How to Determine the Amount of Your Rental’s Security Deposit

 

How to Determine the Amount of the Security Deposit or Your Harford County Rental Property

An important part of owning a rental property in Harford County is charging tenants a security deposit at the start of every new lease term.

This deposit serves as assurance that your property will be cared for during the course of tenancy.

And, if by chance your property is not cared for, this security deposit will help alleviate the financial burden that has now been placed on you to repair your property.

After all, you want to place new tenants as soon as possible, so as not to lose money. Using the security deposit includes covering things such as property damage, failure to pay rent, and expenses incurred if a breach in the lease agreement occurs.

But how do you determine the amount of your rental’s security deposit?

At some point, you will need to seriously consider how much to charge your tenants for renting your Havre de Grace rental property.

In addition, you will need to determine how much to charge them for a security deposit.

For those who are unsure as to how to determine the right amount to charge for a security deposit, check out some of these helpful tips to guide you to a final decision.

How to Determine Your Harford County Rental’s Security Deposit Amount

1. Check Maryland Law

Check Maryland Law for Your Rental Security Deposit

There is no denying there are many federal, state, and local laws applying to owning and leasing a rental property in Maryland.

Although there is no countrywide stance on security deposits as they apply to rentals, it is crucial you understand that how much you can collect in security deposits at the start of a tenancy is determined by the state where your property is located.

According to Maryland law, you are legally allowed to accept a maximum of two months’ rent from a tenant at the start of a lease term as a security deposit.

In addition, the following conditions apply:

  • If you overcharge a tenant, they are allowed to recover up to three times the amount you overcharged, in addition to reasonable coverage of attorney’s fees
  • A receipt must be given to the tenant at the time you collect the deposit
  • Failure to provide a receipt will result in a $25 fine
  • You must provide a list of existing damages, if requested by the tenant within 15 days of taking up occupancy, or else you will be liable for up to three times the security deposit
  • You must place the security deposit in an escrow account
  • During the lease, a simple interest accrual will be applied to the deposit at a rate, depending on the date the lease was initiated

It is very important that you and your Harford County property management company know that two months’ rent is the maximum amount that can be collected as a security deposit, in order to avoid legal trouble later down the road.

 

2. Evaluate Each Interested Tenant

Just because you can legally collect up to two months’ rent worth of security deposit from a tenant you are placing in your Havre de Grace rental property, doesn’t mean you have to collect that much.

Before setting an amount, consider the type of tenant you are trying to attract for your rental.

For example, let’s say your property is located in an area that boasts an average, middle class income at best.

Charging a tenant first and last month’s rent, plus a security deposit worth two months’ rent, in addition to any other miscellaneous fees that may come included with renting a property from you (e.g. pet deposits, cleaning fees, and application fees), may greatly limit your tenant pool.

If you charge the maximum amount in security deposits every time you lease your property, you may find that you are excluding a group of tenants that may otherwise be perfect.

In addition, charging the maximum just because you can, may unknowingly spread your tenant too thin, leading to unpaid rent in the near future.

In order to keep your Harford County tenant turnover rates low, you might want to consider not charging quite so much up front if the tenant screening process you performed on a prospective tenant revealed an otherwise great tenant.

If their inability to come up with such a huge security deposit is the only red flag in your thorough tenant screening, they may still be a good long-term tenant.

 

3. Assess the Value of Your Property

Assess the Value Of Your Harford County Rental Property

Another consideration to make when determining the amount of security deposit you should charge your tenants is the overall value of your property.

Paired with this, you should consider how much money you might potentially have to come up with, should anything happen to your valuable rental property.

For instance, if your property has custom upgrades or comes furnished with expensive antiques or irreplaceable furnishings, you might want to charge the maximum amount in security deposits.

In addition, if your Havre de Grace property comes with lavish amenities such as major appliances, private parking, or a pool house in the backyard, again, you might want to consider charging the highest security deposit you can.

If, after evaluating the value of your property, complete with professional estimates if necessary, you feel that fixing minor damages such as a dent in the wall, scratched floor surfaces, or non-working (and top-of-the-line) appliances will cost you a large chunk of change, making sure you charge the highest security deposit will be in your best interest.

