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What is a Security Deposit?

Regulations for how to accept, store and keep a security deposit differ across jurisdictions, but it is a good idea to keep a tenant or subtenant's deposit in a separate escrow account.

You should always ask your tenant for a security deposit to protect yourself against either damaged property or unpaid rent. The way you handle the deposit is highly regulated on a state-by-state basis, and if you run afoul of a law then you could end up owing your tenant money. Look closely at the rules for your state before deciding to manage a deposit on your own.

Here are the steps you will need to follow to correctly manage a security deposit.

  1. Agree on an amount

    In some states or types of housing there is a cap on the amount of security deposit you can request, but one month of rent is the most common and generally seen as fair. State the amount clearly in your sublet or lease agreement and make sure that both sides sign this contract.

  2. Put into escrow

    When something of value is placed into the hands of a neutral third party for safekeeping it's referred to as escrow. Some states require you to hold a security deposit in escrow, for example by creating different bank accounts for each property, while others do not.

    In any case, doing so is a great way to quell your subtenant or tenant's concerns that their deposit will get misspent or won't get back to them. You could open your own bank account for the rental in the same state as the rental, or start a sublet on Flip and we will manage the security deposit for you.

  3. Complete an inspection

    Several states also require the use of inventory checklists at both the beginning and the end of occupancy if a security deposit is collected. With a simple inspection form and a shared folder of photos you can complete an inspection with your tenant before the lease ends.

  4. Carefully document claims made on the deposit

    If you decide to keep some or all of the deposit after the final inspection you will need to prove that you withheld a fair amount of money and the damages you are taking issue with did in fact occur. Collect either receipts or quotes received from service providers. The damages that were surfaced during the move out inspection should each correspond to one of these receipts.

    Send written communication to your tenant itemizing each problem that you found, the amount it cost or would cost to fix it, and the sum of these repairs. State clearly that you are keeping the sum of these repairs and will be returning the rest of the deposit.

  5. Return within thirty days

You will have to return the deposit within a certain number of days, depending on your state's law, of tenant move-out.

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