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Security Deposits for Rental Properties

States highly regulate the collection and handling of security deposits making it strangely enough big business?  This is money the tenant deposits with the landlord as security for events possibly to happen.  The money must remains in a bank account waiting for a lease term to end.  Billions of dollars deposited in a bank account that no one (not even the true owner) could spend.  "Water, Water everywhere and not a drop to drink" so the Coleridge poem goes.

States regulate the collecting and handling of security deposits primarily to protect landlords and tenants should a dispute over these funds ultimately erupt. Each year town courts across the nation are filled with landlords seeking to lay claim to the security deposit while tenants seek to refute the landlords' claims so a refund can be issued.  

Yes, the security deposit can be a source of heated argument between the tenant and the landlord thereby adding another facet to the property management industry about which the landlord must know. For the moment lets put landlord-tenant laws as debated in our courts aside and focus on just what needs to be done. Are you collecting and handling your security deposits correctly?  Lets find out.

How much can you collect?


The security deposit is intended to protect the landlord's property. The landlord collects a security deposit as security against the pending "destruction" of the landlord's rented property such as when the tenant throws that party that got out of hand but somehow calmed down when the police arrived carrying taser guns.

In your Lease Agreement Kit we have provided you with a manual that explains in plain language what is required of the landlord when collecting and handling the security deposit.  Be advised laws can change. We are not offering legal advice.  We advise that you consult an attorney to learn whether the particulars in collecting and handling security deposits in your local area have in fact changed.  Section 8 Housing is only one quick example of how highly regulated the collecting and handling of security deposits can be.  As any Section 8 Landlord will tell you, each region may have its own distinct policies as to how much you can collect and when you can collect it. The landlord should stay informed.  

So how much security do you need? Can you request any amount? The simple answer is no.  Most state jurisdictions as well as local jurisdictions have placed a maximum on the amount of security you can require.  We have created for your convenience a chart setting forth the maximum amount you can demand depending on where you rent.  Click here for Tenancy Rues and Information. From the chart, you can easily learn that some states do not have a maximum policy in place.  In such cases, the landlord may charge whatever she pleases.  But that does not mean that the landlord will actually get whatever she wants.  Renting space is a business after all governed by the laws of supply and demand.  

As with all viable businesses, there is competition.  So the landlord must make a reasonable demand based upon the economics of his area when setting the amount of the security deposit.  Otherwise, no tenant would rent. That much is obvious.  Less obvious is that just because your jurisdiction does not have a maximum policy does not mean that the Judge, when deciding your claim to keep the security deposit, could find that the amount you demanded as your security is too extreme and so is unenforceable "under the circumstances." Understand this scenario is unlikely but possible.  

How should I handling the security deposit?


Are you keeping your security deposit in an interest bearing account? The trend is growing where states are requiring that Landlords pay interest on the security deposits he collects.  The laws so requiring can be rather complicated. The interest rate can vary on a number of factors:  whether the landlord owns more the 6 units or whether the building has more the 10 units etc.  We have demystified matters by creating a clear and easy to read chart that describes what your state requires.  Click here for Tenancy Rues and Information. States are regulating security deposits more closely. Remember these funds do not belong to the landlord until and unless the landlord can make a valid claim to the funds after the tenancy is over.  Until that time, the landlord is holding the security deposit on behalf of the tenant.

Can the landlord keep the security deposit under his mattress?


Renting space to tenants is a business. Treat it like one. If you are a landlord, you should open a separate bank account for landlord related expenses and deposits.  When the tenant pays rent, the landlord should deposit those funds into the landlord's operating business account and make the necessary withdraws to operate his property management business. Do not use your personal bank account.

But should the landlord deposit the security deposit in his operating business account? 


No. The landlord should deposit the security deposit into a separate bank account that is federally insured and located in the same state as the rented space.  Routinely following this simple practice will make sure you are in compliance with the regulations in all 50 states.  It also makes income tax preparation easier.  More important, the IRS cannot accuse you of mishandling funds.  Never the less, you can completely disregard this simple practice provided your state does not require that you follow this or some other practice.  To know where to maintain the security deposit, you should refer to our chart.  Click here for Tenancy Rues and Information

Can I ever increase the security deposit beyond the maximum?


Another business decision that you will need to make or at least consider is whether you should increase the security deposit beyond the statutory maximum. Can I do this, you ask?  It depends on the jurisdiction.  Some jurisdictions allow the landlord to demand "additional security" under certain circumstances. Some jurisdictions permit additional security, which in certain jurisdictions may be non-refundable, in the event the tenant wants a pet.   You may also demand additional security if the tenant has introduced something that would cause a hazard or potential risk. If you have screened your tenant and find that the tenant has a poor credit score, you may, in certain states, increase the amount of security demanded.  You may even require additional security if the tenant wants a waterbed. In our Lease Agreement Kit, we provide for such contingencies.  

The landlord should carefully consider the reasons for the increase. The landlord could face in seeking additional security a retaliation or discrimination claim. We take this issue up in greater detail in our Discrimination and Retaliation section. We will only briefly cover this intensely litigated area of landlord-tenant law and federal law.  We can illustrate this concept with "Tommy the Tenant" and "Larry the Landlord." Lets say Tommy complained to the local housing authority about his living quarters.  The housing authority agreed with Tommy and fined Larry forcing him to make certain improvements and/or repairs to Tommy's Unit.  Larry is mad at Tommy for complaining to the housing authority.  So Larry decides to "get back" at Tommy by increasing the amount of his security deposit.  Can Larry legally do this?  No.  Larry is "retaliating" against Tommy's whistle-blowing activities.  The landlord may increase the security deposit but it has to be based upon some objective criterion (e.g., tenant added an occupant and the like).  The landlord must also be consistent when seeking to increase the security deposit.  If the landlord increases Tommy's security deposit, he must also increase Tammy's security deposit for the same reasons and if under similar circumstances.  

What if you no longer want to be a landlord?


You may want to own the rental property forever. But you may get an offer that you cannot refuse.  What happens to the security deposit when you sell?  If permitted in the written lease agreement, as ours does, the landlord when transferring the real property can assign the lease agreement to the new owner.  The landlord should not forget however to also assign the security deposit at the time of transfer to the new owner.

We welcome questions. If you have any questions, please contact us.

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