Security deposits don’t protect the average landlord as well as they think.
In fact, for the typical landlord, the security deposit protects against only one thing: minor tenant-caused damage to the property.
What doesn’t it cover?
To begin with, it doesn’t cover major damage to the property. For example, the security deposit may cover re-carpeting one room, but what if the tenants ruin the carpet in every room?
Security deposits also don’t cover unpaid rent. Some states go so far as to specifically bar landlords from using the security deposit to cover unpaid rent. But even in states where landlords can use it for that purpose, one (or even two) month’s rent won’t cover all the losses when a landlord is forced to evict. The eviction process takes a minimum of around three months from start to finish, and that’s in a landlord-friendly state.
And then there’s “normal wear and tear.” The line between “tenant damage” and “normal wear and tear” is blurrier than a big foot photo. But guess who judges tend to side with when it comes time to classify what counts as “normal wear and tear?” (Hint: It’s not you.)
Before Signing a Lease
1. Tenant-proof your property.
Your goal: to make your property a defensible fortress against barbarian hordes. Make no mistake—your property will be assaulted, day in and day out.
Tenant-proofing is a lengthy discussion in itself but here are a couple quick tips:
- When your carpets reach the end of their lifespan, replace them with bamboo or faux-wood flooring.
- Use glossy paint on all walls (it’s easier to wipe clean).
- Install door stoppers behind every door.
- Put a shoe rack by the front door.
Perhaps most of all, you can use aggressive lease clauses and requirements to demand good behavior. But we’re getting ahead of ourselves.
2. Avoid any applicant who makes noises about not having the deposit.
Ever have an applicant say something like, “Well, I have $300 of the deposit now, but I won’t have the rest for another two weeks”?
It’s a big ol’ fluttering red flag.
What can you conclude about the person who said that? Either they only have $300 to their name, or they’re a liar.
Neither bodes well for them as a renter. Good renters are financially stable, and financially stable people have more than $300 to their name. They have an emergency fund, they have some savings (however modest), they have assets like stocks and bonds and mutual funds—OK, well, maybe that latter is too much to ask.
But you get the picture: stable renters, the kind who will pay on time, don’t live hand-to-mouth.
Besides, if they’re living hand-to-mouth and plan to give you all that extra money from their next paycheck, how will they be paying their other bills for the rest of the month?
3. Inspect applicants’ current home as the last step of tenant screening.
I mentioned this when I covered advanced tenant screening techniques, but it’s worth reiterating here.
If you don’t want to end up with more damage in your unit than the security deposit can cover, go see for yourself how this applicant treats their home.
Some people are clean, respectful, low-impact. They take pride in their homes.
Others are dirty, careless, and don’t give a second thought to how they treat their homes. Which type of person would you like to entrust with an asset worth hundreds of thousands of dollars?
Luckily, it’s easy to tell the difference. Just spend five minutes walking through their current home, and you’ll know how they’d treat your property.
The Lease Itself
4. Reclassify “normal wear and tear.”
Landlords have a certain amount of leeway in what they require of tenants in the lease agreement.
And sometimes, if they get extremely specific, they can shift some common forms of damage from “normal wear and tear” to “tenant damage.” Read: able to be deducted from the security deposit.
For example, at what point do drywall holes from wall hangings leave the realm of “normal wear and tear” and become damage? You can leave it to the judge to draw that line—or you can specify in the lease itself.
“Tenants may not use screws or nails larger than 12½ gauge to hang decorations on the wall. Tenants are further responsible for spackling and repainting (in the original paint: Duron DJT-355) all drywall holes created by wall hangings. Failure to do will result in a deduction from Tenant’s security deposit.”
Will that clause hold up in court? Maybe. You can’t know for sure what a judge will rule, if it comes to a hearing. But it’s much stronger than no clause at all and sets clear expectations for the tenant.
Conscientious tenants do everything they can to adhere to the lease agreement, which means that if you’ve screened your tenants well, they’ll honor your lease clauses.
5. Don’t specify uses for different types of deposit.
Know how some landlords list specific deposit types, like “pet deposit,” “cleaning deposit,” etc.?
Don’t do that.
