A security deposit is an amount of money paid upfront by a new tenant prior to moving in. State and local laws regulate how much a landlord may charge as a security deposit, when a landlord must return it, and instances where the landlord can keep it. A typical amount is equal to between one and three months of rent. Don’t underestimate the importance of security deposits for landlords.
Why Collect a Security Deposit
Security deposits are a type of insurance against losses caused by the following instances:
- Damage to property beyond normal wear and tear: ordinary dings and dents from everyday living don’t count as the kind of damage covered by a security deposit. But the security deposit can pay for broken windows, large holes in the walls, and burns or large stains on the carpets.
- Excess cleaning cost: landlords will always clean up before showing a vacant apartment and renting to a new tenant. But if the previous tenant leaves the home so filthy that the landlord must pay for special or additional cleaning services, they can use the security deposit to cover the cost.
- Unpaid rent – if a tenant skips out with rent unpaid, the security deposit is there to compensate the landlord.
- Unpaid bills – if the tenant is responsible for paying utilities and doesn’t, the landlord can usually use the security deposit to pay any utilities left unpaid.
- Breaking the terms of the lease – early termination of a lease triggers the retention of a security deposit.
There are several steps to take before collecting or using a security deposit:
- Know the law: States differ in laws about how much security deposit a landlord can collect, why a landlord can keep some or all of the deposit, and into account type the landlord may deposit security deposits. Laws may require landlords to present tenants with receipts showing how and why the landlord used that money. Many cities and states specify a time period within which a landlord must return a security deposit after the tenant vacates the property.
- Document the home’s condition: landlords should take pictures of the property before a new tenant moves in to have a record of the “before” condition when the tenant moves out. After the tenant leaves, the landlord should take more pictures, get estimates, and keep receipts for any work done. Landlords must justify any amount retained.
- Don’t allow tenants to use security deposits as the last month’s rent: this is actually illegal in some states. Landlords should spell out clearly in the lease all the conditions which trigger retention of some or all of the security deposit.
If you’re new to real estate investing in Atlanta, don’t forget the importance of security deposits for landlords. If the ins and outs of security deposit laws are more than you can manage, consider hiring a rental property management company to handle collecting, depositing, returning, or using deposits to pay for permitted costs. The property manager can also find and vet tenants, collect rent, and maintain the property for you.