What Does a Landlord Need to Know About Security Deposits?

What Does a Landlord Need to Know About Security Deposits?

In the United States, 35% of households (44.2 million households) rent the place they live in. This statistic increases every year as more people find it easier to rent and be mobile for their careers' sake rather than to live in an owned property. This also means there are more opportunities for folks looking to make rent a partial (or substantial) source of income.

Something new landlords may be unsure about is security deposits. What are security deposits, why are they important, and when do they get paid? If these are the kinds of questions you have then keep reading this handy guide.

What Security Deposits Are

A security deposit is a sum of money a landlord (or their representative) collects from new tenants when they sign the lease agreement. The landlord holds this money as a reserve to repair any property damages the renters may have caused.

When renters move out, the landlord returns the security deposit minus the cost of repairs to property damage. If you have the perfect tenants then you should return the full security deposit amount.

Landlords aren't allowed to deduct repairs for normal wear and tear from the security deposit. There are also laws that regulate how to handle this process and it may differ slightly depending on which state you're in.

What Security Deposits Do

Security deposits help keep your rental income cash flow steady in two different ways. When your tenants move on you want to find new tenants as soon as possible and so your property needs to be ready and attractive. The first thing security deposits do is give you a cash reserve to repair any possible damages quickly so that your property can be ready as soon as possible.

Secondly, they also help with tenant screening. You're allowed to charge variable security deposits based on tenants' credit scores as a control for tenants who may consistently pay late or miss payments. Just make sure that you don't accidentally violate the Fair Housing Act in the process.

How Much Security Deposits Should Be

Your rental property will generate income for you like a business, so the main factor to consider when setting your security deposit amount is how competitive your price is in the market. A larger security deposit may cause long periods of vacancy. However, a smaller security deposit may attract the kinds of tenants who pay late and break things.

Thirty of the fifty states set legal limits on what security deposits can be. Florida doesn't have a limit but in other states like California or Nebraska, the limit can be between 1 and 3 months of rent. Be sure to check out your state's laws during your consideration.

Contact a local property management firm to find out what the average rate for the area is. If you're becoming a landlord for the first time, having a similar security deposit to other properties like yours should work out the best. If you have multiple properties then a property management agency can help you set them in a consultation.

Get the Best Property Management Advice

Collecting security deposits is a helpful practice for rental property management. It protects you from damages and it helps screen for bad prospective tenants. It also incentivizes good behavior because tenants can get the deposit back if they leave without damaging your property.

If you need help managing your properties or navigating rent collection and other financial questions landlords may have, contact us for a consultation. We can help landlords in the greater Atlanta area take their rental properties to new heights.