 

4. Know the Market

Nearly all tenants know the market they are entering when they are looking to lease a rental property.

This is why you too should know the market, to prevent interested tenants from going elsewhere to rent.

Knowing what other rental properties are charging in terms of rent and security deposits will help you stay competitive in the tough Harford County rental market.

After all, people want to take advantage of all that Havre de Grace has to offer, without spending a penny too much on monthly rent payments.

In addition, tenants don’t want to come up with thousands of dollars at the start of their lease term if they don’t have to.

To stay competitive and keep your rental property leased at all times, make sure you find the perfect balance of rent amounts and security deposits.

 

5. Market Demand

In line with the above-mentioned considerations is the fact that if there is a high demand for your rental property, it is probably safe to say you can charge the maximum amount in the security deposits, and still land a high-quality tenant.

If, however, your rental is not in high demand, – for whatever reason that may be – undercharging on a security deposit is one way of keeping your vacancy rate lower, and placing a tenant in your property quicker.

If you charge a lower security deposit than your competition, you effectively set yourself apart and make your similar rental more appealing to prospective tenants.

Sure, you might not have as much in the end to cover property damages, unpaid rent, and legal fees. However, the idea is to weed out problem tenants in the first place by conducting thorough tenant screening so that you don’t have to deal with property damages and other problem tenant issues.

 

If you own rental property in the Havre de Grace area and are concerned about how much you should charge tenants when it comes to a security deposit, get in touch with Bay Management Group today.

Bay Management Group’s talented staff has the knowledge and expertise to draft legally complaint lease agreements that follow Maryland’s laws regarding the collection, holding, and returning of security deposits to tenants.

As Harford County’s best property management company, we can help you with all considerations, and set your security deposit at a competitive rate that will also keep you covered, should the unthinkable happen.


The Difference Between a Security Deposit and Last Month’s Rent

security-deposit-versus-last-month-rent
When a new tenant moves into your property, it’s time to start generating income from your investment.

And not just from the first month’s rent – you have two other instant revenue options as well: the last month’s rent and the security deposit.

Both of these are excellent ways to test a tenant’s financial stability and sincerity about renting your property for the long term. However, they’re not mutually exclusive. If you wanted, you could charge for both, one, or neither.

You need to understand the differences between charging last month’s rent and collecting a security deposit to make your decision on what you’ll ask for. Today, we’ll explore those differences.

 

How a Security Deposit and Last Month’s Rent Are Different

What is a Security Deposit?

A security deposit is a tenant’s property, and it should be held for a tenant for the duration of their tenancy.

It’s typically an amount equivalent to one month’s rent, and is intended to cover any damages beyond normal wear and tear to a property.

“Normal wear and tear” is pretty straightforward – if the carpeting shows signs of use, then that is considered “normal.” Carpeting covered in large stains, on the other hand, would not fall under the definition of “normal wear and tear.”

If, when a tenant moves out, a landlord finds that damage beyond normal wear and tear have occurred, the landlord doesn’t have to legally return the security deposit.

You should collect the security deposit before the tenant actually moves into the property. You should also be sure to include the amount of money and the date the security deposit was collected in your lease agreement.

Maryland landlord-tenant laws state that a landlord may charge a tenant up to the equivalent of two months’ rent for a security deposit. Montgomery County landlords must also provide a receipt that describes the tenant’s rights to inspections, the right to receive an itemized list of the deposit deductions, and the penalties for the landlord’s failure to comply.

On top of that, Montgomery County landlords must pay interest on any security deposit $50 or more at an annual rate of 3 percent. You can calculate your tenant’s security deposit with added interest on the Department of Housing and Community Development website.

Landlords are required to return their tenants’ security deposits within 45 days after they move out, as long as both parties met the agreements outlined within the lease. If a landlord fails to return any part of the security deposit within that period, they could face a lawsuit and may be liable for three times the withheld amount.

 

What is Last Month’s Rent?

If you require your tenants to pay a last month’s rent, you effectively give yourself a form of insurance against their leaving without giving you proper notice.

Think about it this way: if a tenant signs a one-year lease, they won’t have to make any payments during their twelfth month of tenancy.

