Some landlords have stopped collecting security deposits. Is this a good idea? What would make a landlord forgo the security deposit, anyway? There are three solid reasons why you might not want to collect this money. Let’s explore them.
What Is a Security Deposit?
A security deposit is a sum of money a renter will pay the landlord before moving into a rental home. This money is held by the landlord, who will return it to the renter at the end of the lease, minus any money deducted for damages beyond normal wear and tear. State law determines how the money is to be kept and when it must be returned.
However, unscrupulous landlords might try to keep the security deposit, thinking it’s a windfall for them. It’s this type of landlord that makes security deposit laws necessary. The problem is that sometimes the state laws and regulations governing security deposits can be overly complex or easily misunderstood.
That brings us to the three reasons landlords might not want to collect a security deposit.
1. Security Deposit Laws Can Be Complicated and Restrictive
Every state, and sometimes jurisdiction, has laws pertaining to the security deposit. Most states have straightforward laws, such as this: Landlords must return the security deposit to the tenant within 30 days after the lease ends. Landlords must give a written explanation and itemize any money withheld. Check your state law since these laws vary.
Chicago, for example, is stringent when it comes to security deposits. Here are some laws Chicago landlords must follow:
- Landlords must place the security deposit in a federally insured interest-bearing account in an Illinois bank. This account must be a separate account, just for the security deposit.
- The landlord must tell the tenant which bank holds the security deposit.
- If the tenant paid first month’s rent and security deposit as one check or as one electronic funds transfer, the landlord needs to transfer the security deposit portion to the separate security deposit account within five business days.
- Landlord must provide tenant with a signed receipt at the time of receiving the security deposit. The receipt must include the date, amount, name of person receiving the deposit, and a description of the rental unit.
- Landlord must pay tenant any interest earned within 30 days of a 12-month term.
- The security deposit must be returned within 45 days of move out.
- If the landlord will withhold money, they must provide an itemized statement of damages and the estimated or actual cost of repair within 30 days of move out.
Seattle also has strict security deposit laws for landlords.
- Landlords must return the security deposit within 21 days of move out or send an itemized list in writing for any withholding within 21 days.
- If a tenant can’t pay the full security deposit at move-in time, landlords must allow payment to be in installments.
Many landlords, rather than risk a tenant lawsuit for possible noncompliance, are simply not requiring a security deposit.
2. Security Deposit Laws Could Cost You Money
Using Chicago as an example, if landlords don’t follow the very specific laws, the landlord must pay the tenant two times the security deposit in addition to the security deposit itself. And if a landlord loses a claim filed by the tenant, the landlord must pay the tenant’s attorney fees and court costs.
Some states are also strict with landlords who do not follow security deposit laws to the letter. California, for example, also awards tenants two times the security deposit in addition to the security deposit if the court finds the landlord acted in bad faith. If you plan on collecting security deposits from your tenants, make sure you read and understand the laws in your state, or it could cost you.
3. The Cost Is Burdensome to Tenants
It can be difficult for tenants to come up with first month’s rent plus security deposit, particularly in high rent areas. If people can’t afford to move into your rental, you could have a difficult time renting it out.
Renters ought to be able to come up with first month’s rent. If they can’t, then they probably won’t be able to pay the rent each month. But adding a security deposit that’s equal to first month’s rent upfront could be tough on some people, particularly if there are other fees involved such as pet fees, utility deposits, and moving expenses.
If you’re finding most people are having trouble coming up with first month’s rent plus security deposit, you might not want to collect a security deposit.
Landlords need protection when they rent out property, and that’s the reason for the security deposit. But some landlords collect a move-in fee instead.
You may say this is playing semantics—whether you call it a “security deposit” or a “move-in fee,” you’re still collecting money. But there are differences between the two. You should understand what they are so you can decide whether collecting a security deposit or a move-in fee better suits your situation.
What Is a Move-In Fee?
A move-in fee is a non-refundable fee designed to cover the cost of cleaning the rental unit, painting, and making minor touch-ups to a rental. Many landlords who don't collect a security deposit might collect a move-in fee instead because it typically isn't subject to as many regulations as a security deposit. The reason being that the move-in fee isn't returned to the tenant at move-out time. However, it's important to note that a move-in fee is usually much less than a security deposit. Most landlords charge 40 or 50 percent of the rent.
Security Deposit vs. Move-In Fee
So, which should you collect? If you live in a jurisdiction where the security deposit laws are complicated and the penalties strict, you might want to consider charging a move-in fee, dropping the security deposit altogether. But if you live in a state with straightforward security deposit laws, you’re probably better off collecting the security deposit. A security deposit provides financial protection in the case of property damage or unpaid rent. It can also serve as an incentive for your tenants to take care of the rental home and fulfill their lease agreement.
On the other hand, a move-in fee is typically non-refundable and is used to cover administrative costs such as cleaning and key replacement. Landlords can choose to charge any amount for a move-in fee, as there are no specific regulations governing it. However, it's important for landlords to clearly state in the rental agreement whether the fee is refundable or not.
What About Collecting First and Last Month’s Rent?
Some landlords collect first and last month’s rent instead of a security deposit. That can prevent you from having to decipher complicated security deposit laws. But doing so means you are protected only from a tenant who skips out on paying a month’s rent. You would have to pay for any damages out of your own pocket.
Bottom line
It’s generally a best practice to collect first month’s rent plus a security deposit. But depending on your situation, you might want to do things differently. Once you determine what fees you want to collect, you'll want to start tracking your income and expenses. Luckily, Apartments.com has a great solution. Our expense tracking platform helps you summarize rental expenses by property and tax category. From there, you can easily export them to CSV or PDF formats to make doing your taxes a breeze. Unlike our competitors, there’s no need to go off-site to a third party for required forms. With Apartments.com, you can download the required tax filing forms directly from your account, and they are backed up for seven years.
The information provided in this article is for educational purposes only. If you have questions related to your rental property and the laws in your state, contact your real estate attorney.
