The handling of security deposits can be a problematic issue for many landlords. Security deposits are an important way for landlords to protect against potential losses, but it is important to understand how to handle them to ensure that you steer clear of potential legal issues. Below are a few tips to assist in guiding you through the process of properly handling security deposits.
First, it is important to understand what a security deposit actually is and what it is intended to do. One of the most common problems that landlords encounter when it comes to security deposits is failing to use them as they are intended. A security deposit is funds that are collected at the beginning of a lease to compensate for damages. When the lease is terminated, any cleaning fees or repairs that are incurred will be taken from the security deposit. Security deposit funds can also be used to compensate for non-payment of rent as well as late fees and charges. In the event that a tenant moves out and leaves the property damaged or does not pay the rent, a security deposit can provide landlords with some degree of protection, as it can be generally impossible to track down a payment for collection once he or she has moved out.
With all of that said, it is also important to understand that the security deposit is not allowed to cover the last month's rent. The last month's rent is an entirely separate entity from the security deposit. It is still a good practice to have tenants pay the last month's rent in advance.
Remember that a security deposit is not your money. It remains your tenant's money and you are only holding it in the event of potential damages or fees. The best way to ensure that you do not comingle funds is to establish a separate account into which security deposits are deposited. This will help to ensure that the security deposit is not accidentally used for business expenses.
Keep in mind that it is also extremely important to be aware of your state or local laws when it comes to handling security deposits. For instance, in California, landlords are required to pay interest on a security deposit that is held for a minimum of one year. This is not the case in all states, but it is important to be aware of any local or state regulations that may apply to ensure that you do not encounter potential legal problems.
Ensure that you inform all tenants that you will perform a walk-through and inspection once they have moved out in order to determine the amount of the security deposit that will be returned. This can provide a good incentive for tenants to care for the property. In order to ensure that damage is well documented and support your case for retaining a security deposit, it is a good idea to make a checklist and photograph the condition of the property on the day the tenant moves in as well as the day that he or she moves out of the unit.