As many first-time homebuyers get priced out of the housing market, rental numbers have soared. Owners of rental properties must protect their investments. To ensure tenants leave properties in the condition in which they moved in, property owners include a security deposit into the rental fees.
Security deposits get paid before the renter takes possession of the unit. The money protects the owner if the renter moves out before the lease ends, causes damage, or requires significant restoration beyond normal usage.
If you're a landlord, you need to understand how security deposits work. Luckily, this guide covers the key things to remember.
Security Deposits: How Much to Charge?
Each state has its rules regarding security deposits for rental properties. The standard practice is that the deposit equals one month's rent. When deciding the amount to charge potential tenants, remember that you cannot use discriminatory practices.
For example, in California, security deposits can double or triple the amount of the monthly rent, based on whether it's furnished or not.
There are different regulations governing residential and commercial properties. Commercial properties do not have amount restrictions.
Return of Security Deposits
Tenants who leave in good standing will receive all or a portion of their security deposit at the end of the lease agreement. It's important to understand that when becoming a landlord, rental deposits are not free money.
At the end of the lease, you and the tenant need to schedule a walk-through. This step is where you document the condition of the unit and review any outstanding debts with the tenant present.
A valuable landlord tip is to hold deposits in an escrow account since the expectation is that the money will go back to the tenant at some point. Smart property owners will place the money in interest-bearing accounts.
Security Deposit Disputes
One of the most common disputes concerning rental deposits centers around rentals with multiple tenants on the lease. It's crucial to document who paid the security deposit. The information will come in handy when the lease ends or if that person moves out early.
Another issue when a tenant breaks the lease is whether the security deposit gets forfeited. Ensure your lease agreement covers what can lead to a deposit forfeiture.
A former tenant can sue in small claims court if the landlord refuses to return the deposit at the end of the lease. If you believe the tenant has forfeited the right to get back the deposit, you'll need to specify, in writing, why not. Plus, you'll need documented proof.
Leave Deposit Disputes to the Professionals
Hiring a property management firm is one way to get around disputes about security deposits. These companies can handle every aspect of the rental process, giving you more time to do the things you love.
The Home River Group is here to support property investors and landlords in Southern California. Visit our property management page today to receive a free rental analysis of your property.