Not all deposits are created equal. The most common deposit is the security deposit, but holding deposits have a place to assist both tenants and landlords. The key to requiring and paying a deposit is to know what can and can’t be done with a deposit. Here a few tips in navigating the confusing world of deposits.
Security Deposits
To begin with, a note about what a security deposit is. A security deposit is a certain amount of money, paid by the tenant, and held in the event the rental is damaged during the course of renting. The security deposit is separate from “last month's rent.” Both are held as a liabilities, but the landlord or property manager is required in most states to keep the deposit separate than rents. In fact in most states landlords are required to pay the tenant interest on the money held. When the tenant moves out at the end of the lease, the security deposit is to cover any costs above and beyond “normal wear and tear” or the money is supposed to be returned to the tenant.
- Snap a photo. Your phone is with you constantly and applications like TenantCloud allow you to store photos for the unit prior to a tenant moving in. This will only take you a few minutes, but save you countless hours and costs in disputes, in and out of court, later.
- Keep a record. Maintain a record of the deposit amount, who paid the deposit, when they paid the deposit. Use a proper rental accounting software to make this easy.
- Security Deposit Return Letter. Each state has laws which determines the time before deposits must be returned or notice of the use of deposit must be given. Typically the time period ranges from 14 days to 60 days. Many landlords make the mistake of having real reasons to use the deposit towards fixing the unit, but don’t send the proper notice and explain how the deposit was used and therefore end up having to refund the full deposit (often time even more).
Holding Deposits
A holding deposit is a different type of deposit that is designed to allow a tenant to secure the ability to rent a unit in the future. If that potential tenant decides not to rent then the deposit is non-refundable to a point. Many landlords make the mistake of taking a security deposit and first month's rent to hold a unit for a potential tenant. In this case, in most states the first months rent and deposit would be eligible for full refund while you are still without a tenant. So, you hold the rental for 3 weeks and then the potential tenant tells you they found something else. No amount of frustration can help you recoup the loss over the 3 weeks, because the tenant is most likely entitled to a full refund of the rent and deposit. A holding deposit must be specified as a holding deposit.
- List it as a Holding Deposit. The holding deposit is easy to apply towards the security deposit, but in the event the potential tenant doesn’t rent - the holding deposit helps for the time period in which the property was held. The holding deposit can also be used during the time a background check and review of the potential tenant’s application is reviewed. The basic rule for claiming holding deposit funds is the costs must bear a reasonable relation to the landlord's costs.
- Track your costs. In most states marketing costs, partial rent and other such related costs to renting the unit can be drawn from the holding deposit, but your records must reflect such costs. Using a rental accounting software makes this easy and free.
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