3 reasons you might not want to collect a security deposit

Written on June 20, 2018 by

It’s important to collect a security deposit that you can use in case of damages to your property, or to compensate you for unpaid rent.

But some landlords have stopped collecting security deposits.

Here are three reasons why.

But first, about the security deposit

The security deposit is exactly what it sounds like—security against damages or unpaid rent. So if your tenant damages your property beyond normal wear and tear, you can use the security deposit money to make repairs. Or if your tenant skipped out on you without paying rent, you can keep the security deposit.

But if there are no damages, and if your tenant has faithfully paid rent each month, you need to return the security deposit. And you need to do so by the deadline for your state.

Some landlords don’t do that, thinking the security deposit is a windfall for them. That sort of landlord makes it necessary for security deposit laws to be created. The problem is that sometimes the laws governing security deposits are more like “gotchas” for the landlord.

Related: How to handle security deposits properly

1. Security deposit laws can be oppressive

Every state, and sometimes jurisdiction, has laws pertaining to the security deposit. You can look up your state’s law here.

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 particularly tough on landlords. 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.

Wow! That’s a lot of regulations to keep track of.

Seattle also has tough 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 can cost you money

Using Chicago again 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.

Ouch.

Other states also are 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. Read your state laws, and you could be shocked.

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.

If you don’t collect a security deposit, collect a move-in fee.

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.

About move-in fees

Most landlords who don’t collect a security deposit collect a move-in fee instead. The move-in fee is typically not subject to as many regulations as the security deposit can be. The reason is that the move-in fee is not returned to the tenant at move-out time. The landlord simply keeps it.

But the move-in fee is usually less than the security deposit. It’s designed to cover the cost of cleaning the rental unit, painting, and making minor touch-ups. Most landlords charge a percentage of the rent, such as 40 to 50 percent.

Which should you collect? A security deposit or a move-in fee?

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.

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 get you off the hook for cumbersome 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.

Related: Collect a larger deposit instead of last month’s rent

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.

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1 CommentLeave a Comment

  • L Phares

    This is terrible advice. You should always get a security deposit. 1. Laws regarding security deposits are hardly “oppressive”, even in Chicago. 2. Any well run business should be able to provide simple documentation of costs withheld from a security deposit. 3. The ability to put together a security deposit is a key tenant screening tool. It demonstrates the ability to manage finances, plan for future events and curcumstances, and an understanding of the responsibilities of being an adult. Those are all factors a responsible landlord looks for.

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