Disputes over a tenant’s security deposit can cause stress and even court battles for property owners. That said, handling a security deposit is not as simple as collecting the amount you want and keeping it to cover any repairs at the end of the lease. Instead, careful preparation, a legal lease, and knowledge of the local laws that govern a landlord’s use of security deposits will set you on the right track. Join us below as we review what every landlord needs to know about responsibly collecting a security deposit along with any reasonable charges for tenant damage.
How Much Should I Charge for a Tenant Security Deposit?
The purpose of a tenant security deposit is to reimburse the owner if the tenant breaks the lease, damages the unit, or leaves a balance of unpaid rent.
Typically, every state will have laws that govern how much a landlord can charge for a tenant’s security deposit. In Maryland, property owners can collect up to a maximum of two months’ rent at the beginning of the lease terms as a security deposit. That said, a few states do not have limits on how much a landlord can charge as a security deposit. However, two months’ rent is a widely accepted industry maximum. Furthermore, setting the deposit high just because you could end up driving away potential leads.
How to Responsibly Hold a Security Deposit as a Landlord
Landlords can withhold part or all of the security deposit at the end of the lease term under certain circumstances. However, in the meantime, landlords are holding the tenant’s funds in trust. Therefore, it is important not to get these funds confused with regular rental income. So, keeping these funds separate is essential for proper accounting.
Furthermore, some states require property owners to hold the funds in a special escrow account. Also, some states stipulate that that escrow account be interest bearing. However, even if not required by law, it is still a great business practice to get in the habit of.
Not separating tenant deposits from other business or personal finances is co-mingling funds. This can cause accounting issues and trouble collecting reasonable charges for tenant damage. Let’s review a few problems surrounding co-mingled funds below.
The Problem with Co-mingling Funds
- Tracking Interest and Funds – Some states mandate that owners accrue interest on the tenant’s security deposit. However, if the funds do get mixed in with other monies from different sources, tracking accurate interest is more difficult. Also, co-mingling funds makes them harder to distinguish in accounting reports. So, be aware that this could hinder an owner’s ability to claim part of the deposit for damages in many states.
- Accidental Repurposing – Without having security deposit funds set aside, landlords may mistakenly spend or appropriate them to other areas. This could cause problems when it comes to repaying them at the end of the lease.
5 Common Reasons for Landlords to Withhold a Security Deposit
At the end of the lease term, the landlord must evaluate the property’s condition to see what, if any, reasonable charges for tenant damage they can deduct. With that in mind, there are things that an owner can and cannot charge back to the tenant. So, continue reading as we look at five reasonable charges for tenant damage below.
- Non-payment of Rent – If the tenant vacates with a balance of rent due, the landlord may use all or a portion of the deposit to cover the charges.
- Lease Breaks – Depending on the lease terms, if a tenant breaks the rental agreement, a landlord may keep all or a portion of the deposit. However, check any applicable local laws before proceeding.
- Unpaid Utilities or Miscellaneous Bills – Property owners may withhold deposit funds to repay utility providers or other unpaid charges related to the rental, such as monthly parking fees.
- Excessive Cleaning – A thorough cleaning is standard between tenants and is part of a typical property turnover process. That said, if the tenant leaves behind trash, personal items or caused the property to need extensive deep cleaning, landlords may seek to withhold some of the deposit amounts. Again, owners will want to check for any applicable state or local laws before attempting to withhold cleaning costs.
- Tenant Damage – Damage qualifies as anything above acceptable wear and tear. We will examine this subject in greater detail below.
What is Wear and Tear vs. Tenant Damage?
Part of being a rental property owner is accepting extra wear and tear that will happen to your investment property. Normal wear and tear occur as fixtures and systems naturally age. Since this is not caused by neglect, it is the responsibility of the landlord to repair it. Check out the chart below for some side-by-side examples of how to determine what is or is not tenant damage.
Damage occurring as a result of abuse or neglect is “tenant damage.” Tenant damage such as stained carpet, broken floor tiles, unauthorized wall colors, and anything considered “excessive” is the tenant’s responsibility to correct. Each state will have its own laws that govern what determines tenant damage.
Looking for more information on wear and tear vs. tenant damage? Check out our blog!
How Can a Landlord Determine Tenant Damage?
Determining what, if any, damage the tenant caused requires the landlord to have a comprehensive record of the property’s condition. Therefore, a move in and move out inspection checklist is the best tool to aid in this process. Using these beginning and ending checklists allows both parties to compare how the unit aged during the lease clearly. If the tenant did cause damage, this would be evident during the inspection process.
Typically, a move out inspection is completed within 48 hours of the tenant vacating the property. This is vital because if tenant damage is discovered, landlords have a set window of time to deduct and provide documentation before the deposit needs to be returned. For efficiency and record-keeping, the best way to perform a move-out inspection is to use a checklist.
Looking for a comprehensive move in and move out checklist for landlords? Check out our blog!
Returning the Tenant Security Deposit
Whether a landlord returns some or all of the deposit, this is a time-sensitive matter. So, when it comes to timeframe, each state will have its own specific guidelines landlords must adhere to. In some states, landlords have as little as 14 days. However, Maryland landlord-tenant law allows owners a full 45 days to withhold or return the deposit plus any applicable interest. That said, failing to do so within the timeframe allows tenants to potentially sue for up to three times the withheld amount, plus reasonable attorney’s fees.
Therefore, within this timeframe, landlords must inform the tenants in writing their intent to either return or withhold any portion of the deposit. Additionally, this notice needs to include an itemized list of the charges along with copies of receipts. If landlords fail to follow the correct legal process, it can jeopardize their chances of using the deposit to cover the cost of damages.
As a landlord, acting responsibly with security deposits and keeping excellent records is vital to avoiding costly tenant disputes. Entrusting daily operations to a reputable rental management company provides peace of mind for landlords. So, if you need advice on deposit charges, help with a legally binding rental agreement, or professionally performed inspections, turn to the experts at Bay Property Management Group. Give us a call today to find out more!