Security Deposits Uncovered

Krista:

Hello, hello. If you’re tuning in today, you are going to be learning about security deposits. This is a foundational part of landlording. Whether you’ve been in the game for 20 years or you are a first-time landlord like our friend Matt, this is a great topic to know like the back of your hand. So let’s go ahead and get started by just hyping up Samantha a little bit. Samantha is our landlord experience specialist and my brilliant co-host. Samantha, is there anything you’d like to say to the people?

Samantha:

Yeah, I am pumped to talk about security deposits. I was in multi-family property management for about a decade, so ranging from 250 units up to 1500 units. So I have collected, returned, and used up a lot of security deposits over my lifetime. So excited to get into it and talk to other landlords about it. Wonderful.

Krista:

I am Krista Reuther. I am your senior content marketing writer here at TurboTenant, which means I get to do this research for you. And let’s go ahead and jump in with the key facts to take away.

Samantha:

Yeah, so there’s a few things to keep in mind as we’re going over security deposits. The first is that the rules vary by state and by county. So we’re going to give kind of a broad overview of security deposits, but you definitely want to follow up on your specific location to make sure that you’re following the guidelines and laws. The next thing is that we recommend you use a dedicated security deposit bank account to keep finances separate, and we’ll go into that a little bit further. We also want to make sure that you’re going over expectations at the least signing and conduct regular inspections to nip damages in the bud. So again, promoting that positive landlord-tenant relationship and communication. And then also security deposit alternatives are more affordable in the short term for tenants, but there’s more to know before jumping in. So we’ve got some points on security deposit alternatives that we will cover. Absolutely.

Krista:

So starting us off here so we can tailor this presentation to you as much as possible, we have a quick poll. We’re looking to learn a little bit more about you, your experience, how many rentals you’re working with, and then we will try and get everything that you need in one fell swoop with this presentation. Of course, and you’re going to get tired of me saying it, we will remind you that, as Samantha said, your local landlord-tenant laws are going to influence what you need to do in terms of your individual processes, but we’ll be sure to highlight those spots where you need to be double checking.

Samantha:

And Jonathan did drop in the chat the link to the TurboTenant Landlord-Tenant Law Guide. So that is all 50 states. Click on the state that you have your rentals and you can get a good summary and overview of what’s happening in your state. Absolutely.

Krista:

That would be all about 15 more seconds to go through here. While we do, let’s thank Jonathan for hanging out in the chat. He is our boss. He deals with us with us every single day and he has all of the links to all of our content.

So if there’s something that you’re curious about, maybe you want to know more about wear and tear, which we’re going to go over in this presentation. We do have a blog about it and we can ask him very nicely to drop the link in the chat. I’m sure he will do it.

Samantha:

And if you want to know resources that aren’t related to security deposits, let’s say evictions or emotional support animals, we’ve got resources for that too. So you can let us know in the chat and Jonathan will help us out. Love it.

Krista:

All right. A great spread of portfolio sizes here. Love to see it. Okay. And a lot of folks who have come for their first webinar with us. Thank you for being here. And let’s see in terms of what people are charging for a security deposit. This is fascinating to me. So today is our second session of this webinar for the month. In our first session, we saw very similar results, although they more closely resembled a normal bell curve. If you’re familiar with statistics, that is the standard deviation curve. Is that particularly meaningful here?

It is to me. But what we’re seeing here today is actually more people charging less, which I think is fascinating. We’ll get into how you can price out your security deposit and what’s considered normal right now.

Okay. So as I’ve mentioned, security deposits are very important for landlords to understand. And there’s something that you really need to keep up on because laws and legislation are always shifting.

However, there are some fundamentals to nail and those should not change. For example, what is a security deposit? Well, if you’re really green, you might not know. But of course, this is something that a renter is going to pay when they are moving into your property. Very, very important. This security deposit is not actually your money while you’re holding it. Right. So you’re really acting as a shepherd of the money.

But that’s an important piece of framework to have as we move through this presentation. A security deposit can be used to cover damage and any kind of costs incurred by lease violations. So for example, if there’s nonpayment of rent, then the security deposit can be used to cover that. If there is a tenant breaking the lease early, you can use the security deposit to cover any kind of lost rent there. And it can also cover, of course, the actual damage that they cause.

We’ll go into damage a little bit later. But the other thing I want to point out is that a security deposit is different than a pet deposit or an apartment deposit. A pet deposit is something that you charge for, as you might have guessed by the name, a pet moving into the rental. This is not an emotional service animal, just any kind of pet like my cat, Abba. So when you move in, you are, excuse me, when your tenant moves in, you can go ahead and require them to pay a deposit for their pet specifically. Typically, this is a refundable charge that you will be able to pay back to them similar to a security deposit. However, what differs here is that the pet deposit can only be used for damages caused by the pet.

Again, it’s all in the name. As for an apartment deposit, that is really used to hold a unit. So it’s also typically refundable or goes to their other fees for moving in, whether that’s the first month’s rent, etc. But that is also something that usually gets handed back to the tenant and the laws around an apartment deposit are different, right? It isn’t actually, to my knowledge, as strictly watched as a security deposit.

So very important to know the differences. In terms of how much you can charge, this is one of those spots where you really need to know your local laws. So about half of the states actually limit security deposit amounts, and they also might have caps based on your local municipality as well. So be sure to check that out. If you need tips about how to find that information beyond the state pages that we’ve laid out, please let us know in the chat. I always love teaching people how to research. It’s one of my passions. So I’m happy to drop some of that knowledge on you.

However, the other half of the states, including Florida and Texas, don’t cap security deposits. So what does that mean? That means that you could basically charge what you’d like, but there are going to be pros and cons, depending on, you know, charging too little and charging too much. That’s why it’s really important to find a balance. I will say before we move on to that balancing, So, you can basically what I would recommend is having a set security deposit policy in place, you know, I expect to charge one month of rent, and then also have set stipulations for which you will consider different amounts of security deposit. For example, if somebody has a co-signer, because their credit score is too low, maybe you ask for a higher security deposit to make sure that everything is all good and on the up and up when they move out.

I’ve also heard people charging less of a security deposit for various factors. As long as you document it and it’s repeatable for anyone who is your tenant, that is a-okay. Of course, as always, it would not be okay for you to charge a different security deposit for someone based on a protected class. If you’re not sure what a protected class is or you’re not well versed in the seven protected classes, I highly recommend checking out our fair housing course.

