NBC news reports that Houston is on track to overtake Chicago as the third-largest city in the country in 2025. A growing population means strong demand for rental properties.
Now is the time to be sure your rental agreements are updated. Security deposits are one area to review. You want to protect your interests while respecting tenant rights.
Learn more about security deposits and how to manage them correctly.
What Is a Security Deposit?
A security deposit is money the tenant pays the landlord before occupying the unit. It can cover damage to the property or unpaid charges if the tenant defaults. Security deposits give tenants an incentive to treat the property well so they can get the deposit back when they move out.
A security deposit is separate from rent, advance rent, and application fees and deposits.
How to Set the Amount of Security Deposits
Texas law doesn't limit the amount you can charge for a security deposit. Houston landlords commonly charge an amount equal to one or two month's rent. Factors to consider when setting your security deposit amount include:
- Monthly rent
- Property features and amenities
- Competition
Whatever amount you choose, you must apply it to all tenants equally. Charging a higher amount for tenants with a lower credit score or families with children is a violation of the federal Fair Housing Act.
Monthly Fee
In Texas, landlords can give tenants the option of paying a monthly fee instead of a security deposit. Tenants who choose this option should have the details clearly explained in their rental agreements.
When to Issue Deposit Refunds
Security deposits are refundable if tenants uphold the terms of their rental agreements. If a tenant didn't give you a forwarding address, you aren't required to refund their security deposit. Texas law requires you to issue any refund within 30 days of the renter vacating the property.
If a tenant damages the property beyond normal wear and tear or otherwise breaks the terms of the lease, you can withhold all or part of their security deposit. You must give the tenant an itemized list of anything you deduct from their security deposit if you have their address.
Taxes and Other Financial Considerations
Security deposits have bookkeeping considerations to keep in mind. First, they don't count as rental income unless you withhold some of the deposit. The IRS has rules for deciding which tax year to declare the income based on why you are withholding the deposit.
Texas law doesn't require you to keep security deposits in a separate bank account. It's a good practice, though. Good financial documentation benefits you and your tenants.
Manage Security Deposits More Effectively
Security deposits protect landlords in important ways. They help you recover some of the costs from problem tenants.
Managing security deposits correctly helps you comply with renter protection laws while getting the money owed to you. For help with security deposits and other leasing essentials, turn to PMI Space City.
PMI Space City is a full-service property management company that specializes in the Houston market. We'll ensure your property is legally compliant and as profitable as possible. Schedule a consultation with PMI Space City today and learn how we can help you improve your leasing processes.
