How to Manage Security Deposits

How to Manage Security Deposits
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It’s a good practice to collect a security deposit to cover potential tenant-caused damages to your rental property. However, it can also be a source of conflict between landlords and tenants. That’s why it is important to know how to manage security deposits to prevent disputes and ensure that they are used correctly.

What Is a Security Deposit?

A security deposit is a payment made by the tenant in good faith that the landlord can hold in trust to ensure the rental property is maintained, the rent is paid, and the lease agreement is upheld. The landlord can use part or all of the security deposit to cover unpaid rent or if the tenant causes damage to the property beyond normal wear and tear.

A typical security deposit is equivalent to one month’s rent but it may also be as high as three months’ rent. The landlord holds the security deposit until the end of the lease and should return it to the tenant after subtracting the allowable deductions (if any).

When to Collect the Security Deposit

To minimize financial risk, you should collect the security deposit before a tenant moves in. If not, you could end up paying for damages out of your own pocket. It is good practice to:

· Require the tenant to pay the security deposit when they sign the lease or before they move in.

· Require the tenant to pay the security deposit in full.

How to Hold the Security Deposit

The security deposit legally belongs to the tenant. You are simply the caretaker of the money – not the owner. As the landlord, you must take proper precautions to make sure security deposits are not unlawfully spent or allocated for other operational costs.

Keep Security Deposits in a Separate Account

Putting security deposit money into a separate bank account isn’t required by every state, but still, it’s a good business practice. Some states require landlords to obtain a security bond or keep security deposits in a separate account. Many states require an escrow-type trust to protect from creditors and to allocate the money as a refundable security deposit.

Security Deposit Interest

Another thing to consider is what to do with the accrued interest of the security deposit during the lease period. Some states require you to return the security deposit plus any interest that accrues, while others require it only after a certain period of the tenancy. Some do not specify if the interest should be returned. To be sure, check your state’s official statutes to research your specific situation.

When to Return the Security Deposit

You must return security deposit funds (or the unused portion of it) in a timely manner. Each state has its own deadline for returning deposit monies, but usually, it ranges from a couple of weeks to more than a month. The clock starts ticking once a tenant moves out and you have an opportunity to inspect the property.

When Can a Landlord Keep the Security Deposit?

The lease agreement should clearly indicate what situations warrant retaining the security deposit. Many state statutes outline the reasons when the landlord can withhold security deposits. These include:

· Damage to the rental property (excluding normal wear and tear)

· Failure to pay rent

· Unpaid utilities

· Cleaning costs

· Terminating the lease prematurely

How to Handle Security Deposit Disputes

You must provide an itemized security deposit return letter enumerating the expenses charged against the security deposit. If a tenant disputes the security deposit return letter, they can file a lawsuit, which could require you to prove that damage and cost of repairs match the amount withheld.


This article covers the major points on how to manage security deposits. To prevent disputes, don’t forget to document all damages when your tenant moves in and out. If you have any questions about property management in general or security deposits in particular, contact PMI of Greater Boston today.