Everything Landlords Should Know About Security Deposits

Everything Landlords Should Know About Security Deposits

More than a third of Americans rent their homes as of 2019. The COVID-19 pandemic continues to cause havoc in the rental industry, making rent collection difficult for new landlords.

At times like these, landlords need to return to the fundamentals. Almost every landlord collects security deposits, which play a vital role in the stability of a rental property.

Beyond providing a cushion in the event of damage to the property, a security deposit encourages renters to take good care of a property. That makes it even more crucial that landlords get comfortable collecting and handling deposits from new tenants.

Keep reading, and we'll cover this crucial element of rent collection.

What Is a Security Deposit?

A security deposit comprises an amount of money paid by the tenant before moving in.

The security deposit serves as a promise that the renter will avoid trashing the apartment or house. Renters who violate their leases, such as those who put holes in the walls or fail to pay rent, also lose their security deposits.

Why Do Landlords Take Security Deposits?

In addition to insurance that the renter will not leave the unit appreciably worse than it was at move-in, security deposits ensure that the landlord has money to fix such problems. A burned kitchen counter needs replacing, and that money can come from the deposit.

Deposits can also handle bills that the tenant should have handled. If your tenant moves out without paying utilities, you can use the deposit.

By using the security deposit in this way, you ensure new tenants have a beautiful new home to move into.

How Much Can a Security Deposit Be?

Each state limits how much landlords can charge for a security deposit. In Washington DC, landlords can collect one month's rent at most. Some states allow two or more months' rent.

Note that these charges come in separately from other forms of guarantees against damage. A pet deposit, for instance, can bring the total number of deposits from the renter above a month's rent.

How Do Landlords Account for Security Deposits?

Security deposits count as a liability in bookkeeping. As they will return to the tenant upon moving out, they count against you on the books in most cases.

Exceptions occur when you agree to take the security deposit as the last month of rent from the renter. In these cases, security deposits become rent paid ahead of time.

Regardless of which system you use, make sure you remain consistent. You don't want to be investigated for improper bookkeeping.

Protect Your Rental Properties

Security deposits will help keep your rental properties safe and well-maintained for years to come. When you collect a security deposit, you can have confidence you'll be able to handle issues that arise when a renter moves out.

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