Attention Rental Owners - The Security Deposit is Not Rent!

Attention Rental Owners - The Security Deposit is Not Rent!

By definition, the security deposit is not rent.

Cornell Law School describes the security deposit as a “payment required by a landlord to ensure that a tenant pays rent on time and keeps the rental unit in good condition.” Some states even require landlords to set up escrow accounts to separate the security deposit from rent.

But it doesn’t take alchemy to change a security deposit into rent.

When a tenant is unable to afford rent, they may ask you to use the security deposit. On the surface, the request is reasonable—especially in the final month of tenancy (if the property was wellkept). Unfortunately, using the security deposit as rent isn’t in your best interest. There are several factors to consider before accepting the security deposit as rent.

1) What if the tenant doesn’t have the next month’s rent?

If the tenant is unable to catch up on rent, you’re in an unfortunate position where you need to ask them to leave (file an eviction if necessary), and pursue them for what’s owed. Some states allow you to use the security deposit for unpaid rent after a tenant leaves. If you use the security deposit prior to their departure, you risk more of your finances upfront. While legal recourse is available to recoup your loss, this takes time.

Rental Owner Who Accepts Security Deposit as Rent

MonthRent DueSecurity DepositRent Received
$1,000$0$1,000 (Security)
4 (Eviction Filed)$1,000$0$0
Total Loss for Rent Non-Payment: $2,000

Rental Owner Who Holds onto Security Deposit

MonthRent DueSecurity DepositRent Received
3 (Eviction Filed)$1,000$1,000$0
Total Loss for Rent Non-Payment: $1,000

2) Are you prepared to pay for damage?

If damage is present after the tenant leaves, you won’t have the security deposit for repairs. Depending on the extent of damage, it may not be worth your time to pursue the tenant. However, a couple hundred dollars in repairs may be a significant out-of-pocket expense, especially for small landlords.

3) What if a tenant uses the security deposit for the last month but doesn’t leave?

A tenant may suddenly be unable to move out as planned. No matter the reason, the safety deposit is gone if you took it as the last month’s rent. You must now hope for the following: your tenant continues to pay; the tenant finds somewhere else (if you already have another renter lined up); and the tenant doesn’t damage the property. In other words, the risks are on you.

Before you accept a security deposit as rent, consider alternative solutions such as working out a payback plan with your tenant or asking for the last month’s rent upfront when signing on new tenants (this may limit the pool of applicable tenants, but those who afford it are likely to be more financially stable). Review state laws and the terms of your lease regarding security deposits, and don’t put yourself in a position where you’re not prepared in the worst case scenario. It’s okay to say no, and if you need a polite way to say it, include a clause in the lease agreement outlining the allowable instances for using the security deposit.

Share on facebook
Share on twitter
Share on linkedin
WILMOTH Group is headquartered in Indianapolis, Indiana. We focus on providing creative local solutions for a variety of residential real estate needs including, properties for sale, property management services in Central Indiana.