We go through the broad strokes of the fair housing law and what you need to know in order to make sure you are staying compliant. Otherwise, you could risk a $16,000 fine for your first defense. If you don’t have that kind of money laying around, that is going to be a ding.

So bear that in mind. For now, let’s talk about finding that balance for a security deposit. So, when you’re figuring out what to charge, just keep in mind that if you charge too low of an amount, then you don’t have enough to really protect yourself at the end of the lease. So bear that in mind as you try and decide how much to actually charge. However, if you go on the other end and it’s too high, you’re going to discourage potential tenants who might be interested in your unit. Because if you put yourself in a tenant’s shoes, when they’re looking to move, they have to come up with usually the security deposit, first month’s rent, any kind of move-in fees, pet fees, or pet deposits as required. So it’s a lot of money to put up all at once. We’ll get into some of the ways that security deposit alternatives can help with that issue. But for now, just know that as you’re sussing out how much you would require as a deposit, you want to balance it pretty well so that you’re not on either end of this stick.

That might lead you to question what balance looks like, right? How much should you be charging? So first, of course, you’re going to go ahead and look at your laws.

I will say it until I’m blue in the face. It is really important for you to know what is required of you. You’ll also want to consider the rental price of your unit. Most typically, as we see here, landlords opt to charge between one and two months rent as their security deposit, even in states where it’s an uncapped amount that you can charge. That’s usually feasible for folks and gets people into the unit without boxing too many people out.

Right. You’ll also want to look at your property amenities. Let’s say you’ve put in brand new stainless steel in the kitchen. You might want to have a higher security deposit, especially if it’s going to be used and you want it to stay good and clean for, you know, its entire life. So again, take a look at what you’re offering in the unit to help you price out that security deposit. Lastly, you should know what your competition is charging.

So don’t be afraid to take a look at other listings in the area, see what the going rate is, and use that information to make a decision for yourself. Again, it’s all about that balance. So you don’t want to be charging the most on the block and you also don’t want to be charging the least. In terms of when to actually collect these fees. Most often it’s collected at move in.

So either before the lease is signed or when the lease is being signed. I would highly highly recommend that you collect this in full. So collect the security deposit in full because then you have it all there as you need it. Hopefully you won’t need it, but that’s a better practice than allowing any kind of partial payments. We did hear from someone in the last session who also collects last month’s rent at this time, and they allowed the tenant to pay the last month’s rent in portions.

That makes more sense in is less risky. So if you want to get creative, you certainly can but highly recommend collecting the security deposit in full. When you have that security deposit make sure that you’re providing the tenant a security deposit receipt. And you’ll also want to keep one for your books. Documentation is key. It’s your best friend as a landlord.

So this is the best practice that you should be implementing throughout all of your processes, but definitely here as well. If you don’t have a security deposit receipt. Good news. Since you’re attending live assuming that you are. Then you will receive this in the follow up email that we send after this session. So keep an eye on your inbox we will send it before the end of the week wraps up. If you don’t like the one that I made for you.

That’s okay. You will want to include the following information on your own. So first of course the tenant who paid include all of the tenants who are listed there right so if you’re getting a physical check for example or cashier’s check. If it only has one tenant name, I would list that one tenant. Samantha, I’m curious if you would do the same?

Samantha:

Yeah, if there’s only one tenant on the lease agreement, then that is the only tenant that needs to be listed. If you have multiple people on the lease agreement, I would recommend putting all names on that. As it relates to returning a security deposit renters are able to go together to a bank if they have both their names on one check to get that check cash, but just keeping it consistent with what’s on your lease agreement would be my recommendation.

Krista:

There we go. And you’ll also want to make sure you note down which property it’s for when they paid it, and then get them to sign it, you can sign it and have contact info listed there as well. Your state or locality might also require additional information including where the security deposit is actually stored and the bank information their contact info, etc. So again, be sure to check your local laws. And that’s what I’m going to do with this. All right. First I’m going to ask you some questions that I’ll pause and take some of your questions, but we have a poll here. Do you list the bank details, including its address where the security deposit is held in your lease, and do you return interest that accrues on a security deposit? Samantha what was your practice when you were in, oh let’s say North Carolina, or any of them. I’m going to start with the part set.

Samantha:

Yeah, so in North Carolina, South Carolina, and Colorado. My leases always stated where the deposit was held. I believe in North Carolina it was a requirement. And I used the National Apartment Association lease agreement when I was doing multiple family management. And so they have some things already built out there. But yes, I did always have that information available for the tenant. And it is again the tenant’s money that we’re returning to them. So I think that it’s important that we have that, that communication and that sort of transparency between the landlord and the tenant.

Krista:

Love it. All about that transparency and communication.

Samantha:

And I do have a couple questions that came in from our landlords. The first is asking how soon do you need to open a security deposit bank account. I’ve already had my tenant for two months. The first month rent went to the realtor and the security deposit came to me but I haven’t opened an account yet. Ooh, you know,

Krista:

That hadn’t come up much during my research but I would say the sooner the better, just so that it’s off your plate off your mind. Definitely one of those kind of set it and forget it situations in my opinion. What do you think Samantha.

Samantha:

Yeah, I would agree. And if you’re opening a security deposit account now to deposit those funds or if you’re moving the security deposit funds from a standard let’s say business operating expenses account into a security deposit specific account. So I think that you can help communicate that to the tenant and you can do it in an addendum.

If you want to have that signed and they have the acknowledgement or if you’re sending an email, just letting them know sort of the status of their deposit because again, it is their money that you’re going to be returning to them ideally at the end of the lease. So just communicating. You can’t over-communicate this information. So it’s always a good idea to just let the tenant know what’s going on.

Yeah. Let’s see here, John is saying we use TurboTenant and we take deposits via the app is received recommended in this instance as we have third-party verification. So yes on TurboTenant anytime there’s a payment submitted your renter will automatically receive an emailed receipt. They also have a history of the payment in their tenant portal and you can of course be that in the landlord portal.

That also works for offline payments. So if your tenant gives you a money order, for example, and you record that offline payment as a security deposit, we do automatically send the receipt. Now we do recommend that you also supplement that with the security deposit receipt, because the receipt that they’re receiving from us from the third party is acknowledging the amount paid and when it was paid and who paid it, but isn’t necessarily giving those additional details. So if you use that security deposit receipt to supplement it’s always a good idea again you can’t over-communicate this information to your tenant.