Under the law, all refundable deposits fall under the same umbrella deposit limits. For example, in many states the collectable deposit limit is two months’ rent—all refundable deposits fall under that limit collectively.
So you’re not doing yourself any favors by separating out these deposit types. In fact, you’re creating self-imposed limits on what you can deduct.
Say you collect $250 specifically as a pet deposit, and there’s $500 in pet-related cleanup. The tenants could make a case that you can only deduct up to the $250 pet deposit for pet-related cleanup and not deduct money from the main “damage deposit” unless the pet cleanup can also be classified as “tenant damage.”
Charge one security deposit, and specify in your lease that it can be applied toward any damage, cleanup, unpaid bills, or other money owed upon move-out (within your state law’s limitations, of course).
Upon Lease Signing
6. Conduct a move-in inspection—and document it thoroughly.
If you do nothing else to protect your property using the tenant’s security deposit, do this.
Walk through the property with your new renter, and fill out a detailed move-in condition report. Mark every single pre-existing issue, however small. Initial each item, and have the tenant do the same. Sign it, date it, and keep the original.
Take many, many photos, with the timestamp function turned on to document the date and time. Save these photos in your digital file for the tenancy, alongside a scanned copy of the signed lease and move-in condition report.
One of the most common ways that tenants get out of having their security deposit dinged for damage is saying to the judge, “That was already like that when I moved in.”
Don’t let them pull that trick. Document exactly what the condition is at move-in, so you can deduct for any damage caused after that date.
7. Put the security deposit in a separate, interest-bearing account.
It’s worth noting that in many states, this is legally required of the landlord.
But even in states where it’s not, there are several reasons to do so. First, it prevents commingling of funds, for cleaner accounting. It also removes the temptation to spend the security deposit on other expenses.
And hey, you get to keep the interest if you’re not legally required to give it to the tenant!
8. Inspect regularly.
Want to make sure your tenants are treating your property with respect and adhering to your lease’s rules?
Schedule quarterly or semi-annual inspections.
Not only will you catch lease violations early, but it also sends a powerful message to your renters that you are paying attention and you take enforcing the lease seriously.
9. Address repairs immediately or risk losing the entire deposit.
Each state has a strict deadline for when landlords must either return the entire security deposit or provide a written accounting of all deductions. Failure to do so means forfeiting the right to deduct anything at all from the security deposit—and in many states even comes with financial penalties for the landlord!
That means landlords must move quickly to get quotes, make all the repairs, put together a written statement, and provide it to ex-tenants.
Really, landlords should be moving at lightning speed on turnover work anyway. Turnovers are a landlord’s biggest expense, and cutting turnover times should be a landlord’s number one priority.
10. How to Deduct Your Own Costs from Security Deposits
Do your own repairs? Or your own cleaning, when preparing a vacant unit to show to new prospects?
There’s nothing wrong with that—it’s a great way to save money. But how do you deduct these expenses ethically and legally from the tenant’s security deposit?
First, know what the market rate is for each type of work. Be able to back it up with real numbers: what comparable contractors or cleaners charge by the hour.
Next, keep detailed written records of exactly how many hours you spent on each task. Make these records as official as possible.
Finally, separate out charges for different types of work. You may be able to charge one hourly rate for higher-skill work (like repairing drywall damage) but a far lower rate for the time you spent cleaning.
If the tenants challenge you on your numbers, be prepared to show up in court with detailed records and evidence that your charges reflect market rates, for each type of work performed.
The Non-Sexy Essentials
Like everything else in landlording, maximizing the protection afforded by a security deposit is all about two things: prevention and having every requirement and record in writing. The overwhelming majority of this work takes place long before you ever go to deduct from the security deposit; it’s all about laying the groundwork in preventative measures and written documentation.
That may not be the sexy side of the landlord business, but it’s where landlords make or break their profits. It’s why we focus again and again on systematizing property management practices with our course students—the groundwork has to be laid months or years in advance for landlords to maximize their returns.
But when you follow best practices at each step of the way, you’ll find that not only fewer bumps appear in the road, but the few bumps you do hit don’t jostle your profits nearly as much.
Being a profitable landlord doesn’t just happen. It’s the result of careful execution and prevention, the non-sexy essentials.