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What Is a Rental Security Deposit and Why Is It Important?

What a Security Deposit Can Be Used For and Why It Is Important?

Security deposits are an essential part of rental property management. No one likes to think about things going wrong, but a security deposit provides just that – security against unexpected situations such as damages and lease breaks. Deciding how much to charge is just as important as understanding what a security deposit can be used for. Read on as we discuss some key things to know to make sure you are prepared for the unexpected.

Why is Security Deposit Important for Your Rental Property?

Security deposits are a set amount of money paid before taking occupancy of a rental property. These monies are held by the landlord for the duration of the lease and either returned to the tenant or withheld for damages. However, there are several essential things to remember:

  1. Thoroughly Document Property Condition: To withhold damages, you must accurately document the “before” condition. So, a thorough move-in inspection should be done, and be sure to take lots of photos. Once the tenant vacates the property, the landlord can perform a move out inspection to determine damages and get estimates as needed.
  2. Know the Local Laws: States differ in how much landlords can lawfully charge for a security deposit. In Maryland, for example, landlords may charge up to two months’ rent. Additionally, states may mandate a time in which landlords have to return the deposit, usually 45 days after move out.
  3. The Security Deposits is Not the Last Month’s Rent: A clearly written lease is vital for any rental, and outlining what is expected for the deposit is critical. Therefore, the contract should state any circumstances that could allow the landlord to withhold some or all of the deposit.

What Can a Security Deposit be Used For?

Security deposits can be used in several situations. In most cases, the landlord must provide estimates, receipts, or proof to substantiate the amount withheld. Below are some examples of reasons to withhold some or all of a deposit.

  • Breaking the Lease Term Early
  • Nonpayment of Rent
  • Damage to Property
  • Excessive Cleaning Costs
  • Unpaid Bills or Utilities

Breaking or Terminating a Lease Early

When a tenant breaks their lease, a landlord can keep all or part of the security deposit. This would equate to the necessary amount to cover the costs associated with this breach. To collect this, there needs to be an early termination clause in your lease. Additionally, research any applicable landlord-tenant laws in your state. It will depend on the wording of your lease and the particular landlord-tenant laws in your state.

Nonpayment of Rent

Most states allow landlords to keep all or a portion of the security deposit to cover unpaid rent when a tenant vacates. Paying rent is a condition of the lease; therefore, nonpayment is considered a breach of the lease. So, if a tenant does not fulfill their contractual rent obligation, landlords may be allowed to keep the portion of this security deposit.

Damage to the Property

Damage is another reason landlords can withhold a deposit. Tenant damage is defined as repairs beyond what is considered normal wear and tear. Below are some examples to help determine the difference.

Examples of Normal Wear and Tear

  • Small nail holes in the walls from hanging pictures
  • Minor stains on the carpet
  • Dirty grout in baths or showers
  • Loose handles or doors on kitchen or bathroom cabinets
  • Minor scrapes or scratches on the flooring
  • Minor scratches to countertops

Examples of Tenant Damage

  • Multiple or large holes in the walls
  • Large stains or holes in ​the carpet
  • Extensive scratches on hardwood floors
  • Missing outlet covers or fixtures
  • Cracked kitchen or bathroom countertop
  • Broken windows, doors, or fixtures

Cleaning Costs

Basic professional cleaning should be a part of your normal turnover process between tenants. This is not something you can withhold the deposit for. However, if the cleanup required is considered excessive, this is grounds for withholding funds. For example, if the apartment requires a haul-out from trash or personal items left throughout the home or if the tenant had a pet that caused a significant cleaning need.

Unpaid Utilities

Utility bills left unpaid by tenants are another reason landlords may withhold part of the deposit. However, it must be stated in the tenant’s lease what utilities they are responsible for paying.

How Much Should a Security Deposit Be?

A security deposit is just as necessary as the monthly rent. Deciding how much to charge depends on several factors, but all are important in protecting your investment. Charge too little, and you may not be able to cover damages, charge too much, and it can drive away potential renters. As you weigh your options, consider these points below.

  1. State Maximums
  2. Monthly Rent
  3. Property Amenities
  4. The Competition

State Laws Limit the Security Deposit

Many states have limits on how much a landlord can charge for a security deposit. On average, regular deposits are around one to two months rent, depending on the property and prospective renters qualification criteria. Additionally, you should be aware there may be other more local restrictions and requirements. In the states without a maximum limit set, it is a good idea to look at the local market to gauge what to charge.

The Rental Price of the Unit

Another factor in determining deposit is the rental rate. So, the price will influence the amount of the security deposit you can collect. For example, in Maryland, the maximum you may charge is two months’ rent. Even in states with no limits, the deposit is still based in part on the rental amount.

Property Amenities

The next criteria for determining the deposit amount are the amenities of the property. Examples of standard amenities that could garner higher security deposits are:

  • Elevator in the Building
  • Onsite Parking
  • Furnished Unit
  • In-unit Washer/Dryer
  • Fully Renovated Unit
  • New Construction
  • Luxury Finishes
  • Onsite Gym or Pool

Competition in the Area

The local rental market is another consideration in determining the amount of a security deposit. Research similar units on the market with comparable amenities and see what the competition is charging. Moving is expensive, and costs add up quickly. If a tenant is trying to decide between similar units, their choice may come down to the deposit. Make sure you are on par with similar units.

Security deposits are a must for all landlords. If you prepare for unexpected damages by having a solid lease, the right amount of deposit, and an understanding of local laws and what a security deposit can be used for, you will protect your investment. Do you have questions or need advice on how to protect your rental property interests best? Contact a property management group in your area to speak with a property management expert.