Well so. Okay, one more about bank accounts. If someone has multiple rentals, would you say all security deposits go into a single separate bank account or does each unit need to have their own bank account?

Krista:

Yeah, so what I saw when I was researching is that each unit should have its own security deposit account. We’ll get into accounts here pretty shortly, so thank you for the perfect segue, but it is important that you isolate those funds and don’t lose them accidentally. All right, so as I mentioned, things like, oh, look at that, the results. I forgot to tell you about these. Yeah, it looks like my friends here don’t include the bank details, which is fair.

I would say, like Samantha said, you can never over-communicate or say too much in this realm, so if you don’t include it currently, consider whether or not you’d like to add that to your lease the next time you roll around. And additionally, in terms of interest accruing, it looks like most folks are not putting the security deposits in interest-bearing accounts, fair enough. Although interestingly here, some folks are about 31% of you are putting them in interest-bearing accounts and keeping the interest. Again, whatever works for you, whatever follows the laws in your state or locality makes sense. I think there are arguments to be made on both sides for either action, but let’s talk through all of these different factors and how that might impact your process. So first and foremost, holding the security deposit. We’ve already been talking about different accounts, what you can do. It’s really important to know that some states are actually going to require you to keep the security deposit in a separate account or otherwise procure a security bond.

Again, that’s because you are really acting as a shepherd for this money. It’s not yours, so it’s important that you have it far and away from anywhere where you might accidentally dabble into it. Again, we’ll talk about this down the line, but there is a possibility that you could get sued if your tenant finds that you were using the security deposit or something gets fumbled there, so it really pays to know what you have to do before you get into that kind of situation. Other states might require an escrow-type account to protect the funds from creditors. So an escrow-type account in this case would mean that there’s a third party holding onto those funds. You are once again hands off, it’s over there.

Peace of mind, you don’t have to stress that you’re accidentally going to spend that on something that you should. And here again, we have linked out to our landlord-tenant laws. So when we send you this deck after the presentation, this is going to be an easy way for you to click in and get the information that you need. I would say it’s a perfect jumping-off point, but you still want to look up your county-specific laws because we are focusing on a state level on these pages. So in terms of the breakdown of where you have to return accrued interest versus not, let’s take a look at this map whipped up by our brilliant designer.

If you live in a state in well, let me take pause. If you have rentals in a state that is in orange, then yes, you are required to return accrued security deposit interest. However, that is not as cut and dry as it might seem. So for example, in Ohio landlords only have to put the deposit into an interest-bearing account if they’re charging more than one month’s rent according to PayRent.com. So that’s why it’s important to know your unique laws because there’s different stipulations that can come into play, whether that is the amount that you’re charging for the security deposit, the age of the tenant. There are some places where tenants that are 62 and older cannot be charged over a certain amount and different other factors that come into play. So don’t be afraid to do some research and make sure that you are following the law to the letter.

All right. So the question we always get about security deposits is when can you keep it? Of course, I’m going to say it again, check your laws. But by and large, you can keep a security deposit, any portion of it, for the following reasons, whether that’s nonpayment of rent, if there’s property damage that is outside or exceeding normal wear and tear, unpaid utilities or other bills, if there’s abandoned property that you have to pay to remove, cleaning costs, terminating the lease early, these are all reasons why you might have to keep some portion or all of the security deposit. However, you want to make sure that your lease very clearly outlines the situations in which you would keep any portion slash all of the security deposit to make sure that you don’t end up in a lawsuit situation. If you don’t have that information in your lease currently, I would highly, highly recommend that you write out a lease addendum and have that try and get that signed by your tenant. You can’t force them to sign it, but it is a good piece of information and by and large, especially when it comes to security deposits, many tenants recognize that as their money and they are more inclined to try and follow the rules to get that payment back.

That’s why communicating is so important here, because if you give them all the reasons and you’re saying, hey, I’m trying to let you know so that you can get all of your money back when you move out, they are more apt to listen and to follow the guidelines that you have set out. Anything to add here, Samantha?

Samantha:

Yeah, I just, again, just communicating. I see that they’re trying to keep up with the chat here and there’s some conversations about being over-communicating with your tenants and how that is a possibility.

I disagree. I think that you and your tenant are in this contract together. It is a living contract.

You are both agreeing to it. You are setting the expectations for your tenant, but also setting the expectations for yourself. So I think by really spending the time and bulking up and protecting yourself with the lease agreement is a way to have a positive experience for you and your tenant. At the end of your lease, ideally, you don’t take any of their security deposits. The rental is less than a great condition.

Your tenants have those funds to go to a new rental or to fund furnishing for another home. And so I think that if we’re on the same page and if we’re communicating, everybody will win. Yes, I firmly agree. All right.

Krista:

So another thing that we get asked about quite often is to talk about wear and tear and how that differs from tenant damage. So wear and tear is very specifically damage that’s expected.

Right? It usually takes longer to come about. Think about a carpet that has had so many feet walking over it day by day. Of course, it’s going to get dirty.

Of course, it’s going to get thin. You will have to replace it. And in those cases where it is normal wear and tear, things that are caused just simply by people using these items or what have you responsibly and as you would expect, then you as a landlord are responsible for taking care of those fixes, repairs, replacements, et cetera. However, damage that’s caused by something irresponsible, whether it’s intentional or not, that is going to go beyond wear and tear. We will go through a really fun example of that down the line.

But let’s take a look at how you can determine the difference. Oops, I’m so good at clicking. There we go. Here we go. Okay. Don’t worry.

I’m a professional. So when it comes to assessing property damage, one of the best things you can do is regularly put yourself in the unit. So in my opinion, that means conducting inspections every three to six months.

In from the security deposit so that the tenant has a chance to fix them. So for example, let’s say I have 30,000 posters of ABBA, the band that I wanna hang up in my room. If a landlord comes in and they see that I’ve used a hammer and a nail to do it, it’d be great if they told me, hey, I see that you’ve put up all of this wonderful art of an 80s band, that’s fun and fresh of you. But I didn’t say, I don’t like that you used a hammer and nail or even just that wasn’t in the lease agreement under the approved changes that you could make to the apartment. So when it comes time to move out, please make sure that you patch any holes and you paint the walls the original color because otherwise that could come out of your security deposit. That kind of communication would give me as a tenant the opportunity to make that fix, which saves the landlord a headache from having to do it or otherwise tacked on onto a list of changes they need a contractor to make.