Collecting last month’s rent is also a great way to attract higher quality renters. Such a barrier for entry allows only those potential tenants with the appropriate cash on hand to move in. Because it can be so difficult for someone of lesser means to move into a new home and pay such a substantial cost, you’ll have significantly fewer (but probably higher-quality) applicants overall.

Just remember, if a tenant has reason to legally breach their lease agreement before the twelfth month, then you would be obligated to return their last month’s rent. Instead of finding yourself simply needing a new tenant, you’d also be a full month’s rent in the hole.

For a more extensive look at last month’s rent, check out this recent blog post.

 

What’s the Big Difference?

montgomery-county-property-management-financial-questions-security-deposit

The biggest difference, clearly, is that you don’t have to return the last month’s rent. That isn’t the tenant’s property – it’s yours.

The security deposit is not actually “income,” but keeps you free of any financial headaches after a tenant moves out. But if you can’t legally hold onto it, you have to return it within that 45-day period.

Because a last month’s rent is part of the overall money owed by the tenant, it doesn’t technically count towards anything other than your tenant’s cost of living in your property. This forces you to pay for any cleaning or repairs needed at the end of the lease.

Your best bet to keep yourself safe and flexible is to require tenants pay a security deposit, and to follow the Maryland state laws on handling the money. The deposit should be as high as you think necessary to cover whatever potential losses you could face.

 

“Living Out” a Security Deposit

Sometimes, your tenant may try to “live out” their security deposit. Instead of paying their last month’s rent, they ask you to apply the security deposit you’ve already collected from and owe them to their last month of rent.

This can be somewhat risky for landlords. For instance, if your tenant has caused any damage to the property, you probably won’t have enough security left over after you deduct their last month’s rent to pay for the damage they caused. If your security deposit was only the equivalent of one month’s rent, this is especially true.

The best advice in this case is to never allow your tenants to live out their security deposits. If you did not require a last month’s rent when they moved in, collect the last month’s rent as you normally would and return them their security deposit within the legal period minus any necessary deductions.

 

Increased Rent Amounts and Last Month’s Rent

One issue Montgomery County property managers might run into when they choose to collect last month’s rent is the issue of increasing the amount of rent due.

If you increase the rent due every month but fail to require your tenant to increase the amount of their pre-paid last month’s rent, you can’t collect the extra amount when the tenant moves out.

When the tenant moves out, there will be a difference in what they initially paid as last month’s rent, and what the actual last month’s rent costs. But you cannot make the tenant pay the difference.

This may not be the most upsetting outcome – especially if the amount you raised the rent was small enough that its absence doesn’t impact your finances.

 

Final Thoughts

The differences here are pretty clear: a deposit is always helpful, and a last month’s rent can be as well. And whether you want to ask for both, one, or neither is entirely your decision.

Take a step back from your business for a moment, and ask yourself:

What sort of tenants will my properties most likely attract? What sort of tenants do I want to attract?

The answers to these questions are different in every individual case. What’s important is that you understand these differences and decide what you should do to grow your rental property business.

 


The Top 5 Reasons to Collect a Security Deposit

security-deposits-are-important-howard-county-property-management-companies
Obtaining a security deposit is one of the most important things a landlord can do before renting out their Howard County property.

In fact, those that do not require a security deposit from their tenants often face many costly expenses when their tenant moves out. Unfortunately this leaves the landlord responsible for damage to their property, among other things, that they were not at fault for.

Seems unfair right?

That is why understanding the importance behind collecting a security deposit is essential to being a landlord.

Today we will explore the top 5 reasons you should procure a security deposit for your rental home as a way to protect yourself from unnecessary expenses.

 

What is a Security Deposit?

When dealing with a rental agreement, a security deposit is a lump sum of money paid upfront by your tenant before their move-in date.

This deposit ensures that the cost of any damage that has been discovered at the end of the lease agreement will be paid for.

As long as the tenant abides by the terms of the signed lease agreement, this deposit should be returned to the tenant when the lease has expired.

It is important to be aware that a security deposit is in place to safeguard the landlord from damage the tenant may have caused, though tenant’s have rights regarding the return of their deposit.

At the end of a lease agreement, the landlord is only entitled to the security deposit, or a portion of it, if there are actual damages that need compensation. Please be sure to check with the different laws regarding security deposits in your area to avoid any landlord-tenant conflict.

