Rentals.com Company Blog

Just for Property Managers

By Steven

A security deposit, even a small one, creates a bond between landlord and tenant, creating an extra financial incentive for the tenant to be responsible for the property they are renting. But the ins and outs of how to handle a tenant’s security deposit can be confusing. Read on for the dos, the don’ts and some recommendations for protecting a security deposit.

How much can I charge?

Each state has a different limit on what a landlord can charge as a security deposit. These vary between one and two months’ rent, though some states have no statutory limit. The higher the deposit, the more you will weed out prospective tenants, so be sure not to price yourself out of the market.

What can I do with the security deposit?

There are a lot of laws regarding the protection and use of security deposits. In many cases, depending on the state, you must keep tenants’ security deposits in a separate bank account. In most states, mixing a tenant’s money with your personal finances, borrowing it or declaring it as an asset to secure a loan are not allowed. Some states have laws in place that would deliver the entirety of the security deposit (in some states, up to three times its value) to the tenant if you mishandle his or her security deposit.

What about interest?

Not every state requires that tenants receive interest on their security deposit, but those that do, require payments, generally from 1% – 4%, annually or every six months. In some cases, if the deposit is under a certain amount, or if a landlord has a minimal number of units, interest does need to be paid.

Withholding a security deposit

A security deposit may be withheld in part or total because of damages to the rental or if the tenant fails to pay last month’s rent and/or utilities. If the landlord withholds any portion of the deposit, he or she will need to give the tenant a list of damages and notify them within a reasonable amount of time (the exact number of days required varies depending on the state). In most states, unless the lease states it explicitly, the deposit may not be used for last month’s rent, though it may be left to the landlord’s discretion.

As with many aspects of tenant/landlord law, the protection and use of security deposits depends in large part on the state in which your property is located. Be sure to check the laws in your area to be sure you are protecting your tenants’ security deposits properly.