Before a tenant moves in, you may require them to pay a security deposit to ensure the rental property is maintained, the rent gets paid and the lease agreement is upheld. According to the Zillow Group Housing Trends Report 2020, 88% of renters pay a security deposit, and the typical security deposit amount is $700.

While a security deposit isn't required by law, it can be a good practice to collect one in accordance with the laws in your city and state to financially protect you and your rental property.

How to determine a security deposit amount?

Some security deposits may be equal to one month's rent or as high as three months rent, which is why many states have a limit on how much a landlord can charge for a security deposit on an apartment or rental house. Even if your state doesn’t have a limit, be careful not to charge too much. Recent research found that 35% of renters that save for upfront rental costs like application fees and security deposits say it's a challenge. If you're unsure about the particular security deposit regulations in your city and state, consult an attorney.

Find a balanced security deposit amount

Setting a deposit too high: This could discourage potential tenants who are deciding between your property and a similar one with a more reasonable security deposit.

Setting a deposit too low: If you do this, you may end up paying out of pocket if the tenant defaults on the lease and moves out early, or if a tenant causes excessive damages to your property.

Account for factors that affect the amount

State laws: Security deposits are permitted in all 50 states; however, many states have a maximum amount you can charge and require that itemized accounts be given to the tenant if you use any of the security deposit at the end of the lease.

Monthly rent price: This is the most common factor — the average security deposit amount is usually based on the property’s rent price.

Your property’s amenities: If your property has an elevator, pool or other amenity that is costly to repair, you may want to charge a security deposit amount that’s higher than the typical one month’s rent.

The competition: If other nearby properties have security deposits in the same range, consider setting yours within that range as well. In competitive markets, having a higher security deposit could mean you miss out on a qualified tenant who decides to go with a property that charges a lower deposit.

Keep in mind that charging a high security deposit for families with young children is considered a discriminatory practice under federal and state fair housing laws and should be avoided. Likewise, you can’t charge a higher security deposit based on an applicant’s age, disability or use of a service animal.

When should I collect the security deposit? 

You should always collect the security deposit before the tenant moves in to minimize your financial risk. If you don’t collect the security deposit before they move in, you could end up paying for any damages out of pocket. This is why a security deposit is sometimes referred to as a damage deposit. It’s good practice to:

• Require the tenant to pay the security deposit, first month’s rent and any pet fees at the time of signing the lease or before they move in.
• Require the security deposit in full.
• Give the tenant a security deposit receipt and keep a copy for your records.

Remember that depending on your city or state, there may be laws and regulations around the collection of the security deposit and where it can be held. Always complete a thorough screening of all applicants, and ensure they sign and date the lease agreement and pay all fees before they move in. With Zillow Rental Manager, you can collect rent and one-time fees online.

How should I hold the security deposit?

Some states require landlords to either keep security deposits in a separate account or obtain a security bond. A separate bank account is not required by every state, but it is a good business practice that makes it easier to track tenant payments and pay your taxes.

An escrow-type trust is required by many states to protect from creditors and clearly earmark the money as a refundable security deposit, since security deposits remain the legal property of the tenant. In other words, you are simply a caretaker of the money — not the owner — and must take proper precautions to ensure security deposit funds are not used to cover other operational costs or unlawfully spent.

What do I do if the security deposit accrues interest?

Depending on where your rental is located, you may be required to return the security deposit and any interest that accrues during the lease. Other states may only require you to return it after a certain length of tenancy — and some states don’t even specify whether the interest must be returned. Check your state’s laws and other city and county government sources to understand your specific situation.

When must the security deposit be returned?

Each state has its own deadline for the return of security deposits. But you must return unused security deposit funds in a timely manner, which generally ranges from a couple weeks to more than a month. Usually, the clock starts ticking once the tenant moves out and the landlord has an opportunity to inspect the property. Keep in mind that these funds legally belong to the tenant unless a triggering event like excessive damage to the property has occurred.

When can the security deposit be kept?

Your lease agreement should clearly say which situations allow you to keep all or part of a tenant’s security deposit; otherwise, the tenant may have a strong case against you for wrongfully withholding tenant funds. Nonetheless, many state laws outline the reasons a landlord may withhold funds, even if those reasons are not explicitly cited in the lease.

Here are some common reasons why a landlord may withhold a tenant’s security deposit:

• Failure to pay rent
• Property damage exceeding normal wear and tear
• Unpaid utilities
• Cost to remove abandoned property
• Cleaning costs
• Terminating the lease prematurely

How should security deposit disputes be handled?

In nearly all states, you must provide an itemized security deposit receipt detailing the costs of your expenses, the amount of the security deposit used and any remaining money. If the tenant disputes the charges on the receipt, they may be entitled to file a lawsuit, which could require you to prove that damage occurred and the cost of repairs matches the security deposit amount withheld.

Here are some tips to help avoid potential disputes over security deposits:

• Make sure you’re aware of your maintenance responsibilities as a landlord.
• Document all damages when a tenant moves in and out with a walkthrough checklist.
• Provide the tenant a security deposit receipt itemizing any deductions.

For more articles, tips and trends on being a landlord and managing property, visit our Rental Resource Center.