 

Top Reasons a Landlord Should Collect a Security Deposit

As noted above, a security deposit protects landlords against a variety of damages that can occur to the landlord’s rental property. Let’s take a look at the top 5 reasons you should strongly consider requiring a security deposit for each property you lease.

 

  1. Protection Against Damage to the Premises

To avoid paying out of pocket expenses to fix physical damage to your rental property, collect a security deposit that can be used to repair these issues.

This consists of expenses to cover damage by the tenant or the tenant’s family, agents, employees, or guests to your rental home, and includes surrounding areas, major appliances, or furnishings owned by the landlord.

This may be especially helpful in places such as Columbia or Elkridge. These regions of Howard County are known for being great places to raise families. This means longer tenancy stays and an increase in the likelihood that your rental property will encounter some physical damage beyond normal wear and tear.

Keep in mind that property damage is different than normal wear and tear. This deposit is not to be used as a way to renovate or upgrade any furnishings, appliances, or cosmetic looks of the home, and must only be used to cover the cost of repair.

It is also required by law that you provide the tenant a list of damages including the costs required to repair those damages in order to justify keeping the security deposit.
security-deposits-protect-howard-county-property-management-companies

 

  1. Early Termination of Lease

Should your tenant break their lease early with or without proper notification per the signed lease agreement or simply abandon the property, you are entitled to use the security deposit as a way to recover your losses associated with this breach of contract.

If you have an early termination clause built into the signed lease agreement you will have to abide by those terms, as well as any relevant state and local laws, should you wish to keep all or part of the security deposit.

In addition, should legal action be required due to this breach of contract, you may be entitled to use the security deposit to cover your legal fees as well.

The security deposit will help to cover the necessary preparations required to rent out your property to new tenants, the cost of advertising a vacant rental, and the loss in rent that you will incur.

It is important to note however, that once another tenant is placed in your rental home, you can no longer use the security deposit as a way to recoup lost rent.

 

  1. Non-Payment of Rent

Similar to a tenant terminating their lease agreement early, a security deposit will help you cover your loss in rental payments should a tenant simply stop paying altogether.

Most states will allow you to keep all of the security deposit you collected at the start of tenancy should this situation occur.

Unfortunately, if the tenant still resides in your home, even after non-payment of rent, you will then be forced to take more serious action such as beginning the process of eviction.

 

  1. Excessive Cleaning Costs

It is generally understood, and is usually outlined specifically in a solid lease agreement, that upon move-out your tenant will leave your rental home the same way they found it when they moved in, less some normal wear and tear.

Unfortunately, in places such as Laurel that boast long-term tenancy potential, your tenants may not be able to restore your rental home to the way it was upon move-in after years of leasing your property.

This is where a security deposit comes in handy.

Not to be confused with general cleaning costs associated with being a landlord and having a rental business, this use of the deposit is for extreme cases of uncleanliness, should the need arise.

 

  1. Unpaid Utilities Upon Move-Out

One issue that often goes overlooked is the transition of utilities between landlord and tenant.

During the lease term your tenants will have most, if not all, utilities in their name. However, when the lease comes to an end, and your property becomes vacant, the utilities will then be switched over to your name again.

Should a tenant fail to pay the last months’ worth of utility bills, you are entitled to use the collected security deposit to cover those costs.
howard-county-property-managers-use-security-deposit-unpaid-utilities

 

Final Thoughts

In the end, it is advisable to have a security deposit collected at the start of each lease agreement for your protection in the future.

Whether a tenant excessively damages your home, breaks the lease agreement early, or even just disappears, it is helpful to know that some of your losses will be recovered.

Consider using Bay Management Group to help you take care of things such as thorough lease agreements, the collection of security deposits and rental payments, and the inspection of your home so that extreme cases of damage do not have time to surface.

With their highly trained team being knowledgeable in all of Howard County’s laws, you will have the peace of mind that the lease properly addresses security deposits and that the use of one, should the need arise, will be done in good faith.

 


6 Security Deposit Best Practices You Should Be Using As A Landlord

Prince George's County Property Management Tips for Security Deposits

As a Maryland landlord, you can’t just “wing it” when it comes to handling security deposits.

