When it comes to residential income property, there are many criteria that can lead to very expensive mistakes if you do not handle your decisions properly. Let’s start out by stating this: security deposits are not the landlord’s money until after the tenant has moved out and the landlord has proven what damages they need the funds for. Security Deposits are the tenant’s funds which they are allowing you to hold for them. Most states require security deposits be held in a separate bank account; Not the primary bank account used for income and expenses. You may not commingle these funds with other money not designated as a security deposit. It should come as no surprise that security deposits are in the top three incidents that landlords and tenants find themselves fighting over in small claims court, so here’s our top 5 tips every residential landlords should know:

Do Not Designate Specific Deposits

In the event you feel you need more money for a deposit than the state allows you to ask for (commonly security deposits are the same amount as the asking rent), you can indeed ask for an additional deposit. These are most common for pets or tenants who are running a business out of the rental. For example, if you allow pets and want an additional deposit to cover possible damages from the tenants pet, do not label it a “pet deposit”. If the pet does not damage the property, a landlord cannot use the funds from a “pet deposit” for a non pet related issue. For example, mold remediation, clearing and dumping personal belongings the tenant left behind, or replacing damaged lamenate flooring in an open concept area where the flooring must match. There are many instances where damage may exceed the amount of the main security deposit. If you need more deposit than allowed for a security deposit, add an addendum to your lease and simply label it “𝐀𝐝𝐝𝐢𝐭𝐢𝐨𝐧𝐚𝐥 𝐃𝐞𝐩𝐨𝐬𝐢𝐭”. This deposit will cover ANY damages that may be found during the move out inspection. In addition, NEVER designate a security deposit as “first and last month’s rent”. If you do so, you are essentially only receiving those months of the lease prepaid and you do not have any funds for damages that may occur.

Have Thorough Records Of All Correspondence With The Tenant Including:

•Move-in inspection form (signed by all parties). Google Move-In/Move-Out inspection form for a sample. We created ours in carbon form with 3 sheets.

•Maintenance or repairs requested and completed throughout the duration of the lease. These should always be in writing either by email, text, or an electronic form submitted through an app. All correspondence regarding the repair should be in writing as well.

•Your request for a move out inspection (to show them items that need to be remedied to avoid deduction from the security deposit).  California requires a landlord to offer this inspection within 2 weeks of the move-out date.

•Your detailed invoices incurred for final repairs with the unit address and unit number on each invoice.

•Final documentation of what their security deposit was used for if applicable. If you find yourself needing to defend your actions in front of a judge, a landlord better make sure they have all of these documents and photos ready for the judge to see. Make sure you can print your emails, texts, etc. to submit as evidence if needed.

Take Photos Of Every Angle Of Every Room Before Move In.

The 3rd of the 5 tips for security deposits is important for landlords to know; Implement this tip with your next tenant flip! Photos from phones and digital cameras have a date stamp and can prove that dent was not in the dishwasher before they moved in. In the same manner, landlords should take the exact same photos at move out. Take multiple photo’s from all different angles to catch every area of the unit.  Do not take videos, many small claims courts will not allow video, only photos. Keep these in the tenant file or have it noted which electronic folder the photos are located in so you can find them easily. It can take months for the tenant to act on a legal action against a landlord. By then, hopefully, a new tenant is in place but you have no recourse to prove the damage occurred during their stay if you don’t have proof dated within their lease terms.

Know Your City Ordinances.

Some cities require the rental property owners pay interest back to the tenant for the security deposits they hold. It’s a good practice to pay this interest back to them annually as the required interest rates can change from year to year. Choosing to do a large balloon payment at the end of their 10 year stay can be complicated and costly if having to account for different interest rates per year.

Know How Many Days You Have to Return or Estimate The Security Deposit Held After Move Out

This tip is one that gets many rental property owners in trouble. Many states require the security deposit distribution noted with estimated repairs or fully paid within a specific number of days. California is a strict 21 days. This means post marks are your saving grace to show you’ve followed the law. If you do not, you may lose the right to use the entire security deposit held. No forwarding address? Send it to the property address they rented from you. Likely they filed a form with USPS to forward that mail to their new address. If not, the post marked form will be returned to you as undeliverable. You may also find it in the mail box of your rental property. You now have that piece of mail with the postal date marked to put in your file. They will contact you at some point to inquire about it. Bottom line about security deposits: It’s the tenants money that you are holding in trust for them “just in case”.There are strict fines in some states when you do not follow the landlord/tenant laws. Run your property rental business in a professional manner by knowing your laws and local ordinances.

CTTO Article Source: www.biggerpockets.com