And it preserves the relationship, it gives us something to work on. Also, as you’re walking through and conducting these various inspections at regular intervals and you see something that’s maybe on the borderline, maybe it’s the carpet again, looking kind of raggedy, you’ll wanna consider how long the tenant has resided there and what the condition of the carpet was before they moved in. If it’s old carpet that you’ve had for 10 years and they’ve only been there for three months, it’s most likely a wear and tear issue from other tenants, other feet walking through, which would mean it’s up to you to replace it.

If they’ve been in there for three months and the carpet was new when they moved in and now it’s just caked with all sorts of scary things, that is excessive and in that case, you would tell them to clean it or otherwise point back to your lease agreement to know how to handle the situation. Lastly here, of course, make sure that you have pictures of the unit and all amenities before they move in. You’ll also wanna use things like a move in, move out checklist. Samantha, you have a really good thought on this, specifically the move out checklist. Can you share what you used to do with that?

Samantha:

Yeah, so the move-in, move-out checklist, really just bulk it up so that it includes everything. There is a template in TurboTenet, which breaks it down by room and it’s fully customizable so that you can even edit it further than that and add more information. Another thing that you can do is add charges. So especially if you have a furnished rental, I saw somebody was asking questions about furnishing. You can put replacement or repair costs for things on that move-in and move-out condition checklist. The tenant will do that checklist, turn it into you, hopefully in the first couple of days of living in the rental, then you revisit that when it’s time for move out. I also recommend including move-out cleaning instructions and move-out instructions if you have them within the lease agreement right away so that you are communicating those expectations with the tenant. They are knowing what to expect and also have the opportunity to ask questions if there’s any confusion. Absolutely, love that tip.

Krista:

Okay, so let’s play a very fun game together. Now I might be a little bit biased because I invented this game, but what we’re gonna go ahead and do is show you different pictures of various rentals and we’re gonna decide together whether you are seeing wear and tear or tenant damage.

So starting off here, you got a sneak peek because I’m so good at clicking, but there we go. Tell us in the chat if you think this is normal wear and tear or tenant damage. You can see we’ve got some carpeting here, clear imprint of something that was sitting on top. What do we think? They’re saying normal.

Samantha:

You clean carpets, that’ll come out. You got one damage, normal, normal, normal. All right, smart cookies.

Krista:

All right, yes, this is normal wear and tear. It’s faded carpet. There’s a good chance that it will just wash out and everything else looks good that we can see in the picture. So I would say normal wear and tear here, but how about this one? It’s kind of mysterious. Maybe it’s a burn, maybe it’s a stain. What do we think?

Samantha:

So far we got damage, damage, more damage. All caps, damage, damage. Blob that won’t come out. Normal wear and tear, damage, damage, damage, damage, damage, damage, damage dollar signs.

Krista:

Whoa, damage forever. Yes, this is damage. Anything like a burn in the carpet, you can clearly point to that not being wear and tear, right? Because not everyone is coming through and burning your carpet, I hope. Now, before we move on from this very quickly, something that came up last time, Samantha, is the importance of having a good relationship with your contractors or other folks who might come in and fix this. Can you talk about that and how you might address the situation?

Samantha:

Yeah, absolutely. So you have the opportunity, if you have a relationship with your vendors, your contractors, let’s say your carpet or floor installer has done a couple turns for you or a couple of replacements, they may be able to give you a carpet patch. And so now this carpet specifically, looks like it would be a little bit harder to pack. It’s not a flush carpet. But if you’ve worked with your contractor before, they may have leftover carpet or could even like cut a piece from a closet and you could have less finished floors on a closet or crawl space or something to that effect and pack this whole, but it is still damaged and the cost of that pack or repair would still fall on the tenant and their security deposit.

Krista:

Heck yes. Take away, have good contractors, build relationships with them too. Let’s move on. We’ve got this door, it is not closing. We don’t get a lot of context from the picture, but I’m curious, do we think this is wear and tear or tenant damage?

Samantha:

And I love to the comments, we got really a critical thinking last session that we did with this one. Needs adjustment, wear and tear, damage both wear and tear, wear and tear, normal damage, wear and tear. Out of alignment, structure. Unless it was already like that. We are assuming that none of these things happened when the tenant moved in for the purposes of this game. Within normal use, probably wear and tear could be dependent upon the cause.

Krista:

Ding, ding, ding, that is exactly it. It does depend on the cause. So here in this case, this was caused by a combination of both humidity and the foundation of the property shifting, but this is why it’s so important to get in the unit regularly so that you can see this kind of taking place, start to make note of it. That way you don’t have to come to the tenant at the end of their lease and say, well, what happened with this?

Now you still can, but if you’re in the mix and you’re having those conversations, you’re walking them through, that’s one less chat that you have to have, one less friction point as they move out. So pays to know what’s going on. The only real way to know what’s going on is to get in the mix and do your inspections.

Samantha:

And if you’ve established that positive landlord-pennate relationship ahead of time, that renter may already let you know that that’s an issue before you’re aware of it so that you’ve got it on your radar for when it comes time to move out or you can repair it.

Krista:

Yep, so true. Now let’s look at this gross bathtub. So there’s a lot going on here that we could talk about. What do y’all think? Is this wear and tear? Is this tenant damage? What are we guessing?

Samantha:

Damage, negligence, unless noted before moving. Needs cleaning. Damage unless it washes out easily. Damage, rust is not on the tenant. Neglected damage, damage, both damage.

Krista:

Yeah, sounds like a good mix, but leaning on the damage. So there are a few different things we need to look at with this picture, right? So the rust slash hard water stains, that is gonna be normal wear and tear. Something that was pointed out last session is that this tub is dragged away from the plumbing. So if a tub is anywhere that it’s not supposed to be, that is damage.

That is not supposed to happen unless you have a tub on wheels in which case please contact me after this call. I have some questions. But something else is just how dirty everything is. The dirtiness could come down to needing a cleaning fee which could be subtracted from the security deposit. But once again, if you’re conducting regular inspections, you can one, let the tenant know that this wouldn’t be acceptable. And also, Samantha, you brought up something that is really smart information you could have in your lease regarding expectation set.

