Security Deposits are extremely important.
Important to you as the Landlord, and important to your Tenant, because it's their money... until it isn't.
In fact, my guess is if you polled Property Management Companies around the country, the majority would say Security Deposits generate the most friction in their businesses.
So, you need to have strong processes around Security Deposits, understand your state and local laws and still be prepared for some battles along the way.
Today, we thought we would discuss best practices concerning Security Deposit and provide some additional insight into how Indiana operates (or fails to operate, in some cases).
How Much Security Deposit Should I Charge?
When deciding what to charge Tenants, keep in mind that going too high may limit the pool of applicants, but going too low may attract unwanted applicants.
The state of Indiana does not have any rules or
restrictions on what you can charge for a Security Deposit, so it's completely up to your discretion. At T&H Realty, we preach that you should NEVER charge less than one month's rent.
We use what's called a risk-based deposit model which simply means that we base the amount we charge on a variety of factors such as credit score, rental history and monthly income. Depending on the outcome of the applicant's processed app, we may charge up to 2 month's rent for the Security Deposit.
A well-priced Security Deposit protects you from potential damage and encourages residents to respect the property.
When Should I Collect the Security Deposit?
Short answer... as soon as you have screened the applicant and are comfortable moving forward. We generally require Tenants to pay their deposit within 24 hours of signing a Lease. A signed Lease without a deposit, while valid, doesn't have the teeth as a Lease with a fully funded deposit.
If a Tenant balks at paying a deposit or wants it divided up into three different payments over a few months, I would continue looking for a tenant. It’s always a concern if a Tenant does not have the financial resources to pay for a Security Deposit and the first month’s rent.
Where Should I Hold the Deposit?
We advise that, since the Security Deposit is considered the Tenant’s money, you should hold it in a separate account that only has Security Deposits in it. Failing to do this can cause numerous problems such as lack of tracking and accidental spending.
The state of Indiana doesn't have a statute on interest bearing accounts, so you are not required to refund any interest gained on the deposit.
The amount of properties you manage will determine how you should structure your bank accounts.
What Can I Keep the Security Deposit For?
Obviously, there are certain instances where you can deduct all or part of the Security Deposit from the Tenant. The official law states that Landlords in Indiana may keep Security Deposits for the following purposes:
1. To reimburse the landlord for actual damages to the rental unit or any ancillary facility that are not the result of ordinary wear and tear.
2. To pay the landlord for: (A) all rent in arrearage under the rental agreement; and (B) rent due for premature termination of the rental agreement by the tenant.
3. To pay for the last payment period of a residential rental agreement if a written agreement between the landlord and the tenant stipulates that the security deposit will serve as the last payment of rent due.
4. To reimburse the landlord for utility or sewer charges paid by the landlord that are: (A) the obligation of the tenant under the rental agreement; and (B) unpaid by the tenant
So, while there is some good guidance here, there is a lot left to interpretation as well, especially when assessing what is "normal wear and tear."
This is where you will need to construct your Lease with exactly what you expect when the Tenant leaves. Should the carpets be professionally cleaned? Should the house be fully cleaned?
Further, you will need to adopt some standards on certain items like paint and flooring. If a Tenant lives in your property for 3 years and the home needs painted upon move-out, should the Tenant bear any of this responsibility?
These are important and tricky considerations that you need to determine as soon as you decide to become a Landlord.
How Do I Refund the Deposit?
Again, it’s state-driven. In Indiana, you have 45 days after the lease end date and the Tenant has vacated to return the deposit in full or provide a letter noting what deductions were made from that Security Deposit.
If you’ve read my previous blog on wear and tear, this is where that information becomes extremely important. If your security deposit is $1,000 and you feel like the Tenant did $200 of damage outside of normal wear and tear, you’ll need to refund the $800 within 45 days and provide documentation on how that $200 was spent.
What if I Don't Refund the Security Deposit within 45 days?
If you, as the Landlord, fail to return the deposit or send a letter itemizing what the deposit was used for within the allotted 45 days, then you leave yourself open for a lawsuit.
The Tenant has the right to sue you in small claims court for the full amount of the deposit and you will be forced to claim that no damages are due, with the exception of unpaid rent.
As a Landlord in Indiana, you don't have a ton of guidance on the matter of security deposits. You can combat this by A) Knowing and understanding what laws Indiana does have regarding security deposits and B) Developing a system and process that you will adhere to consistently from Tenant to Tenant.
Remember, the security deposit is the Tenant's money.
Contrary to what you may think, it's actually better when you end up giving the Tenant back the full (or close to full) deposit because that means the Tenant left your property in good condition which means less turnover work for you.
It's a win-win-win situation!
This blog was originally written in January of 2014 and has been updated for comprehensiveness and accuracy.