As a landlord, you often have to make decisions on a case-by-case basis. One such decision is how much the security deposit should be on your rental unit. Security deposits are usually equal to a month or two of rent. However, multiple factors go into how much yours ought to be. Read on to learn more about how to determine an amount for your security deposit.
How to determine how much a security deposit should be
Many landlords wonder how much security deposits should be. The truth is there is no universally correct answer to this question, as many different factors help determine what amount is right for you to charge. However, in an effort to make the process easier, we've listed three factors that will help you make a decision.
1. Check state and local laws
Like many different aspects of being a landlord, security deposits are sometimes regulated by law. Right now, all 50 states have statutes regulating the collection of security deposits, and over half of them include laws limiting the amount that can be collected. With that in mind, check with your state to ensure you're complying with any relevant laws and regulations.
It may be worth checking in with your municipality as well. Though local laws governing the collection of security deposits are rare, they do exist, and it's better to know about them.
2.Figure in the monthly rent
Usually, the amount you'll charge for a security deposit is tied to the amount you charge in rent. Typically, this amount is equal to a certain number of months' worth of rent, such as one or two months. Notably, state laws, if applicable, typically limit the security deposit to a certain number of months' rent as well.
The higher the monthly rent is, the more you can charge in a security deposit. For example, while you might charge one month's rent for a one-bedroom apartment, for a three-bedroom apartment, it may be worth trying to collect two months of rent.
3. Scope out the competition
Many landlords try to keep their security deposit amounts on par with what other landlords in the area are charging. If you are charging significantly more than your competitors, you may find it hard to rent out your unit.
For example, if the prospective tenant is choosing between your unit and another similar rental unit, the tenant may end up going with the unit that comes with the least amount of upfront cost.
Setting prices for other rental deposits
Depending on your tenant's unique circumstances, you may want to charge additional deposits on top of the security deposit. Many landlords also charge deposits for pets and for any tenant improvements to the unit, often known as move-in fees.
Setting these fees is a lot like setting your security deposit fee. Check your state's laws on the issue. Some states allow for pet deposits while others allow for pet fees or pet rent. While these three names may sound similar, they're all slightly different, so make sure you know what's allowed in your state. In California, for example, pet deposits of any kind are not allowed, and landlords can only collect security deposits.
Also, check out the competition. Typically a supplemental deposit like a pet deposit falls somewhere between $100 and $500. Notably, a recent study from Petfinder found the typical pet deposit is between 40% and 85% of an apartment's rent payment.
When is it acceptable to keep a security deposit?
Now that you have a better idea of what you can charge in terms of deposit money, the next thing to talk about is when it's acceptable to keep a security deposit. Typically, there are five occasions when it is acceptable to keep the entire security deposit, or at least a portion of it:
1. Damage to the property
Damage to the property is probably the most common reason why landlords end up keeping a tenant's security deposit. Keep in mind, however, that "damage" is not the same as normal wear and tear. While things like faded paint or worn carpet would not be an acceptable reason for keeping the security deposit, larger issues like holes in the walls or scratches on the floor may give you cause.
2. Cleaning fee
If the rental unit requires substantial cleaning after the tenant moves out, that may be cause for keeping the deposit as well. Again, in this scenario, the necessary cleaning must go above and beyond what you would normally do in order to get the unit ready for your replacement tenant.
3. Nonpayment of rent
If the tenant does not pay rent, you should be well within your rights to keep the security deposit as compensation. However, you may want to make this clear in your lease agreement so there is no confusion.
4. Broken lease
Usually, if the tenant breaks the lease agreement and leaves the apartment early, you're also entitled to keep the security deposit. That said, different states have different laws regulating this, so make sure you're familiar with the laws in your state.
5. Unpaid bills
If there are unpaid utility bills owed by the tenant, you can deduct those costs from the security deposit, much like you would any cleaning fee.
Remediation steps if a tenant challenges your right to keep the deposit
As the landlord, you'll want to be sure you're prepared if your tenant decides to dispute your right to keep their security deposit. In particular, you'll want to provide an itemized list of how the funds from the deposit will be used. For example, you'll need to show whether they're going to pay back rent or a cleaning fee or to fix damages. In some states, you may be required to provide this list before any deductions are made.
If the tenant disagrees with your deductions, they may decide to file a claim in small claims court. In that case, depending on how much is owed, you'll have to decide if it's worth going to court rather than just giving the deposit back. If you're willing to go to court, make sure you have plenty of evidence on hand, including a copy of your lease agreement and photos of any damage to the unit.
The bottom line
Security deposits can be tricky for landlords to handle. It's absolutely crucial to make sure you're complying with any state and municipal laws on the subject. However, beyond that, most discussions around this topic are settled on a case-by-case basis, so it's important to use your best judgement when deciding how to handle setting or returning the security deposit.