Samantha:

Yeah, so you can use something like them about cleaning instructions with your lease agreement to set those expectations. But you can also put stipulations in your lease agreement about the cleaning. So if you have, let’s say, an approved vendor list, so you only want cleaning company ABC, Sparkle and Shine, or you only want carpet cleaners, Demi Fresh, you can put those things in your lease agreement and require your tenants to use those approved vendors. You could also not allow tenants to do cleaning or, you know, stipulate in the lease agreement that you will be doing cleaning and it will be X amount as a cleaning fee, X amount as a carpet steaming fee. But you can build that into your lease to fit your business and to communicate those expectations with the tenant. You can really make it your own. Of course, follow up with your state and local guidelines and landlord tenant laws.

Krista:

Heck yes. All right. One final round. This one might be my favorite. What the heck is this? Is this normal wear and tear? Is this tenant damage? What do you think? Got some damage. Right. All right.

Samantha:

Jocelyn, I love your comment. Charging and move out. If life is so much easier, charging a cleaning fee at move in. Absolutely. Put it in your lease. Destroy damage typical earthquake. I can schedule it. It looks like a car drove through the window. Damage. Yeah.

Krista:

Okay. Once again, context is key. So this particular picture and I shouldn’t laugh. This was taken from a news story. What unfortunately a homeowner was there and the fridge is electrical system just completely exploded literally. So if that was the case, your tenant is living there and the fridge just takes on a life of its own and explodes. That would be your responsibility as the landlord to fix. Again, we’re assuming that the tenant did not inappropriately use the fridge.

We’re just assuming that the like the electricity went haywire. However, if they stored their dry ice collection in the fridge and it exploded, that’s on them. That is damage and they would have to replace the fridge and also correct any further related results. We can see the kitchen counter is crumpled.

I’m not saying that you have to add don’t store dry ice and close containers to your lease, but I’m going to throw it out there just because it does make an explosive and it’s my job to let you know of unsafe situations like that. Thank you for playing my game. Let’s go ahead and scuttle on here. So okay, you’ve gone through, you know what the damage is. You are making a list of everything that you need to have changed, fixed or repaired. And with that, of course, you know your landlord tenant laws because we told you so many times you have them like the back of your hand. They’re also going to tell you the notification you need to give to your tenant. The amount of notification you need to give might vary depending on whether or not you’re using any portion of their funds.

So check your laws. In some states, for example, if you’re not using any portion of the security deposit, you have to let the tenant know within 15 days. In other states where you are returning, excuse me, where you are keeping some portion of the security deposit, you have to let the tenant know in 30 days. When it comes time to return or notify them that you’re not returning a portion of their security deposit, you’ll want to make sure that you include an itemized security deposit receipt.

This is different than when you received the security deposit because this one is going to include the costs of any expenses occurred, the amount of the security deposit that’s being used and any remaining funds. This is the point most often where a lawsuit pops up. So be sure that you’re doing your due diligence and you are really notating everything that you’re getting in terms of quotes from contractors or details of the job. You’ll want to take pictures, etc. I’ll go into how you can protect yourself in a slide here. But before we move on, I do think it’s important to point out that one in four tenants have actually just lost their security deposit and never received an explanation, which is really disappointing. So make sure that you’re communicating because, again, you’re really shepherding that money and your laws do dictate in every state that you let people know if you are taking that money and using it for something. So bear that in mind. But now let’s talk about how you can actually avoid a lawsuit and protect yourself.

Here we go. So first and foremost, it’s going to start before you even move someone in. Maintain a good tenant screening process because when you do that and you ask questions, you know, of their previous landlords and figure out how they’ve treated rentals in the past, you can choose someone who’s going to move in and be respectful of your property. Of course, you can do all the tenant screening in the world. It’s going to make you more confident, but you’re also going to want to make sure you back that up with language in the lease. So have a conversation with them. Make sure that your lease outlines everything that they might need to know regarding the security deposit, how it might be returned to them, things that they could do to jeopardize that money, et cetera, and talk with them about it.

Right. When you’re doing the lease signing, I would highly, highly recommend having an opportunity for them to ask questions of you and pointing out some of these most important clauses, like anything relating to the security deposit. If you want to go the extra mile, you can go ahead and provide a list of approved changes or upgrades. So we have here as an example, telling tenants that they can use command strips if they want to hang things up that are less than five pounds. Or like Samantha mentioned, maybe specifically noting which kind of cleaning or the actual cleaning companies you’d like them to use if they want to have someone come in and do a clean things like that. You can really bulk up a lease to fit your unique rental situations and the rules that you want followed.

If you just do it at the forefront rather than getting into a situation down the road where it’s a bit stickier. Additionally, as we said, you want to conduct those regular inspections. We’ve talked a lot about that, but that will also help you stay up to date with your maintenance responsibilities as a landlord. That way, when they are moving out, if there’s something that needs to be fixed, but you’re not sure what the cause was, they’re not sure what the cause was. You have a history to go back to and say, OK, well, three months ago, and I looked through this wasn’t there. So let’s try and figure this out because we need to take care of this issue.

Right. Additionally, you want to make sure you document everything. I would say use a checklist, but also take pictures, take videos. You can’t have too much documentation, just like in my opinion.

You can’t overcommunicate with your tenants. And lastly, as you go through, make sure you itemize all of the deductions from the security deposit with a receipt for each deduction. That is going to really make it easy for you to present the case for why you kept what you kept from the security deposit. And that could mitigate a lawsuit altogether. Right. Sometimes people just need to see the actual receipts and say, OK, that was charged by ABC Sparkle.

I knew that they were going to come in fair enough and walk away. So. You’ve got the money or otherwise it’s in your world.

Let’s talk about accounting. We talked about this a little bit at the beginning, but best practice is to keep the security deposit in its own account for that property. Mostly because, again, you do not want to risk spending any portion of that before you’re allowed to. Whatever you choose to do, as long as you’re following your local lodge, you’ll be in a good spot, especially if you’re also tracking the following information. You want to know, of course, which security deposits you’ve actually collected for what unit, in what amount, et cetera, all of the information that’s on that downloadable that I made for you that we’ll be sending out. Also, if you do put it in an account that accrues interest, you want to track that, whether or not you’re returning that to the tenant. And lastly, of course, make sure your books have when and if you returned a deposit and for how much this is something that you need in your records, just in case anything pops up in the move out process. So when it comes to actually recording your security deposits, you’ll want to record refundable deposits as a liability for your tax. I’m going to talk about the taxis. Let’s get into some IRS talk here. It’s going to be a little bit boring, but it’s important.

