"The Rental Security Deposit Makes a Great Safety Net"

You MUST collect a rental security deposit from all of your tenants. Whenever you have a new tenant moving in, DO NOT hand over the keys unless he/she has all the monies owed to you. At a minimum, this would encompass the security deposit and the first month's rent.

WHY YOU SHOULD COLLECT THE MAX SECURITY DEPOSIT

The rental security deposit is a great way to reduce risk. As such, rule #1 is to collect the maximum allowed by law. The max is 1.5 months in my state, but all states are different so please check with your agent.

I used to collect only a 1-month security deposit, but over the years I have found that this is simply not enough. The benefits of demanding the maximum deposit allowed by law include:

• It will help pay for repairs after a tenant moves out.
• It can be used as income if a tenant moves out before the expiration of the lease (subject to state law).
• It can serve as a deterrent to bad tenant behavior – the more your tenants have on the line, the more they have to lose by acting inappropriately.
• It can motivate vacating tenants to clean up after themselves when moving out.
• It can act as an added measure to screen out undesirable tenants when you're looking to fill a vacancy.

DETERMINING SECURITY DEPOSIT DEDUCTIONS

Whenever a new tenant moves in, you will want to do a thorough inspection / walkthrough of the property, jot down any major problems or defects, and have the tenant sign the form.

You can find a free copy of my tenant move-in/move-out inspection form by clicking here (note: you'll need Adobe Reader...to download a copy, click here).

This inspection goes hand-in-hand with the rental security deposit. You will want to do another walkthrough with the tenant when he/she is moving out, and then compare the "before and after."

The benefit of doing this is that it helps clearly identify items where the tenant is responsible for the cost. If possible, it would be a good idea to take pictures of the before and after as well.

The bottom line is that you want to have clear information on the state of the apartment before and after tenancy so that there is no ambiguity as far as what the tenant should be responsible for. Armed with this information, you can deduct legitimate repair expenses from the security deposit in an itemized fashion.

SECURITY DEPOSIT TIPS

A few additional points to keep in mind regarding the rental security deposit:

• Again (it's worth repeating): collect the maximum allowable by law.
• Request that the security deposit be paid via certified / bank check.
• You must disclose the specific amount on the lease.
• In some states, upon move-out you must pay the tenant any interest that has accumulated on the security deposit during the time it was held in deposit.
• At the end of the lease term, you will have a set period of time (usually 30 days) to return the deposit to the tenant, less any deductions.
• Clearly itemize all deductions from the security deposit (repairs, cleaning, unpaid rent, etc.), and attach copies of receipts if applicable.
• Do not charge tenants for normal wear & tear (click here for a little more detail on normal wear & tear).
• Mail the balance of the rental security deposit, itemized list of deductions, and receipt copies to the tenant via certified mail.

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