The Big Picture On The Common and Costly Mistakes Landlords Make With Security Deposits
- Protect yourself from tenant disputes by meticulously documenting the property’s condition during move-in and move-out inspections.
- Keeping security deposits in a separate, interest-bearing account, as required by law, ensures compliance and avoids financial complications.
- You can avoid legal penalties by strictly following your state’s deadlines for returning security deposits and providing itemized deduction statements to tenants.
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How much security do security deposits actually provide?
Security deposits are only as effective as landlords’ policies regarding them. But most mom-and-pop landlords learn the hard way that security deposit mistakes are among the costliest they can make.
Sure, most landlords know there are state-specific limits on what they can collect as a security deposit (see our state landlord-tenant law summaries). But that’s about the extent to which most landlords think about their security deposits.
So, what do landlords get wrong with their security deposit policies? Here are five common landlord security deposit mistakes… and some actionable tips for better results.
Mistake #1: Assuming the Security Deposit Will Protect You
Security deposits protect against exactly one thing: minor tenant damage to the property. They don’t protect against major damage (anything costing more than the deposit collected), “normal wear and tear” (which often requires $4,000-6,000 in fresh paint jobs and new carpets), rent defaults (the eviction process can take as long as 5-9 months), or lawsuits.
So what can landlords do to protect against those costs and risks?
First and foremost, landlords should aggressively screen all rental applicants to avoid landlord security deposit mistakes down the road. We have entire articles devoted to tenant screening, but start with running tenant credit reports, criminal background checks, and nationwide eviction reports. Call each applicant’s employer to verify income and future employment prospects. Call current and prior landlords to verify rent payment history.
Beyond tenant screening, sign a thorough, protective lease agreement. It must be state-specific and comply with all state requirements (including required lease clauses and disclosures). But it should also include clauses that protect your property against damage (such as these lesser-known lease clauses to protect you as a landlord.)
Once the renters move in, conduct semiannual inspections of the leased unit. If you don’t like how the renters treat your property, start by sending lease violation notices. If they keep up the bad behavior, you can either start the eviction process or non-renew the lease agreement with them when the end of the lease term approaches.
Essential Landlord Insurance Policies to Consider
While we’re at it, landlords should consider insurance policies for added layers of protection. Below are some of the common ones. Note, however, that coverage varies from one insurer to another.
| Insurance Policies | What They Cover |
| Property Damage Insurance | Covers physical damage to the rental property caused by fire, weather, or other covered perils |
| Liability Insurance | Protects against legal claims and lawsuits filed by tenants or their guests for injuries sustained on the property |
| Rent Loss Insurance | Reimburses lost rental income if the property becomes uninhabitable due to a covered event |
| Umbrella Insurance | Provides additional liability coverage beyond the limits of your primary policies |
| Landlord Contents Insurance | Covers any personal property you keep on-site for maintenance or tenant use, such as appliances or furniture |
| Emergency Repair Insurance | Covers the cost of emergency repairs, such as burst pipes or HVAC breakdowns |
Mistake #2: Failing to Do Move-In & Move-Out Condition Inspections
Another common landlord security deposit mistake is failing to record the property’s condition. Hear me out: if you didn’t document the condition when the tenant moved in and the subsequent condition when they moved out, how can you prove what damage the tenant caused?
You can’t. When they object to you deducting money from the security deposit to cover their damage, the renter can simply say, “That damage was there when I moved in.”
Use a Move-In/Move-Out Condition Report and walk through the property in person with the renter both at move-in and move-out. Write out every damaged item, every scar, and every scuff. Initial each line and have the renter do the same. Photograph each item with a timestamp, and store both the signed document and the photos on our landlord app to track each unit’s status.
Keep both hard copies and digital files – losing either one is too easy, and we’re talking about assets worth hundreds of thousands of dollars here!
If you ever need to defend your security deposit deductions to a judge, you’ll have ironclad proof of what damage was pre-existing and what was caused by the renter.
If, for some urgent reason, you or your leasing agent can’t walk through the property with the renter in person, include a provision in the lease that the tenant must sign and return a condition report within an allotted time. Go one step further and specify that if the tenant fails to return the report, the rental is received as satisfactory.
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Mistake #3: Failing to Hold Security Deposits in a Separate, Interest-bearing Account
Many states require landlords to hold each security deposit in its own separate, interest-bearing bank account. Even if your state doesn’t require this, do it anyway.
It makes your accounting easier. But more importantly, it prevents any temptation to spend the security deposit. You’d be amazed how often landlords commingle their tenants’ security deposits with other funds, spend the money, and then scramble to come up with the cash when the tenant moves out.
And if the security deposit earns interest, and you don’t have to hand that interest over to the renter, it’s found money!
Mistake #4: Improperly Keeping Deposits for Early Lease Termination
Every experienced landlord probably understands how tenants pulling the plug on their lease early can throw them for a loop. The temptation to hold onto that security deposit as a quick fix is real—due to the hassle and potential money loss.
However, one of the most common landlord security deposit mistakes is keeping the money without adhering to regulations, which could result in legal trouble. State-specific laws, such as the California Civil Code Section 1950.5, mandate landlords to handle security deposits similarly, whether tenants stick them out or bail early.