Stick with me. Whether you record some or all of the deposit as income is actually going to depend on the unique situation with your tenant. For example, if you keep part or all of the security deposit because the tenant breaks the lease by vacating the property early, you need to include the amount you kept in that year if your practice is to deduct the cost of repairs as expenses. To the extent that security deposits reimburse those expenses, don’t include that amount in income. If your practice isn’t to deduct the cost of repairs as expenses. And last one, I know it’s a little brain numbing, but if a security deposit amount is to be used as a cost of repairs, you need to include the amount you can pay for the tenant as the tenant’s final month’s rent.

It is advanced rent that you include as income when you receive it rather than when you apply it to the last month’s rent. Personally, I don’t recommend that last situation. I think using the security deposit as the last month’s rent is not only a mouthful for me to say in this presentation, but also it gets really confusing for the tenant. I would not personally recommend that, but I wanted to include that information just in case it was applicable.

If you just blacked out for the last two minutes while I read those rather boring statements, don’t worry when we send you this deck, you will be able to click on this link. It has all of the information for you there. This is really important and it’s a part that people often have questions about. All right. So before we march toward security deposit alternatives, are there any questions in the chat that we should touch on? Yes.

Samantha:

One of the landlords is asking why is it so important to keep each unit separate if you keep strict records?

Krista:

Good question. In some states, they’re going to require you to keep it separate. Check there first. Otherwise, if you keep really good records and you feel super confident in your ability to each their own, if it’s working for you, then you can keep it separate. data, that’s good. If it’s not breaking the law in your state or county, A-OK. Just make sure that you’re keeping up on your tracking. Perfect.

Samantha:

I saw a question way back up in the chat. I can’t seem to find it now. But it was relating to when you’re collecting deposits. If the question was to the vein of if one tenant paid the deposit out of the deposit, then you can keep it separate. Well, I think there’s three or four roommates. Unless it’s on the lease agreement, that tenant paid the security deposit and is fully responsible for giving it back. Likely with on your lease agreement is a joint and several lease between you and all four tenants. The amount of rent is due for all four tenants. That’s the amount they owe you each month. You are holding that security deposit for all four tenants. When it is returning the deposit, unless you have some sort of agreement in the lease that says the tenant individual tenant paid the deposit and is getting the full thing back or is responsible for the refund, you would want to address it to all of the tenants on the lease agreement because it is an agreement with all of the tenants on the lease agreement.

Krista:

Yes, I will add that if you have a situation where a tenant moves out early, let’s say for example, eons ago I had a boyfriend he and I were living together. We broke up. He moved out. The security deposit sticks with the lease. So that was not returned until 30 days after the lease ended, even though he left early. And then it’s up to me as the tenant to go and work.

It was up to me to work that out with him as needed, right? But you don’t have to divide up and really you cannot divide up the security deposit when somebody moves out midterm if they’re not, you know, if that is them breaking their lease and leaving, right? It sticks with the lease. It sticks with that contract. Once that ends, then you have to notify people on that specific timeline.

Samantha:

Yes, and in that situation your landlord could have used something like a roommate release form, which would remove one party from the lease agreement and could also stipulate that they are getting a deposit back and the landlord is collecting a new deposit from you. But those things can be built and sent to your tenants to amend the lease agreement to make changes to the existing document. Absolutely.

Let’s see. Is it okay to send a security deposit retention notice at the same time in the same envelope or the refund tax? That’s how I always managed it. I would send the security deposit closing statement with itemized, you know, lists the receipts of what I took out of the deposit.

I would attach receipts or copies of invoices and I would send that along with the check via certified mail so that I have that additional paper trail to track everything. Let’s see. We do have a few more questions in here but I want to make sure we get through these security deposit alternatives. So let’s boogie to that and I’ll keep checking out the chat. Beautiful.

Krista:

Thank you. So security deposit alternatives have been gaining popularity. I’ve got to ask you guys, do you currently accept any security deposit alternatives? Let us know in our poll. We’ll get into the most popular kinds. But they are fascinating and definitely something worth knowing more about before you decide to enact them or accept them, I suppose. Samantha, did you ever accept security deposit alternatives?

Samantha:

Yeah, I think maybe at the big point at the beginning of leasing, so, you know, 12, 13 years ago or so, we had some security deposit alternatives so that would allow, we used more of the surety bond method so that would allow tenants to pay a lesser amount to move in and then any charges that I had, any damages, I would have to take up with that third party company. Personally, prefer the security deposit method. It’s a lot cleaner in my opinion less to deal with. But it’s nice to have to help out tenants with lower moving costs. Yeah, absolutely.

Krista:

All right, well, fascinating here with our results. Looks like most folks do not accept them and they’re not interested in accepting them. That’s a okay. And then 42% of y’all don’t accept them yet, but you’re interested in just 5% actually accept them currently. So if you are currently accepting them, I’d love to know your experience so far in the chat. Feel free to share. But otherwise, let me tell you more about what these are.

So the following types of alternatives are the most popular. Right, you have your surety bond, as Samantha mentioned, typically the surety bond requires the tenant to pay a non-refundable fee that’s usually 10 to 20% of the total security deposit required. They then, oh, excuse me, you then as a landlord would bill whoever it has the surety bond, but you would bill them for damages once again, making sure everything is itemized, listed out exactly as you would with a security deposit to cover yourself perfectly. And they would pay that out. Alternatively, there are insurance policies. Now, these are not insurance policies, as you would typically think about them. It’s not the same as landlord insurance or renters insurance. This is really just meaning that the tenant is going to be paying a low monthly fee in order to cover up to the amount of the security deposit would normally be. A rent guarantee is even more different or excuse me, even more similar. Again, they are paying a lower upfront amount in order to have a guarantee that if there is any unpaid rent, that it will be covered by this pseudo security deposit. A lot of these efforts are being propelled forward by legislative movements, including the most popular one, which is called renters choice. So renters choice has actually successfully convinced a couple of states to start accepting security deposit alternative. So, I’m going to talk about alternative alternatives. They call them security deposit replacements or SDRs. I think that’s silly.

