Any investor who owns rental income property, and thus,
rents to tenants, has to deal with security deposits. It seemed like a good
idea, therefore, to discuss at least five issues that you may want to address
about security deposits in your next rental agreement.
The amount of the deposit
When the deposit is payable
What rate of interest, if any, will be paid on the deposit
What conditions warrant when tenants will forfeit all or
part of their deposit
When the deposit will be refunded if tenants satisfy all
terms of the lease
These important issues must clearly be spelled out to
tenants your rental agreement. The last thing you want is a dispute that could
lead to unnecessary legal action with a tenant. To eliminate the possibility,
just craft a security deposit- free living policy
with every issue openly addressed.
Okay, let's look.
Amount of the Deposit
- Many real estate investors prefer high security deposits along with first and
last month's rent. The idea being that renting to tenants with a substantial
financial capability is preferred. You may find, however, that your tenant
segment doesn't (or can't) meet this requirement. Therefore, you might want to
see what other property owners in your area are doing, and tailor your security
deposit policy accordingly.
When the Deposit is
Payable - Real estate tech investors
usually prefer to make the deposit payable in advance. It's commonly accepted
that you would just be asking for trouble if you allow tenants to pay their
deposit piecemeal over several months. The popular notion is that it's always
best to collect the deposit up front, before the tenants move into the unit.
Interest on the
Deposit - Though some local and state laws require owners to pay interest
to their tenants for security deposits, some landlords pay interest to their
tenants even if the law doesn't require it. It might not be a big issue when
interest rates are low, but it can otherwise comfort tenants who have to pay
larger deposits.
Forfeiture of the
Deposit - The important thing here is to make sure your tenants understand
your deposit forfeiture policy before they take possession of your unit, and
likewise, perform a thorough property walkthrough inspection with your tenants
as soon as they completely vacate the unit.
There are several ways real estate investors handle deposit
forfeitures. Some owners develop a schedule of costs with a clear-cut amount
per correction, such as broken windows at $30, wall holes at $60, dirty
appliances at $25, and general cleaning at $125. Other owners simply levy actual
costs after the remedial work has been performed. And some more stern owners
try to keep the full security deposit as liquidated damages even when the
actual damages fall substantially below the amount of the security deposit,
though I don't recommend this policy.
Regardless of which approach you use, be sure to conduct a
final walk-through as soon as possible (never let too many days pass between
the date tenants move out and the date you inspect). Always perform this final
inspection with the tenants present, and be sure to have your inspection sheet
with you (the one prepared when the tenants moved into the property) so you can
compare the property item by item.
One final thought about forfeitures. When signing the rental
agreement, tenants should understand that the security deposit does not limit
their liability for rent or damages. If their actual damages exceed the
deposit, they must pay the higher amount.
Return of the Deposit
- It's best for your image that you return security deposits with interest
back to the tenants as soon as you know the correct amount; perhaps at the end
of the final walk-through. Any needless delay returning deposits simply sours
tenant relations and may subject you to legal penalties.
No security deposit, security depositof course, regardless
how high the amount or how stern the policy, is a safeguard against bad
tenants. With any investment real estate ownership, unfortunately landlords are
sometimes going to rent to a deadbeat tenant with little regard for the
investor's property. It happens. What better reason, therefore, for you to
understand what might constitute a good security deposit policy and begin to
implement it.
Here's to your real estate investing success for more
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