San Francisco is one of the most booming rental areas in the country. And when you’re placing a new tenant in your San Francisco County rental property, there’s a lot to think about. From lease agreements to move-in inspections and welcome packages to handing over the keys, it quickly becomes a very busy time.
That said, one of the most important things you should collect from your tenants before they move in is a security deposit.
Collecting a security deposit is something all successful landlords do. But there are some things to remember. So, if you’re ready to start protecting your property and finances, read this guide to collecting a tenant security deposit.
What is a Tenant Security Deposit?
A tenant security deposit is a deposit of money that tenants give to their landlord or local property manager when they move in. This money serves as a guarantee that the tenant will follow the lease agreement. It also helps ensure they’ll pay rent on time and take care of the property. If the tenant fails to follow through with their promise, the money can be used to cover the landlord’s losses.
It’s important to remember that a tenant security deposit does not belong to the landlord. It is not extra income for the landlord. Lastly, if the tenant lives up to their end of the lease agreement, the landlord is legally required to return the security deposit in full.
If there is damage to the property at the end of the tenancy, the landlord can use some of the security deposit for repairs. The same is true if the tenant fails to pay the last month’s rent. But until that happens, it’s the landlord’s job to hold onto the security deposit throughout the tenancy.
Tips for Collecting a San Francisco Tenant Security Deposit
Collecting a security deposit from your San Francisco tenants is more complex than having your tenant hand over some money. That’s why we’ve put together this list of tips to guide you through the process.
1. Follow State Rules and Regulations
All states have their own landlord-tenant laws about how to handle security deposits. For example, San Francisco has the following rules and regulations regarding security deposits:
- Landlords must pay interest on the deposit to the tenant every year
- Unless there is damage to the property, the security deposit must be returned in full
- Landlords must perform pre-move-out inspections if requested by tenants
- Security deposits are always considered “refundable” in the lease agreement
- Landlords can only collect up to two times the monthly rent
- Landlords have 21 days after a tenant moves out to account for any use of the security deposit or return it in full.
2. Collect a Tenant Security Deposit Before Move-In Day
As an experienced landlord, you’re probably familiar with collecting first (and possibly last) month’s rent prior to your tenants moving in. Yet, if you want to collect a security deposit, this too should be done before your tenants move in.
Here are some things to consider:
- Discuss with your tenants how much you’ll be collecting
- Always run an income check to ensure they can pay all the required money upfront
- Have tenants sign the lease agreement, hand over the money, and then receive the keys
You’ll want to do all this before your tenant moves in to make sure everything goes smoothly. It also prevents any future disagreements.
How Tenants Should Pay the Security Deposit
Another important thing to think about when it comes to collecting a security deposit is how the tenant will pay. You want the funds they pay to be guaranteed. Because of this, you should never accept a personal check for a security deposit. You never know if that check is going to clear or not.
Also, don’t accept cash. While cash is good, there is no way to keep track of cash for your accounting records. The last thing you want is for your tenant to claim they paid you more than they actually did. If you accept cash, you won’t be able to prove it either way.
Instead, require a money order or cashier’s check from your tenant. This way you know they’re good for the money.
3. Put it All in Writing
You should always include the security deposit details in your lease agreement. This means the size of the deposit and the landlord’s responsibilities. It also includes the tenant’s responsibilities plus what it will take to receive the security back in full.
You might also consider adding a due date to the security deposit. If your tenant cannot come up with the full amount by move-in day, it’s time to reconsider them.
4. Collect the Security Deposit Separately
It’s convenient to collect the first and last month’s rent from your tenants at the same time you collect the security deposit. But we recommend collecting them separately.
To start, collecting them separately makes organizing your finances a lot easier. There’s a lot of bookkeeping required when you own a rental property. Making sure your records are clear and concise will prevent accounting errors.
In addition, most states require you to hold security deposits in a separate bank account. Remember, this money is not to be added to your income. It is the tenant’s money you’re holding for safekeeping while they rent from you. If you collect the tenant security deposit on its own and place it in the correct bank account, you’ll never risk accidentally mixing that money with your own assets.
5. Use the Security Deposit Responsibly
When the end of your tenant’s lease term comes, you should be very careful about how you spend the security deposit you collected.
A security deposit is collected from tenants to financially guard you from excessive damage to your property. That said, you cannot use the money on typical wear and tear to your property. This type of damage is part of being a landlord and you must foot the bill for those costs.
Here are some of the most common reasons you will be able to keep some or all your tenant’s security deposit:
- Excessive Damage to the Property: Burnt carpet, upholstery rips, broken appliances, and large holes in the wall equal excessive damage. Faded paint, worn carpet, or anything else that equates to regular use of the property does not.
- Cleaning Costs: Removing excessive amounts of trash or abandoned furniture or performing a deep cleaning may warrant the use of the security deposit. The regular cleaning you perform as part of the rental turnover process will not.
- Lease Violations: If your tenants violate any major lease provisions, you may be able to withhold some or all the security deposit. For example, having a dog when you have a no pet policy in the lease agreement might warrant the use of the security deposit. This is especially true if the animal caused damage to your property.
- Unpaid Utility Bills: When your tenant moves out, it is expected they pay for the last month’s worth of utility bills before they are transferred back into your name. If there are any outstanding charges, you can use some of the security deposit to clear the late payments.
- Nonpayment of Rent: In serious situations where your tenant abandons the property and fails to pay the rent, you can use some of the security deposit to cover your losses and the cost of eviction proceedings.
Are you in need of San Francisco property management? If you’re done with having to collect your own security deposits but aren’t ready to get rid of your rental property, contact us today and see how we can help.
At Sharevest Property Management, we take the hassle out of owning a rental property and leave the benefits to you. We’ll place nothing but high-quality tenants in your rental and ensure they have the money to fund a security deposit, so you’re always protected. Mix in rent collection, property inspections, maintenance and repairs, and more, and you’ll never have to worry about your investment property again.