5 Things Real Estate Investors Should Know About Security Deposits:

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 details visit our website here: fin tech