So I’ve been calling them alternatives, but to each their own. Currently Cincinnati and Atlanta. Actually, those were the first cities to pass laws supporting security deposit alternatives or replacements. So, very interesting to see where it is popping up.

Now there are a couple things to note about these talking in broad strokes. So, unlike a security deposit, these alternatives or replacements are non-refundable. So the tenant is paying something they are not going to get anything back, even if there is no damage or, you know, nothing that you would normally subtract from the security deposit when they move out. Also, instead of submitting any claims or information to the tenant necessarily about why you’re, what’s gone wrong, what’s something that needs to be fixed, you would send that to the SDR company. They would then pay the claim up to the maximum coverage and then pursue the rest of the amount or whatever else needed from the tenant.

So typically, if there are damages, you know, even if the tenant is paying a fee every single month, the company will come back and ask them to pay to cover whatever was damaged because they’re a business, they are trying to get money. So, of course, there are definitely some pros and cons to this that are worth chatting about. So again, talking in broad strokes, the reason that these are gaining popularity is because it makes housing more accessible for people who don’t necessarily have the full security deposit available to give at moving. It reduces moving costs.

Additionally, in terms of the landlord sphere, it, it takes away the need for you to be tracking the security deposit or worrying about notifying the tenant, etc. You’re really putting that on a third party. It’s out of your hands. Okay. It’s also easier to submit claims.

However, I will say, they don’t always pay out it’d be irresponsible of me to say that they do and in fact, as you would expect with any situation where you are submitting claims, it might be a longer process so it’s easier to initiate, but you might need to provide backup documentation or additional resources for them to decide whether or not they’re going to be paying it. Keep that in mind. In terms of the drawbacks on the tenant side.

It can be really confusing. Again, eons ago in a galaxy far, far away. I was using a security deposit replacement. But my, I was also living in a big apartment complex so not an independent landlord, it was cornerstone, if you know them. And I didn’t fully understand what a security deposit replacement was. They didn’t fully explain it to me I was a very new renter.

And so it created a really bad experience for me upon move out because they submitted charges to the company, the company then charged me double to try and recoup their costs and also pay back the claim and it just, it was a whole firestorm that I went through. So I’ll admit my bias, I do not like security deposit, deposit replacements. I do think that security deposits themselves are just cleaner. Also, again, these are not widely accepted in many states. So it’s still a work in progress. But you could definitely check out to see if they are available in your state.

If it’s something that works for you. Awesome. I would just say make sure you are communicating with your tenant exactly what it means. You’ll be paying a fee every month.

If there are any charges I’ll submit them to the company they will then come to you, etc, etc. Okay. All right.

I know we went rapid fire on that last bit. But I am here to answer any questions you have we also have one final poll for you if you’ll indulge me there. And fill that out. In the meantime, Samantha, anything to add. Yes.

Samantha:

So first I am dropping a link in the chat to our exclusive Facebook group for Turbo tenant landlords. It is called better landlords, or you must have a TurboTenant account. And I verify that before joining you. But we talk about landlord topic, give referrals on products and it’s all around good time so you haven’t joined a link in the chat to join that as it relates to questions.

Okay. If a tenant verbally states to use the security deposit to pay for cleaning repairs damages, and it’s verbally agreed to do so. Would that hold up in court if it wasn’t in writing additional details. I had a tenant notify me one day prior to move out for dad with thick, and she had to fly out of town immediately and was unable to fulfill the contractual obligations listed inside when she moved in. So I use the deposit for cleaning and repairs caused by the tenant not normal wear and tear. And then she asked for the deposit back. What are your thoughts.

Krista:

Ooh, wow, what a hard situation. First of all, like that’s always sticky. When your tenant has something like that pop up. I would, I would say, take it as a learning lesson, I would always always always have it in writing in your lease, regarding any way that the security deposit is going to be used. Will it hold up in court.

That’s hard to say, because it’s hard to prove. So in that position. I would probably reach out to the tenant in writing whether that’s over email, probably over email or however else you’ve been communicating with them and recap, say okay as we discussed. I will be using the security deposit for XYZ because you were unable to fulfill your obligations as outlined in the lease. At least that serves as a record of the conversation you had, even if it’s not like a recording of it. What do you think Samantha anything you’d add.

Samantha:

Yeah, I would agree with that but I would also let the zoom that the tenant didn’t notify you and they’re, they just leave the unit in the way that they left the unit. You would likely be using the security deposit for those repairs and damages regardless of the tenant left or not. Right. So, of that situation. So unless the tenant has requested let’s say a reasonable accommodation because of this, and they are unable to fill and so they’d like an accommodation they’d like a change to the lease agreement to the rules and to your expectations as a result of this. I would say that using security deposit for damages and things should already be outlined in your lease agreement so you should be okay.

Also, let’s see here. Okay, so in Colorado, even if the landlord has 60 days to return the deposit, the deposit did I hear correctly that expenses being withheld must be reported within 30 days.

Krista:

Oh, I was not speaking about Colorado in that example I can’t remember which state it was, which is why I cleverly avoided using the name. But the Colorado’s laws. I feel like I should know them like very well because I live here. But I can’t remember because I’ve got so many state laws bouncing around my dome. So double check on the state pages I just edited the Colorado one. Let’s take a look at that. But my apologies for the confusion.

Samantha:

Let’s see Jonathan drop some links in the chat down there. If you’re not a permanent user there’s a link to sign up there’s also information about the premium plan subscription we’ve got our free Friday landlord newsletter The Key. And then of course that that Facebook group at the end of this webinar there will also be one last survey and that survey is how we get topics for next month’s webinar. That’s how we get details and suggestions on improvement, and it is anonymous. So if you ask questions in that survey if you want to follow-up email from us, please do include your email and one of your responses, so that we can get back to you otherwise all of the information is anonymous. So we don’t know who you are. Yes.

Krista:

Thank you for that plug. And of course, as we have up on the screen here we do offer a wonderful referral program in which you can earn up to $25 when you get your fellow landlord to sign up for TurboTenant, our accounts are free. What do you have to lose. So do it. All right, any other questions that we can answer I know we’re a little bit over time but I’m happy to chat with y’all if we want to.

Samantha:

Yeah, so it looks like someone was asking if there are three levels of deposits. So it looks like security deposit for damages rent deposits for lack of payment or cleaning deposits for cleaning is that correct. I would say it’s all one deposit. And you can use it for those different things as outlined in your lease agreement.

