4 Min Read

The Worst Mistakes You Can Make with Security Deposits

Remen Okoruwa
Remen Okoruwa Published : March 1, 2021

Being a successful landlord requires that you handle security deposits the right way. Mistakes with security deposit funds can seriously damage your reputation. However, making legal mistakes with security deposits can land you up in court if tenants sue you. Of course, one of the biggest mistakes to make is not requiring tenants to pay a security deposit in the first place.
Apart from rental income, screening tenants, and background checks, security deposits are essential in being a residential landlord.

In this article, you’ll find out the worst security deposit mistakes that landlords make regarding security deposits. Avoiding these blunders will save you time, money and ensure that you have a reputation as a successful landlord.

free-rent-collection-app-button

Why Are Security Deposits Necessary?

Security deposits are vital to protect landlords financially in the event of tenants causing rental property damage. Security deposits and the first month’s rent are usually the first payments tenants make before they move in. Although the law doesn’t require landlords to take security deposits, all states allow for security deposits.

When a tenant moves out, you have to return the security deposit—after all, this is the tenant’s money. However, suppose there is significant property damage or unpaid utility bills. In that case, landlords can hold back a portion of the deposit to cover losses. However, you must allow for reasonable wear and tear.

security deposits financial protection

The Top 8 Worst Security Deposit Mistakes

State laws govern how landlords handle security deposits. Some of the most common mistakes landlords make include charging too much, deducting too much from the deposit, or forgetting to include security deposits on the lease. Errors with security deposits can be costly.
So, to avoid sinking your residential landlord business due to security deposit errors, here is a list of eight things you must avoid.

Mistake #1: Charging too much

Most states have strict security deposit laws that you must abide by. One of these is how much you can charge for a security deposit. Depending on where you live, the security deposit may not exceed two months’ rent for unfurnished rental units and three months for furnished places.

Under landlord-tenant law and fair housing laws, it’s vital to treat everyone fairly. So, you couldn’t increase a security deposit because children will live there.

One tricky area is pet deposits. Most security deposit laws say that the security deposit is also for pet damage. Even if you have a “pet security deposit,” you usually still can’t go over the set limit for deposits.

Mistake #2: Not handling security deposits properly

Don’t make the mistake of viewing the security deposit as part of your liquid assets. Residential rental property laws sometimes stipulate that the security deposit should be held in a separate, interest-bearing bank account. When the tenant moves out, you must return the deposit along with any interest.

Remember that you are only holding the money in case something happens. The best rent collection apps, such as RentDrop, allows tenants to pay security deposits directly. You can then transfer the funds to a separate bank account for safekeeping.

Mistake #3: Not doing move in and move out inspections

Failing to document the property’s condition upon a move-in is a big mistake. If there is property damage when the tenant moves out, how are you going to prove this? Always do a walk-through with the tenant when they move in and when they move out. Document damage in writing and get the tenant to sign it also.

Mistake #4: Not putting everything down in writing

Make sure that your rental agreement contains all the relevant information on security deposits. This information should include the bank account where it’s held. You may also have to provide a yearly statement of the accrued interest.

It would be best if you also avoid any ambiguity when it comes to security deposits. For example, deposits must be returned, and the tenant expects that. However, fees or rent advance are different. So, if you have a “pet fee” in the lease, don’t call it a “pet deposit.”

Using a quality app for online rent collection is one of the best ways to keep a digital record of all transactions. Not only can you track rent payments and calculate late fees, but you can also easily manage all security deposits.

security deposit mistakes

Mistake #5: Not waiting until you receive money before handing over the keys

It’s common practice that tenants only pay rent and the security deposit after they sign the lease. However, depending on the payment method, you may need to wait before handing over the keys. If the check doesn’t clear, you’re then left without money and a problematic tenant.

Our top security deposit tip is to use an online payment method to collect security deposits. That way, you can see when the money clears. A direct ACH payment or debit card payment should show up almost instantly.

Mistake #6: Keeping too much of the security deposit

One security deposit gaffe that gets many landlords into legal bother is holding on to too much of the security deposit. There are several situations when this situation can happen.

Here are a few mistakes to avoid when returning security deposits:

  • The tenant breaks the lease: Holding all the security deposit if the tenant violates the lease agreement. You can only use the security deposit to cover the cost of unpaid rent and utilities and property unit damage.
  • Not itemizing damage: You need documented proof of the damage that the tenant has caused and the cost of repairs. Also, the damage can’t be anything that is classed as “normal wear and tear.” So, make sure and provide an itemized list with a breakdown of deductions.

Mistake #7 — Exceeding the time limit for refunds

You need to return the security deposit in full, or part of it, within a specified period. Most local landlord-tenant laws state that you have between 14 and 21 days to return the money. Within this time, you should also carry out the repairs to the property.

Mistake #8 — Thinking that a security deposit covers all damages

Another common mistake that rookie landlords make is to think the security deposit covers all damages. In most cases, your security equates to two months’ rent. But if the damage is extensive, you may have to sue the tenant to recover more costs. Also, security deposits don’t cover the cost of any eviction process.

Security Deposit Mistakes — In Conclusion

To successfully manage rental units, it’s crucial to avoid common mistakes landlords make. Make sure to include all precise details of security deposits in the lease. Also, ensure that your rental agreement terms are in line with fair housing laws and landlord-tenant laws.

Get into the habit of handling security deposits properly. You then will be able to run a lucrative residential landlord business.

Topics: security deposit, rent collection app, security deposit mistakes