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Security Deposits 101

Cash Being Put into a House Piggy BankIt would seem that of the many aspects of managing a rental property, the security deposit is the simplest. However, there is still much that a Midwest City property owner has to learn about handling a tenant’s security deposit correctly. Unlike a rental payment, a security deposit is not part of your investment income. In fact, there are rules that one must follow about accepting, depositing, and reimbursing security deposit funds legally. Aside from knowing how much to charge, you must also know what you can legally and ethically use the security deposit to pay for when your tenant moves out. Here is some basic information on security deposits that can help you become more confident in handling them from start to finish.

Determining How Much to Charge

Before even advertising your rental, a rental property owner has to first set an amount for a security deposit. Many states leave it to the landlord to decide this figure. There are, however, limits to how much you can charge, so study your state and local laws first before finalizing a number. Usually, tenants are asked to deposit an amount equivalent to one month’s rent, and a cleaning deposit or pet deposit, if needed. You can do some research on what other landlords are charging for similar properties in your area so you can keep your rental rates competitive. If you ask too much for a security deposit, potential tenants might balk and leave.

Handling Security Deposit Funds

Once you receive the security deposit funds, you have to know where your state requires you to keep them. Some states require landlords to keep the security deposit in a separate, interest-bearing bank account. Still, others let landlords decide where to keep the funds. Regardless of where you may be living, it is wise to maintain careful records of where the funds are kept. You must also not spend the funds without a legal, documented reason to do so.

When You Can (Legally) Keep Security Deposit Funds

There are a few specific situations that allow most landlords to keep and use a tenant’s security deposit funds. The most usual one is to pay for any repair of damages to the property beyond normal wear and tear. Broken appliances, big holes in the wall, or excessively stained carpet could all be ethical reasons for keeping a tenant’s security deposit. However, if that carpet is more than seven years old, and was already due for replacement for your next tenant, it would be illegal to withhold the security deposit to cover the cost of the replacement.

Other ethical reasons to keep some or all of a tenant’s security deposit include cleaning costs, unpaid bills, and in some cases, a broken lease or nonpayment of rent. There are some states, however, that forbid landlords to withhold the security deposit to cover unpaid fines or late fees, so make sure you know the specific regulations for your area.

Security Deposit Refunds

As soon as your tenant moves out, you will have to calculate how much of their security deposit will be refunded. If all the lease terms have been met, it is the landlord’s responsibility to return the refundable amount of the security deposit in full. Most states require that the refund be issued within 30 days or less. It is also wise to include an itemized list of the repairs that were paid for with the security deposit if you need to withhold any portion of the fund.

One of the best practices of rental property management is providing clear communication to your tenants of any funds withheld so as to avoid misunderstanding or legal action. This should be done regardless of state requirements. Also, if a property owner withholds the security deposit or an accounting record with a bill for amounts exceeding the deposit longer than the timeline permitted by law, that property owner can be held liable to pay the tenant up to three times the amount of the deposit as a penalty.

In reality, security deposit issues are more complex than they seem. Because of this, a lot of rental property owners rely on expert professionals at Real Property Management Elevate. We have local Midwest City property management professionals who have a very good grasp of the laws in your state. They can help make sure that you handle your security deposit, rent, and other interactions with your tenant in an ethical, legal manner. Would you like to learn more? Contact us online or call at 405-876-7611 today!

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