Rules for Handling Security Deposits

by Zac Kandell | Updated: Dec 20, 2019

The security deposit is very important for your property. As the name implies, it helps give you security in case something happens, like damage done by the tenant. In exchange, though, there are rules for handling security deposits that you need to follow, so make sure that you’re not caught off-guard by these.

We have to note, we aren’t lawyers and none of this is legal advice. Make sure that you have a good lawyer before renting out your property and use this more as a guide so that you know what are the right questions to ask, rather than legal advice or exactly what to do or not to do.

Know the initial condition of the property

In order to know how to handle the security deposit at the end of the lease, you need to know what the property was like when the lease started. Make sure that you have, in writing, the condition of everything when the tenant moved in. A walk through, inventory sheet and photographic evidence can do a lot of good for showing the condition it was in at the start, helping to prevent issues if you need to withhold some of the deposit.

Know the limit of how large of a deposit you can take

How much can you legally take as the deposit? That can vary, but even if you know the upper limit, you shouldn’t just go with that. The larger that you make the deposit, the fewer people who can afford it, meaning that you’re restricting the market for your rental. There’s a limit, both legal and practical, to what you can demand.

Do you have to pay interest on it?

In some states, you need to pay interest back to the tenant on their security deposit. Make sure that you know this ahead of time, since not preparing for this may mean that you come up short at the end of the lease.

Know how to store the deposit

Related to the interest, some states require you to store the deposits specifically. You may not be able to just throw it in with the rest of your money and pay that amount out at the end of the lease. Depending on the laws, you may have to store it in a specific account and give the tenant information about where the money is stored so that they know you’re following the proper procedures.

Find your state laws

While there are also variations at the local level, state laws will determine a lot of what you can do with a security deposit. Check for an overview of what your state’s laws are about security deposits, but make sure you don’t stop there.

Have a good lawyer

We said it before, but it bears repeating: get a good lawyer. They will be able to get you all the information you need on state and local laws, along with providing actual legal advice. Don’t just follow what we say or what you find in other online resources. A good lawyer is useful for so many other parts of renting and is essential for keeping your business running well.

There are a lot of rules for handling security deposits, so make sure to spend the time and money to get it right. You may think you can figure it out on your own, but proper research and a good lawyer will help keep you out of legal trouble you may never have known was out there.

Categories: Landlords

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