Everything You Need to Know About Security Deposits

You bought investment property, fixed it up to be market ready, posted an ad, screened tenants, and now you’re ready to sign a tenant to a lease. Congratulations! Now that you’ve got almost everything sorted out, it’s time to collect the security deposit from your prospective renter. If you haven’t gotten everything in line for your security deposits, though, it’s not too late. Not sure where to start? Follow this guide to learn everything you need to know about security deposits, from how much to charge to how to return them (or keep them) and everything in between.

How Much Should You Charge?

Unfurnished apartments in Chicago—as well as in most other cities and states—have a set limit for security deposits that cannot exceed the equivalent of two months’ rent (for furnished apartments, the limit is three times’ the monthly rent). For instance, if the rent is $1,500 per month, your security deposit cannot exceed $3,000; the payment due upon move-in would be the first month’s rent plus the security deposit. So, how much should you charge?

It’s advisable to charge around the equivalent to one month’s rent as the security deposit. This amount can cover a reasonable amount of damage should you need to do any repairs once the tenant moves out, and it can also discourage and weed out tenants who may be stretching their budget and savings to live in your property. One month’s rent is usually a manageable amount for most tenants, and it’s a very common amount for landlords to charge, so there won’t be any “sticker shock” with that rate. If you’re worried about turning some tenants off by charging a security deposit, you can consider charging a non-refundable fee instead. This is becoming more and more common, and it’s up to you to decide which is the best option for your properties.

When you receive a deposit from a tenant, be sure to issue a receipt including the date of payment, and keep a copy for your own records. When dealing with investment properties, the best thing you can do is keep detailed records and accurate books.

Where and How to Store Security Deposits

In most states, it’s required by law to keep your security deposits in separate bank accounts. Even if it’s not required by law where your properties are, it’s a good idea to keep deposits separate for a number of reasons:

  • They’re easier to keep track of when they’re not sharing an account with standard rent income.
  • It’s easier to manage interest earned; some states allow landlords to keep accrued interest on security deposits, while other states require anything earned plus the initial deposit back to the tenant at the end of the lease. In separate accounts, it’s far easier to track how much interest is earned on a deposit. Maintaining separate bank accounts for each property you own is advisable for optimal organization. You can have a master rental operations checking account, but security deposits for each property should be kept in separate, individual accounts (ideally also checking accounts, so that you can quickly pay them back or use them for repairs at the end of the lease).
  • It prevents accidentally spending the security deposit on maintenance or other expenses. If you do this and find yourself lacking the deposit at the end of the lease, this can be big trouble. That leads us to the next point–what you can use the deposit for.

What Can You Use the Security Deposit For?

Trick question! You can’t use the security deposit for any of your expenses, and it can only be used to cover the tenant’s last month of rent if you agree to those terms. Otherwise, it has to stay in its account, untouched, until the lease is up. Then, you can decide whether to give back the entire deposit, keep a portion of it for repairs, or keep the entire deposit (for major repairs, unpaid rent, etc.).

What to Do If You Sell the Property While Tenants’ Leases Are Still Active

There may come a time when you want to sell your property while existing leases are still in effect. In this event, you have two options: you can return the security deposit to the tenant at the time of sale, or you can transfer it to the new owner. You can’t keep the deposit (you’d think this would be common knowledge, but it’s always good to cover all the bases!). If, for whatever reason, an owner does walk off with the deposits when selling the property, the new owner cannot demand a second deposit from the tenants—the new owner will have to come up with that money on their own. But we don’t need to worry about that, do we? You know you can’t keep the deposit. Let’s move on!

The Lease Is Up: Now What?

When your tenant’s lease is up, there’s a set time frame you have to return the deposit. Since you kept the deposit in it’s own account (you kept the deposit in it’s own account, right?) returning it or keeping it is a pretty easy endeavor. If you’re returning the entire deposit (the tenant screening process worked!), you simply write your tenant a check for the whole amount (plus the interest, if applicable), along with a receipt, and you’re all done. This should be done within 14 to 60 days of the tenant’s moving out, but check your state’s laws on when security deposits need to be returned to be safe. Be sure to date the receipt—a simple mistake of omitting the date can cause a lot of problems, and can cost you money if a tenant later claims you didn’t pay their deposit back. Without a date on the receipt, you don’t have adequate proof of giving the deposit back, so we can’t stress it enough—you need to date the receipt.

If you’re keeping any of the deposit, it’s best to give your tenant an itemized list of charges as well as a receipt for the amount issued. You can’t keep any of the deposit to cover normal wear and tear, but you can keep part of the deposit for repairs or extensive cleaning.  

If you’re keeping the entire deposit, it’s beneficial to notify the tenant as such as well as provide them with an itemized list of expenses that were covered with the deposit. All of this paperwork should be dated, and it’s important to notify the tenant of this in a timely manner. Sometimes, tenants will try to fight your keeping of the deposit, and that’s where detailed documentation of the apartment’s condition upon move-in and move-out as well as any repairs or maintenance done will come in handy. You can fight the tenant for what’s rightly yours, and provided your reasons for keeping the deposit are reasonable, you’ll be ready to re-rent the apartment in no time.

 

You Don’t Have to Do Everything On Your Own

An important note about all of this is that when it comes to managing security deposits or any other part of the property ownership or landlord responsibilities, you don’t have to do everything by yourself. In fact, if you are doing everything yourself, it can be easy to miss certain details or get so bogged down by busywork that you aren’t able to do what you really want to be doing. You didn’t get involved with investment properties so that you could screen tenants and deal with writing up maintenance checklists after leases end—you got into investment property to, naturally, see a return on that investment.

Here at Lofty, we understand that your time is valuable, and we think you should be enjoying owning investment property, not spending all your time dealing with leases, security deposits, and other paperwork. We work hard to make sure our clients and landlords have an easy time with their investment properties, and we do so by taking care of every aspect of property management, from advertising your apartments in Chicago to screening tenants, scheduling maintenance and repairs, collecting rent and distributing security deposits, and so much more. With the help of a property management company, you can spend your time how you want to spend it—not doing work for your properties.

To learn more about how Lofty can help you start living the life you deserve, contact Lofty’s managing broker Anthony Zammitt to chat!

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