Imagine a world where residential tenants never had to pay a security deposit. As a landlord, you'd bear the cost of renovating the property and making it ready for the next tenant. This would make investing in rental property less attractive.
Thankfully, due to security deposit laws, landlords are within their rights to ask tenants to pay up a deposit, which is separate from the initial rent, before moving into the property.
However, there are many regulations surrounding security deposits that landlords must know about. Keep reading for expert insight.
Security Deposit Limits
The law allows landlords to collect a security deposit, but that doesn't mean you can ask for any amount. In most states, there's a limit that's built into the law.
In Alabama, for example, the limit is equal to one month's rent. So, if you're charging $1,500 a month, your tenant shouldn't deposit more than that as security. However, there are exceptions, such as when a tenant lives with a pet that isn't a service animal.
It's your responsibility to research your state's laws and establish what the limit is, as well as if there are any exceptions. If there aren't any limits, as is the case in about 20 states, there are best practices for setting the security deposit amount.
You also need to be familiar with the consequences of violating security deposit limit laws.
Security Deposit Management
Think about this: you have 10 rental units, each attracting a security deposit of $1,500. Fully occupied, you'll have a whopping $15,000 of cash that doesn't have immediate use.
Why not use the money for personal needs, such as a vacation? Well, that would not only be financially imprudent but also an offense. You shouldn't use the security deposit money to settle personal expenses.
Some states require landlords to deposit the money into interest-yielding accounts and pay out the interest to the tenants. Others have no specific laws, but in general, the money should be banked in a separate account and left alone until when needed.
Utilization of Security Deposit
The principle behind security deposits is simple: to reimburse the landlord in case of property damage or non-payment of rent.
However, not every kind of property damage qualifies. Normal wear and tear, for instance, cannot be charged on a tenant's security deposit. Things like faded paint and worn door handles aren't a tenant's responsibility.
Deliberate damage, such as holes in walls, stains on walls, and broken appliances constitute damage to the property and as such, the tenant is liable.
You can also use the security deposit to settle any debt the tenant owes to utility service providers.
Know How to Handle Security Deposits
Handling security deposits prudently is one of the primary responsibilities of a landlord. There are laws and best practices you need to observe, otherwise, you might find yourself in trouble. With this guide, you're now well-informed.
There's a lot on your hands as a landlord, but you can hire a property management firm to handle everything for you. Get in touch with us today!