Security Deposits: Dos, Don’ts... and Maybes
Can’t live without them.
They offer some protection—or compensation—if your renter damages your apartment beyond normal wear and tear. Such deposits also protect if a renter fails to pay a month or two of rent owed.
But as with so many things in the world of property management, it’s important to get the details right. It is, or can be, the most contentious issue between landlords and renters.
Why all the fuss?
Each state, and sometimes city, have very specific laws about how and when security deposit can be used by the landlord—and what must be returned to the renter.
What Can You Do with a Tenant’s Security Deposit?
DO Charge up to Two Months’ Rent for an Unfurnished Apartment, and Three Months for a Furnished One
ou can charge another half months’ rent if the renter has a waterbed because of the damage a rupture can cause to your property, as long as it is stated in your lease agreement.
DON’T Make the Deposit NonRefundable
You cannot make the deposit nonrefundable—that’s California law—but you can request the maximum deposit to give yourself the most protection.
Check the local laws and regulations in the city or state your rental property is located.
DON’T Spend the Money
Otherwise you’ll be stuck if your renter suddenly vacates the unit. You might also need the money for repairs or cleaning expenses when they vacate.
DO Consider Keeping Renters’ Deposits in an Interest-Bearing Bank Account
Owners managing their own property should consider keeping renters’ deposits in an interest-bearing bank account—as opposed to a simple checking account—to earn a little interest on it. In fact, in a few Bay Area cities, you have to pay your renter interest on the deposit.
How to Use the Security Deposit?
What are California Rules for Using a Security Deposit?
The renter’s security deposit can be used for four general purposes, per California state law. They are:
- For rent that owed, but not paid
- For cleaning the rental after the renter moves out. But only to return it to the condition it was in when the renter moved in.
- For damage repairs other than ordinary wear and tear—but not damage that was there before the renter moved in.
- For the cost of restoring or replacing furniture, furnishings, keys or other items beyond normal wear and tear. Warning: Make sure this is in the lease!
Security Deposit Pay to Play
Don’t forget this “do.”
Several Bay Area cities require landlords to pay renters interest on their security deposit. For example, in Berkeley, California the rate of interest is 0.1%.
So if you hold a $4,000 deposit from a renter, you owe the renter $4 in interest for each year you hold it. That amount is due to the renter by January 10 of the following year. Be sure to refund this to the renter by that date.
If you don’t, the renter can legally recover, yikes, the interest of 10% on the deposit.
How to Discuss Security Deposits with your Tenants?
Paper Work - Document Everything!
Planning to spend the deposit money for repairs and such?
Document absolutely EVERYTHING. Pardon the legalese, but after a renter moves out of your property you have exactly 21 days to either send them a full refund of their deposit or, if one or more of the conditions above applies, send them copies of all receipts and an itemized statement listing the amounts of any deductions from the deposit and the reasons for them along with the remaining funds, of course.
Again, this might seem simplistic, but you would be surprised how many landlords are sloppy about the basic record keeping.
With that in mind: KEEP all receipts for the repairs, the cost of materials required for said repairs—and the hourly rate charged by the repair guy. Again, all this must be provided to the renter when you list the deductions.
Basically, to protect yourself, the more documentation you can provide about how you spent some of the deposit funds, the better. If repairs don’t exceed $126 you—maybe—don’t need to provide all this. But it’s a good idea. When it comes to money, anything can trigger litigation.
The Tenant Walk-Through
By California law, a renter has the right to request a pre-departure inspection before he or she vacates the rental unit.
In fact, you as landlord are REQUIRED to notify your renter of this right as soon as you find out they plan to leave. Then, if requested, you perform the inspection.
Best to do this with the renter by your side, and it must be in the two weeks before the end of the tenancy or lease term, by law. Be sure to give the renter 48-hours notice of the inspection. After the walk-through, you need to provide the renter with an itemized list of repairs or cleaning that they need to perform in order to avoid deductions from the security deposit.
More on Berkeley’s security deposit interest right here. San Francisco and some 13 other California cities require this.
Bottom Line on California Security Deposit Law
Confused about any or all of this?
Contact our local California teams in the East Bay, North Bay and South Bay Area to learn more about avoiding such issues and what needs to be included in your lease agreement to ensure you are set up properly and prepared.
For more details on security deposits and interest in California, see the California Department of Consumer Affairs.