Not sure whether to require security deposits or not on your rental property? Let us help you decide through this informative article. We’re weighing out the pros and cons of requiring a deposit from your tenants, so read on.
What is a security deposit?
A security deposit, also called a damage deposit, is a sum that is usually in a form of money that a tenant agrees to pay to a landlord before moving into a rental property. This protects the landlord in case there is damage to the property or breach of the lease. It can also be used to cover incidental costs such as repairing drywall after the tenant removes their hanging pictures and wall-mounted TV or to replace or resurface damaged flooring
In general, the security deposit amount is based on the monthly rent, where most landlords require at least one and a half month’s rent.
Benefits of a security deposit.
Though not legally required by the law, most landlords would prefer to collect security deposits. The reason is pretty simple – it’s in their best interest. Let us show you why.
- Tenants are more likely to take care of the property and be careful with their actions knowing they might not be able to receive the full amount of the security deposit back. Therefore, they’d do their best to ensure that they are complying to the terms of the lease.
- In an unfortunate event that the property has been damaged due to the negligence of the tenant, the landlord can simply deduct the cost of damages to the security deposit rather than filing a lawsuit, which can be expensive and stressful.
- Should the tenant stop paying his/her monthly rent, the landlord is still protected since he/she can simply consider the security deposit as a payment for the unpaid month and then decide on the tenant eviction.
Important things to remember about security deposits.
Include security deposit terms in your lease contract.
It’s very important that you include the terms of the security deposit in the lease agreement. Details to include are:
- Amount of the security deposit
- Where the money will be deposited
- Reasons or scenarios where you will have to deduct from the deposit.
- How and when you will be returning the security deposit
Provide a receipt for the deposit.
It’s important that you provide a receipt after the security deposit is collected for both parties’ interest. The receipt should include the amount of the deposit, the name, and address of the financial institution or bank where the deposit will be kept, as well as the annual interest rate that the money will earn.
You need to note though that the interest belongs to the tenant. So, you will have to turn over the entire amount including any interest accumulated to the tenant.
So should you collect a security deposit? You sure should!