Krista:

Yes, exactly. We also discussed the possibility of charging a cleaning fee upon moving. That’s something you can opt to do. But yes, at the end, if you don’t have that, then you would just use the security deposit as needed when they move out.

Samantha:

Yeah, Alan’s letting us know that they deliver AC filters every month when they collect the rent and that allows them to do a visual inspection each time. Love that suggestion Alan. If you aren’t doing that and want to incorporate it, you can make a lease addendum to make that happen and send to your tenant, whether you do those monthly or quarterly. It’s a great way to get eyes on the rental without being a full inspection, but you at least get some eyes on it. Yes, good idea. Let’s see. How do you address repairs that you complete as a landlord? How do you provide a legit receipt for that?

Krista:

Ooh, okay, so I’m going to assume that you’re talking like they’ve moved out and you are fixing something. First, look at the cost of parts. I would keep all my receipts and charge those as necessary. In terms of charging for your time, that gets a little bit sticky. For me personally, if it was like a very quick fix, I’m talking an hour or less, I might not necessarily charge for the labor, but to each their own. You could look up what the average labor cost is in your state slash locality and use that as a guide. If you’re someone who has significantly more experience, let’s say you’re a master plumber in your spare time, and you have to do something in that realm, then you can lean on your industry knowledge to trace it out accordingly.

Samantha:

And didn’t you say that your landlord has some sort of stipulation for repairs in your lease agreement?

Krista:

Yeah, I have seen that. So yes, add this language to your lease as you’d like, but what I’ve seen is that you can just list out anything up to X amount is going to be the responsibility of the tenant to pay for repairs. Anything beyond that is the landlord or vice versa. My landlord, it was like a super gem, and so it was very generous for me. It was anything $50 or below is my responsibility. Anything $50 or above is his responsibility. So do you have to be that generous? No, but I certainly like to morph for it. So do what you will. Absolutely.

Samantha:

Let’s see, we purchased a property that already had tenants in it. They’ve already expressed renewing their lease with us in October. Do we charge another security deposit?

Krista:

No, I wouldn’t. Because you should have the security deposit from the old landlord. If you don’t, I’m sorry, that is really unfortunate because that’s something that you can stipulate at the time of sale for the property. I don’t think you’d be able to pursue it at this juncture if it wasn’t agreed upon earlier. But no, I wouldn’t collect an additional security deposit from them if you have one from the old landlord. Let’s see.

Samantha:

I was told you should roll all deposits into one so you can use the money for any issues that come up. This might only work in my state, but that’s what an attorney had told me. So I would be managing multiple rentals and putting all the security deposits in one security deposit account instead of individuals for each rental. Valid.

Krista:

You know, if an attorney in your state gave you that advice, not here to disagree with it, but I will emphasize the importance of tracking. Make sure you know exactly which money correlates to which unit and you’re not overspending or getting into a situation where you’re misusing those funds because that is a lawsuit waiting to happen.

Samantha:

John also mentioned all repairs after move out are done by contractors so we have a receipt and nothing to contest. I think that’s a great idea. Let’s see this is the last question I think unless somebody gets one in. This is my first time renting out a house. I did a basic lease for Washington State and didn’t specify cleaning or carpet cleaning upon move out. Is this something I should do an addendum for since these items will be done before they move in.

Krista:

I would try for it. Yeah, I would absolutely try for it. You can again you can’t force a tenant to sign an addendum but most of the time, especially, you know, prioritizing that landlord-tenant relationship. If you guys are on good terms there’s really not a reason to not sign this kind of addendum. And you have the added bonus that it’s about the security deposit so it’s very easy to frame and say, hey, I want you to be able to get your money back so I’m communicating what I would expect from you in order to return your security deposit. Pretty easy sell.

Samantha:

Yeah, I would definitely second that because it is benefiting you as much as it’s benefiting the tenant. And when it comes to move out. You know this is your first time renting out your house, it could also be their first time renting out a house.

So it could actually be beneficial to them to say listen, I’m having these things done ahead of time before you move in, they’re going to need to be done after you move out or at the end of your lease. This is how we’re going to handle that. So again, communication, I will say it a million times, you cannot over-communicate. So if you have the addendum you have the conversation then you’re on the right track. Absolutely. Any final questions? The tenant renews the lease and the rent has increased. Do you ask for the difference in the security deposit?

Krista:

I would not. Because again, you know the security deposit is to me something you capture and pretty much leave alone until they move out or until a lease violation pops up. With that in mind, Samantha, what do you think would you change the amount?

Samantha:

Yeah, I would not. Because my thinking on this is that that security deposit was given to you as security, right? So you’re anticipating the rent will be in the same condition when you get it back as when you gave it to the tenant and if there’s any discrepancies, that’s security deposit is there to cover that. When you are increasing the rent, you are not likely providing additional rooms. You are not likely upgrading the rental. You are likely not giving them new things for the increase in rent. It is probably just a standard increase and therefore it wouldn’t justify an additional security deposit because there’s not additional things that they’re securing, right?

The rental is still in the same condition. If you were to add upgrades, if you were to, let’s say add a cloud-toothed tub in the middle of the living room and the plumbing works, put that in the addendum, put that you’re requiring a higher security deposit with the lease renewal because of this, or this deposit is specific because of this. So I don’t think that if it’s a standard rent increase at the renewal, I don’t think it needs a new deposit. If you are adding additional features or increasing the value of the rental, I would say that that would be a different story. Absolutely. All right. Awesome. Okay.

Krista:

Well, gang, thank you so much for joining us here today. We love having these webinars for you. So go ahead and let us know in the closing survey what you’d like us to cover next month. Also, don’t forget to share the love, refer your friends, and oh, questions to host.

Samantha:

Let’s see. Okay. Let’s see, I’ve got it. What if you forget to return the deposit within the 30 days required by state law but still want to charge the tenant for damages? You can’t. There you go. Got it.

Got to follow the law. All right. If I missed your question, feel free to email me, [email protected]. When you’re sending chats to host and panelist, it kind of just ends up in the whole chat bubble and there’s not an easy way to separate on our side. So if I didn’t get your question, please just send that to [email protected] and I will get you a response this afternoon.

Krista:

Absolutely. Thank you so much for being here. We will see you next time. Bye. Thank you.