The Fundamentals of Security Deposit

Understanding the concept and its significance

Security deposit is certain amount of money collected from the tenant along with the initial month’s rent and is liable to be refunded at the end of contract.

Security deposit protects the landlord from the excesses committed by the tenants on his property, amounting to willful or inadvertent destruction of property and denying paying rent. The landlord can use a part or entire deposit to offset such expenses.

How much you should demand?

Security deposit collection has been accorded legal approval across USA. The quantum of deposit is dependent on the rental property’s location.

Certain states like Illinois have imposed no bar on the maximum value of deposit, whereas other states have stipulated the deposit in the range of 1 to 3 months’ rent. You should carefully understand the rules applicable for a particular state and also crosscheck with the county or city to learn about limitations imposed by them.

The validity of maximum amount charged for a unit should be gauged by surveying the local rental market to get a fair idea of the deposit being charged for comparable units by other landlords. If you charge in excess of the custom deposit, you may face the wrath of potential renters. In the event of your vacancy sitting in the market for additional time period, you may lose significantly on account of the vacancy costs being born without any monetary return.

Deciding the appropriate time to collect deposit

You should extract the entire deposit amount from the tenant before allowing him to move in. If a tenant expresses his inability to pay the entire sum upfront, you should defer his moving in until he is willing to deposit the entire sum or you should look for other potential renters ready to make the payment.

If you act otherwise, you are most likely not going to recover the deposit in entirely through the renting period. This makes you financially vulnerable to allay the damages caused by tenant or if rents are stopped midway.

How to keep the deposit?

Rules vary by state. Some states offer relaxation to the landlord regarding the mode of storage of deposit. Certain states mandate landlords to keep aside the entire deposit in a discrete interest bearing account. Some states stipulates landlords to intimate tenants through written notice within a month of moving in regarding the bank where the deposit is secured and the interest rates. You may also be legally required to annually inform the tenant about the interest accrued on the security deposit held in bank.

When you should return the deposit?

The specific time of returning the deposit varies from state to state. Some states legally require the landlord to return the amount within 15 days of lease termination, whereas others may provide one month’s time. The same law applies for landlords who wish to notify tenants why the deposit was not returned.

Purpose of security deposit

The deposit serves as insurance for landlords. It comes to their protection in the event of any clause of the lease contract being violated by the tenant. You can have recourse to the courts to secure a judgment in your favor in the event of the tenant failing to pay the rent. But in most cases, the long drawn process usually has the landlord at the loser’s end. The deposit offers some cushion to landlords to recover the lost money.

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