If they want to recoup costs from a broken lease, like missed rent or the tab for finding new tenants, they’d need to take it to court and get a judgment in their favor. It is an absolute nightmare from the landlord’s end, but sticking to the rules helps you avoid legal headaches and ensure you’re on solid grounds.
Mistake #5: Missing Security Deposit Deadlines
Every state has its own rules on how and when landlords must refund vacating tenants’ security deposits. Or, as the case may be, providing a written breakdown of deductions.
In most states, however, if the landlord misses the deadline to provide a written breakdown of deductions, they lose all rights to deduct any costs from the security deposit. They must immediately fully refund the deposit or deal with nasty fines and penalties.
Do not pass Go, and do not collect $200.
Your rental investing business is a business. You need to operate as such because you’re under strict deadlines. Missing them will cost you dearly.
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Mistake #6: Taking Extra for Normal Wear and Tear
I can’t overstate how important it is for landlords to understand how much they need to take from a tenant’s security deposit. Overcharging can lead to a whole heap of troubles.
Landlord security deposit mistakes, such as mixing normal wear and tear with actual damage, are very common. We already know what “normal wear and tear” is, right? On the other hand, actual damages might include loads of holes, massive stains, busted fixtures, etc.
Now, overcharging tenants for simple wear and tear can spark arguments and even legal situations. If a tenant decides to take the issue to small claims court and wins, the landlord might be required to pay for the wrongly withheld amount plus extra penalties, depending on the specific state laws.
To avoid all these headaches, the best thing to do is document everything thoroughly and charge only for real damages. Again, keep detailed records and take before-and-after photos to be ready to justify any deductions.
Mistake #7: Deducting Your Labor Expenses Without Documentation
Landlords get into a fuzzy gray area of the law when they do the repairs themselves after a renter moves out, and they deduct from the security deposit to pay themselves.
If you do this, ensure you cross every T and dot every I. Keep detailed records of your hours worked and receipts for all materials. Charge an hourly rate comparable to other providers for this type of work.
If your ex-renters take you to court over the deductions, be prepared with four types of evidence: proof of the damage itself, proof that the renters caused it, proof that the time it took you to repair it was typical of industry standards, and proof that your hourly rate was typical of industry standards.
The burden of proof lies squarely on your shoulders to defend your legitimate labor deductions.
Are There More Landlord Security Deposit Mistakes To Avoid?
Here are a few more tips for success in protecting yourself, your property, and your returns:
- If you allow pets, charge higher rent (“pet rent”) and a pet deposit for each pet. Pets cause extra wear and tear and damage to your rental property. There are good reasons to accept renters with pets, but you must also protect your property. Landlord security deposit mistakes often include not understanding state restrictions on deposits. In most states, pet deposits are lumped in with other security deposit restrictions – if your state limits security deposits to 1.5 month’s rent, you can’t charge one month’s rent for the security deposit plus one month’s rent for the pet deposit.
- If you’re thinking of accepting a higher-risk renter, collect a higher security deposit if you can. If you’re considering taking a risk on a rental applicant with patchy credit or housing history, collect the maximum amount allowed by law in your state. You might also consider requiring a co-signer for the lease agreement and/or automated rent collection.
- Know the difference between damage and “normal wear and tear.” Generally, damage is caused by a single incident, while “normal wear and tear” is caused by repeated use of a lived-in space. Your mission should be to minimize normal wear and tear, too. How? Lucky for you, we have an entire article devoted to tenant-proofing your rental property!
What security deposit mistakes have you made? Do you have any gnarly stories to share to help other landlords avoid the same mistakes? Don’t be embarrassed—I’ve made plenty of my own mistakes!
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I spent several weeks trying to get decent estimates for all the damage caused by a particularly bad tenant. I sent him a breakdown of deductions two days past the deadline. He then took me to court over the deposit and won. Unbelievable
My landlords agency failed to send me a certified mail letter imposing claims on my security deposit. By the way I live in Florida. I turned in all keys and gave forwarding address to the company on 12/9/2019. On 01/10/2020 I received a manilla mail envelope (not certified mail) with a letter from the agency on what remaining balance that they are sending me. They provided two invoices that the owner paid to get work done and a total of nine pictures of the home that the owner took. I also recieved a check from the actual landlord of the remaining balance, portion of it written in Spanish. I thought that if I paid the agency my security deposit they were to send me a check not her directly. Prior to me moving out I did a seven minute video and pictures of the home since they do not do walk throughs with tenants. However long story short the landlord spent an estimated $994 dollars out of our $1500 deposit before submitting a claim then sent me the remaining balance. By law I was under the impression they were to notify me by certified mail for me to object before spending money? I believe that if they dont they forfeit and is to return my full security deposit. I will be filing a lawsuit. Remind you she put the house up for sale on 12/22/2019. It appears she spent our money to get her house ready to sell.
It can get even worse. It PA, if you are even one day late, a tenant can be awarded back double the security deposit. Usually the case would have to show some type of negligence on the landlord’s side of things. BUT if you have a judge who was just appointed to the local district court as a sideline to his comic book business……well, it will be all up to him to decide. Not very comforting!
