A security deposit is intended to provide some balance to the risk that a rental property owner takes on when allowing someone to move into their rental property. The money you collect as a security deposit is meant to cover the potential costs of repairing any damage that’s left behind by a tenant after the move out at the end of the lease term. It could also cover unpaid rent and utilities. If a tenant breaks a lease and moves out before the end of the rental contract, the security deposit will cover part of those expenses as well.
It’s never a good idea to waive security deposit requirements. Even your best-qualified tenant should provide you with a security deposit before moving into your rental property.
Security deposits can be tricky. If there’s going to be a dispute between you and your tenants, it will likely be around the security deposit and its return. Most tenants expect to get a full refund of their deposit at the end of a lease term. Most rental property owners will not hesitate to withhold part of that deposit for even a little bit of damage that’s discovered.
Before we worry about the security deposit return, however, there’s the security deposit collection to navigate. How is it done? What are the legal requirements for security deposits in Virginia?
As professional property managers, we’re dealing with security deposits all the time. We understand the legalities involved, and we’re careful about documenting every step of our collection and return process. We’ve put together a brief guide on how to effectively collect this money from your tenant. Here are the conditions that are required to effectively and lawfully collect a security deposit from your tenants at move-in.
You Must Have an Approved Tenant
You cannot collect security deposits from tenants who are simply interested in your home or filling out an application. As they prepare to be screened, you can charge an application fee from each prospective renter, however the security deposit cannot be collected until you have an approved tenant who is ready to sign a lease agreement and set a move-in date.
In some cases, a prospective tenant will put a deposit down on a property in order to secure it during the leasing period. This is not the same thing as a security deposit and cannot be treated as such. To avoid potential fair housing claims, it’s not a good idea to give one tenant preference over another, even if they’ve offered a deposit. Move through your screening process swiftly, and offer the property to the tenant who meets all of your rental criteria. Once that tenant has expressed that they’d like to rent your property and sign the lease, you can ask for and collect a security deposit.
Virginia Limits on Security Deposit Collections
You don’t want to violate state law by collecting more of a deposit than is legally allowed.
In Virginia, you are permitted to collect up to the equivalent of two months’ rent. You cannot collect more than that. If you do the math, it’s pretty simple. When you’re renting out a home for $2,000 per month, the most you can collect in a security deposit is $4,000.
What you collect is up to you, as long as you don’t surpass that limit. Remember, however, that to find and place a qualified tenant quickly, you’ll want to make it easy for them to move in. Coming up with a lot of cash up front might be a struggle even for financially stable renters. They’ll be paying the security deposit, but they’ll also be paying the first month’s rent before they move in. If they’re bringing a pet into the property, there may be a pet fee as well.
Most of the best practices you study will say to collect the equivalent of one month of rent, or slightly more. So, with your $2,000 per month rental home, you can ask for a security deposit of $2,200. That will keep you competitive with other rental properties, especially apartment buildings that often offer a security deposit that’s as low as $300 to qualified tenants.
This condition has to be met before you collect the security deposit. Know what you’re charging, and make sure it’s no more than the legal limit.
Your marketing might want to include your security deposit amount so prospective tenants understand what they’ll need in terms of cash on hand in order to move into your property.
Security Deposit vs. Damage Insurance
Virginia law allows you to collect up to two months’ of rent in a security deposit or in damage insurance. Damage insurance premium payments will not be the same as a security deposit, and here’s what the law has to say about this matter, specifically:
§ 55.1-1206. Landlord may obtain certain insurance for tenant.
“A landlord may require as a condition of tenancy that a tenant have damage insurance and pay for the cost of premiums. As provided in § 55.1-1200, such payments shall not be deemed a security deposit, but shall be rent. However, as provided in § 55.1-1208, the landlord shall not require a tenant to pay both a security deposit and the cost of damage insurance premiums if the total amount of any security deposit and damage insurance premiums exceeds the amount of two months' periodic rent. The landlord shall notify a tenant in writing that the tenant has the right to obtain a separate policy from the landlord's policy for damage insurance. If a tenant elects to obtain a separate policy, the tenant shall submit to the landlord written proof of such coverage and shall maintain such coverage at all times during the term of the rental agreement. Where a landlord obtains damage insurance coverage on behalf of a tenant, the insurance policy shall provide coverage for the tenant as an insured. The landlord shall recover from the tenant the actual costs of such insurance coverage and may recover administrative or other fees associated with administration of a damage insurance policy, including a tenant opting out of the insurance coverage provided by the landlord pursuant to this subsection. If a landlord obtains damage insurance for his tenants, the landlord shall provide to each tenant, prior to execution of the rental agreement, a summary of the insurance policy or certificate evidencing the coverage being provided and upon request of the tenant make available a copy of the insurance policy. For a tenant that opts out of the landlord's damage insurance program, the landlord shall allow such tenant to either provide their own damage insurance policy or pay the full security deposit.
It’s rare that we come across a property owner electing to collect damage insurance instead of a security deposit.
Reference the Security Deposit in Your Lease Agreement
A condition of collecting the security deposit is that your tenant is prepared to sign the lease agreement.
In Virginia, landlords are not required by law to provide a written receipt for the security deposit. You’re not required, legally, to put this information in your lease agreement.
We still recommend it. When you talk about the amount you collected and what your tenants will have to do in order to receive a full refund of that deposit, you’re giving them an early indication of what you’ll be looking for at the end of the lease term, when you’re conducting your move-out inspection and making decisions about the security deposit return.
Include a receipt for the security deposit, with the name and location of the bank where you’ll hold the security deposit. You can also provide a checklist or a move-in statement that describes and documents the condition of the property at the start of the tenancy. Again - this is not a legal requirement, but a best practice from your local property management experts.
Security Deposit Interest in Virginia
Before 2014, landlords in Virginia were required to store a tenant's deposit in an interest-earning account and pay out that annually once those tenants had rented for at least 13 months.
Virginia landlords are no longer required to put a tenant's entire security deposit in an interest-accruing account, per the law. The only exception to this is if both you and your tenant agree in writing as part of the lease or rental agreement. There are also no requirements on where you hold the deposit; you can put it in a bank of your choosing.
Remember that Security Deposits are Always Refundable
You cannot charge a non-refundable security deposit. Any fees you collect (such as pet fees) must be specifically designated as non-refundable. Security deposits, by nature, are refundable. You are not permitted to declare any portion of your tenant’s security deposit as nonrefundable.
There’s a lot to consider when it comes to security deposits, and it’s easy to make a mistake.
Instead of risking an expensive error, work with a local property management company. Contact our team at Doud Realty Services, Inc. for extra help or additional resources. We provide expert property management in Norfolk, Portsmouth, Hampton Roads, as well as surrounding areas such as Virginia Beach, Suffolk, Chesapeake, and Newport News.