You have to follow specific procedures and adhere to Maryland laws (whether you’re in Prince George’s County or somewhere else in Maryland). Otherwise, you could end up in court and/or owe your tenants a lot of money!

To help you avoid those negative consequences, we’ve put together this list of 6 security deposit best practices you should follow as a landlord.

 

Security Deposit Policies and Best Practices

1. Require a new tenant to inspect the property upfront

When a new tenant has signed their lease and received the keys to the property, they should inspect it thoroughly. Make sure they know to look for anything that could affect how much of their security deposit they can get back.

As they look, they should have a Condition of Rental Property Checklist that includes details of every room in the property.

Require the tenant to mark the condition of each detail as they walk through, and have them sign and date the document and turn it in to you directly.

Tip: To avoid disputes with difficult tenants in the future about what was or was not marked on the inspection sheet, use carbon copies. Yes, it’s kind of an old-school way to document something, but it’s one of the best ways to maintain unquestionable proof of the tenant’s inspection.

2. Inspect your property thoroughly when a tenant moves out

Property Manager Inspecing Maryland Rental Property after Tenant Moved Out

If you’re a seasoned landlord, you probably already know about property inspection procedures.

You should conduct inspections throughout a tenant’s lease period (just make sure you enter the property legally by notifying the tenant at least 24 hours ahead of time) and when they move out.

During the move-out inspection, look over the property thoroughly and take plenty of pictures of any damages caused by the tenant that could allow you to deduct an amount from their security deposit.

For even more proof, record a video as you walk through the property and zoom in on any damages.

And, if you can, add a time/date stamp to any pictures/videos you take of the property. This will help if any tenant tries to dispute the date of the damages.

Tip: Don’t just save your photos and videos to your camera memory card and/or computer. Back up your files whenever possible on an external storage device like a flash drive or by using a cloud storage program online. This will help ensure that your files aren’t lost if your main hardware goes missing or becomes damaged.

3. Charge your tenant the proper amount for the security deposit

In Maryland, the most you can charge a tenant for their security deposit is the amount they pay for two months of rent.

Make sure you don’t charge more than that, or you could owe the tenant a lot of money and end up paying attorney’s fees, which tend to be pricey.

That being said, you shouldn’t undercharge for the security deposit either.

You might think that undercharging will help you rent out your property more quickly, but it might just end up attracting a financially unstable tenant.

Set a reasonable amount, and stick with it to get a high-quality tenant living in your property.

4. Keep all security deposit money in a separate bank account

Accidentally spending your tenants’ security deposit money can put you in a sticky situation.

Instead of simply depositing the money in your regular bank account, set up a specific account for deposits and put the money there. That way, there is no confusion about where the money is and you won’t be tempted to use it.

5. Be aware of Maryland laws for landlords concerning security deposits

Laws for landlords vary by state. To stay out of legal trouble, familiarize yourself with the laws for Maryland landlords.

To get you started, here are a few notable laws in Maryland regarding security deposits:

 

Legal Concerns for Rental Property Security Deposits in Prince George's County, MD

 

Keep in mind that these aren’t the only Maryland laws concerning security deposits – not even close!

So, if you’re not sure about something, look it up online before you take action. By doing so, you could save yourself from ending up in court later due to a simple mistake.

6. Keep track of your receipts

When a tenant damages your property or leaves it excessively filthy to the point where you need to deduct from their security deposit, make sure you document every repair/cleaning transaction required by keeping the receipts.

These receipts will show the amount(s) you can deduct from the security deposit.

Doing this gives you clear proof of the money spent to get your property back in good condition, which helps ensure that your tenant cannot dispute the charges later.

If you need help managing your security deposit procedures, consider partnering with our Prince George’s County property management team.

Whether your property is located in Bowie, Takoma Park, or a surrounding area, we can help you avoid tenant disputes regarding security deposits.

Our services include move-in and move-out reports, and we take pictures of the property both before and after a tenant inhabits it. That way, we can accurately pinpoint any damages, maintain solid proof of those damages, and handle any security deposit deductions with ease.

So, if you have been struggling with security deposit issues or would like to learn more about how our property management team can free you from unwanted landlord responsibilities, contact us today!