposit Calculation

As mentioned before, the amount of the security deposit may vary depending on the state's laws. Still, the landlord can also keep some factors in mind before choosing an appropriate amount for their renter. These factors include the following:

• Type of property
• State laws
• Tenant's rental application
• Amount of the security deposit of properties nearby
• Cost of first month's rent
• Cost of monthly rent in general

Keep in mind that a tenant with a low credit score may be considered high-risk for a property manager. In these cases, landlords may charge a higher security deposit to cover unpaid rent and other considerable damages. On the contrary, if the tenant has good credit, the landlord may charge standard amounts for the security deposit.

Security Deposits vs Last Month's Rent?

Some lease agreements state that a security deposit may be used to pay last month's rent. In essence, a landlord may request their tenants their last month's rent upfront, meaning they may not use that money to cover normal wear and tear. On the other hand, if the landlord requests a security deposit payment, they may use it to cover these damages.

When Are Security Deposits Paid?

In most cases, the tenant pays the full security deposit before getting the keys to the property. Overall, the tenant may use any form of payment the landlord approves, although these payment methods typically include a money order, cashier's check, or electronic payment.

Where Are Security Deposits Held?

Some states have different laws regarding where the security deposit must be held. Overall, it depends on whether the deposit must collect interest or not. Typically, the tenant must deposit a security deposit in an interest-bearing bank account, and they must do it at least within a month of their move-in.

As mentioned before, the tenant or landlord cannot use the security deposit money for any reason that's not in the rental agreement terms.

Deposit Returns

One of the primary questions a landlord often asks themselves is "When does a tenant get their security deposit back?" In most cases, a security deposit serves as insurance to cover ordinary wear and tear and other repairs; this means the tenant is entitled to getting their deposit back as long as they complied with the landlord's lease terms.

In most cases, the property manager must give the security deposit back from 30 to 60 days after the tenant moves out of the property. If everything is good to go, the tenant must provide their property manager with their forwarding address to receive the deposit correctly.

Reasons for Withholding a Security Deposit

There are several landlord-tenant issues that may lead to the tenant not getting their deposit back. As mentioned before in this guide, landlords may choose to use the security deposit to protect themselves and cover any additional damages that the tenant may have caused to the property.

In case the landlord believes the tenant must pay for damages, they must provide an itemized list of all the damages and repairs needed. There, the repair cost is going to be deducted from the deposit. Some common reasons why you may not give the deposit back to protect yourself involve the following:

Damage Beyond Reasonable Wear and Tear

It's impossible for a property to not suffer regular wear and tear after some time. In these cases, the landlord must provide the necessary care to the rental unit as per the guidelines in the rental agreement.

However, if the landlord must provide more money or beyond-reasonable efforts to repair damages, they may choose not to give the deposit back. This is one of the reasons why tenants with pets are usually asked to pay a pet deposit in addition to their security deposit. It's important to note that some states have provisions regarding what counts as "abnormal damage," so you must check these terms before making small claims.

Unpaid Rent or Fees

If the tenant fails to pay rent or fees at any point of the lease, the landlord may take the same amount of rent out of the security deposit to make the payment. Additionally, the landlord may make deductions from a tenant's security deposit if they break the lease earlier than what was stated in the agreement. These fees must have been stated in the lease if the landlord wants to deduct them from the deposit.

Cleaning Fees

Typically, it's the landlord's job to clean the apartment when the tenant leaves. However, if the tenant left the apartment in a mess, you may have to pay extra cleaning fees. Most property owners include a clause in their lease stating that renters must leave the apartment as clean as possible when they leave. In essence, the apartment must be left ready for the next tenant to move in.

Tenant Claims

Security deposit disputes are more common than most people think. Typically, these disputes arise because the property manager and tenant can't get to an agreement regarding the deductions stated in the lease agreement for the apartment.

In case the tenant disagrees with your deposit deductions, they may make a demand letter, which includes exactly what the damages to the apartment were and whether the tenant agrees with your deductions or not. You may decide to agree with these terms or not.

If you decide not to agree with these terms, you may take the case to a small claims court, which typically handles cases under $10,000, depending on the state.

Security Deposit Alternatives

In some cases, some tenants may find application fees plus advanced payments of deposits too much for a lease. While signing a lease is an expensive process, you may consider other options to make the process easier for the renter.

Some of these alternative lease options include the following:

Lease Insurance

It works similarly to regular insurance. The tenant pays a company for "insurance" each month, and the landlord may use a particular amount of coverage to pay for damages. Typically, the cost of these insurance options is much lower than paying for a security deposit.

Surety Bonds

A surety bond allows the tenant to pay a part of the security deposit to the apartment manager. This is because a third-party bonding company takes the tenant's responsibility of paying and abiding by the bond terms. Considering the legal guarantee that the landlord gets, you may be more likely to accept lower deposit amounts.

Pay-per-Damage

This is the only alternative that doesn't involve an advance payment scenario. Here, the apartment owner may charge the tenant for damages on a case-to-case basis, meaning that if the tenant makes any considerable damage to the rental, the owner may charge a particular amount to fix that damage.

It's important to note that the owner may not charge a higher amount than a regular security deposit for pay-per-damage cases.

Natural Disaster Coverage

Overall, a security deposit may be used to cover for a tenant who didn't pay rent or caused significant damage to the rental. A landlord may not deduct money from the security deposit if the unit was damaged due to a natural disaster since they weren't the tenant's fault.

Typically, uncontrollable damage repair fees come from the owner's insurance, so you may have to check with your insurance company to determine whether your unit is covered for these scenarios. Additionally, keep in mind that landlord's insurance typically only covers apartment structures and not appliances or items.

Fire Coverage

It mostly depends on the nature of the incident. In cases of a fire, the tenant may have to pay for damages if they were responsible for causing the fire under the apartment's roof. However, if the fire was caused by a third party, and it reached the apartment on accident, the tenant may not have to pay for those damages.

Either way, it's vital to invest in proper insurance to cover these damages. Even if the tenant or neighbor pays for the structural damages caused, you may still have to cover material losses.

Bottom Line

A security deposit involves several details that depend on the state you live in. If you want to make the most out of a deposit, make sure to take your renter's credit score and background in mind to choose an appropriate amount.

Additionally, remember to state your deposit's terms on the lease accordingly so that you can get paid in case the renter damages your unit in any way.