This tenant is always late can o evict this person or refuse rent at some point
I’ve found the best way to deal with tenants who make you chase them for rents is to non-renew them when their lease agreement comes up for renewal, rather than going through the eviction process, with is time-consuming and expensive.
Landlords can use security deposits for rent defaults and to cover early termination. Is there a citation for point #1?
The problem is it takes longer than one month to get non-paying tenants out. So if the security deposit is one month’s rent, but it takes four months from when a tenant stops paying rent to when you get a new tenant in place, that’s three months of lost rent, not including any damage caused by the tenant.
I plan to use my security as last months rent.
My landlord is great, sort of ….lovely house, respectful, but constantly in common area watching TV or doing her exercises, or eating. I feel like I am living in a fish bowl.
Her kids keep visiting — so I come home from working finding their cars in my parking space.
She has a revolving door of renters…due to her strictness….She likes me because I don’t use the laundry machines, kitchen, common areas…and pay rent on time and am good, respectful tenant….I do this to keep hassles to a minimum…..then she expects other renters to do the same. God forbid, they expect to use the kitchen and other parts of the house.
She is there ALL THE TIME…no privacy…even though she is nice….but no one likes being locked in their rooms upon coming home…because to go out again results in prying eyes and questions of the landlord.
She lost another renter and decided to bring in a “really sweet girl” right before she leaves for vacation another month and before she knew anything about this person.
The girl whined my using our shared bathroom..as God forbid I didn’t clean up after myself (there was a drop of water left on the sink. The horror!) Pitches were taken of said offense and emailed to landlord who then forwarded them to me with the words “discuss.”
Spoiled girl made a mess of the house in the landlord’s absence while my presence was hardly notice. Meanwhile, I had proof she had been exploring in my room and stolen from me. I only mentioned this after I got the “discuss” emails….
I ended up taking out a gym membership ($500/year) to avoid roommate drama.
Even though I was no longer using the bathroom, I once came in to check myself in the mirror before heading out to work whereupon I noticed notes taped all over the bathroom whining about how I needed to clean up after myself in there…even though I never was in there….and kept the place neat when I was…..
I wrote back…Lady, I’m paying $500/year now for a gym so you can have your own private bathroom….That led to notes under the door from said renter…apologies…and finally to her either getting evicted or leaving on her own accord….
Landlord has hustled me for jobs for her kids…sending me their resumes and demanding that I forward them to HR…..I am a good renter, bordering on doormat…pay rent on time…am quiet and respectful….
You better believe when it comes time to leave…there is not a chance in hell I am going to risk losing my security deposit….In stress, liberties taken, my not even using the services I am paying for, and then being inconvenienced by self-involved landlord ….my security deposit is going to be last month’s rent…because I said so…..
I secretly believe landlord is keeping all the other security deposits from revolving door of renters. She can’t seem to keep people for long. Gee, wonder why….
Renting sucks…I used to own…..then you have to deal with financial extortionists otherwise known as HOAs, property taxes in which you pay for your house many times over, ever increasing utilities, upkeep etc…..Sucks….Now at least I can keep the money ….
I don’t see the point in security deposits beyond free money for landlords. If you can’t afford to rent, don’t. If the tenant damages the property, evict or sue or require payment….Why should I have to chase the landlord down for my money back?
Landlords are narcissistic..thinking we are peasants from whom they collect taxes….The liberties these people take is unbelievable. Don’t forward notes from dumb renters with words, “discuss.” I don’t want to discuss. Not my problem. You brought these people into the house to disrupt my right to quiet enjoyment without consulting me….and who are furious simply at sharing a bathroom because you want more money by bringing these people in without vetting them….
No, I don’t want to help your kid get a job. I paid for my parking space. Your kids should not be in it even if they are your kids. If you can’t understand this, don’t rent. If you rent, have enough decency to quite living in common areas so that others can enjoy privacy. No, you don’t get to keep my security deposit me. Not only am a due a refund, but I am using that as last months’ rent — the smiling, put upon renter.
I am in the process of purchasing a rental property and the lender wants to see the first months rent and security deposit from the Tennant deposited and cleared. I don’t feel I can require someone to let me deposit a large sum of money ($6000) on something I don’t even own yet. Seems to me this would be illegal and the rental contract isn’t even valid until I have ownership of the property.
Hmm, seems a bit unusual. One option is putting the money in escrow, so that it’s held be a neutral third party. But it’s a more difficult ask from a prospective renter.
Brilliant writing! Another often overlooked but crucial aspect for landlords is ensuring proper home cooling systems, especially during tenant turnover. High humidity levels can cause mold growth, which may lead to costly repairs and potential health issues. Installing a dehumidifier in addition to regular HVAC maintenance can prevent these problems. Furthermore, energy-efficient cooling systems not only reduce utility costs but also attract eco-conscious tenants. Investing in smart thermostats allows for better temperature control and can prevent disputes over utility bills. Proper attention to indoor air quality can enhance tenant satisfaction and protect your property investment.