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 10 Steps to Becoming a Good Landlord: Collecting and Handling Deposits
By: Darin "Sid" Cameron, CRS
Fri, Dec 1st, 2006 7:14 am

This is part four of a series of blog posts discussing things people need to know if they decide to own rental properties.  Over the past few days we've discussed the process for selecting tenants, dealing with occupancy issues and setting your rental rates.  Today I'd like to focus on collecting and handling deposits.

Collecting Deposits from Tenants

No one likes paying deposits, and if you set them too high you will eliminate potential applicants that would be great tenants simply because they don’t have enough money up front to make the deposit.  But with that said, it is in your best interest to at the very least collect the last month's rent in advance.

There will always be tenants that fail to live up to the terms of the rental agreement no matter how many glowing references they had.  A deposit for the last month will at the very least help you to defray some of the costs of evicting the tenant when (not if) this happens.  Ask any longtime landlord and they’ll tell you defraying the legal costs of eviction is the only reason why this deposit exists.

It is also very reasonable to require a cleaning deposit and/or a security deposit. These deposits are applied to any damages that occur while the tenant is occupying the unit.  If you plan to accept pets, a pet deposit to cover damages done by the pet is also reasonable.

But be warned, this is not just “free money” for you.  Renters who leave your unit in pristine condition at the end of their contract will expect to get this money back and may take legal action if they don’t.  State and local housing laws may also stipulate how these deposits can be applied.  So in your Rental Contract you need to spell out exactly what these deposits are for and what conditions need to apply prior to them being refunded.

You should also check with state and local housing agencies and consult a real estate attorney to know any legal conditions that you should follow.  For example, depending on where you live you might be required to hold deposits in an escrow account (meaning you can’t just spend them and rely on the hopes that you’ll have the money available to you when you need to repay them).

Handling the Return of Deposits

If a tenant has damaged your property beyond normal wear and tear, you have the right to keep some or all of the security deposits and/or cleaning deposits. The challenge is trying to determine what is and what is not “normal wear and tear”.

Like it or not, your property begins deteriorating the second you buy it regardless of how careful your tenant is to take care of it.  More often than not, legal action against a landlord by a tenant is due to quarrels over how damage or security deposits were assessed.  So my best advice is don’t try to keep a tenant’s deposit just because the carpet looks another year older or because a seal on a 20 year old window has worn out.  Reserve the deposits for “real” damage directly caused by the tenant- carpet stains, holes in the walls and cleaning requirements that are beyond normal.

When a tenant moves out, it’s also a good idea to document any damage or cleaning that was required to make it rentable again.  A digital camera is a cheap and easy way to accomplish this.  If you own a video camera that will also work.  This gives you evidence should the tenant or a state agency make a legal challenge in why you kept deposit money.

[ Next Article: 10 Steps to Becoming a Good Landlord: Maintenance and Inspections ]
[ Previous Article: 10 Steps to Becoming a Good Landlord: Occupancy and Rent ]

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Darin "Sid" Cameron spent 15 years working in the technology industry which in 1998 relocated him to St. Louis. In 2004 he took over web development tasks for Kimberly's real estate team and later became the full-time Marketing and Operations Director in 2005. In 2011 Sid launched two brokerages, The Realty Store, Inc. and Realty Referral Partners, Inc, while continuing to perform marketing and operations for Kimberly's team. Sid holds a real estate broker's license in Missouri, CRS certification and was the first CyberStar in the St. Louis area.
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