Security Deposit Interest
Interest on Security Deposits

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INTEREST ON SECURITY DEPOSIT

When a tenant signs a lease, they are usually required to provide the landlord with a SECURITY DEPOSIT. 

The SECURITY DEPOSIT is to ensure that when you leave, you have not caused damage above Normal Wear and Tear. The deposit will also be applied to unpaid rent and late charges. You may also be responsible for any other fees such as utilities and cleaning costs they are a permitted charge by your lease or by law.

The deposit is NOT to be used to pay the last month's rent, although many tenants elect to do so. If you do so WITHOUT the landlords permission, they may be entitled to charge you a late fee - which would come out of the security deposit.

SECURITY DEPOSIT INTEREST

Today, the interest rate earned on MOST security deposits is minimal (assuming you are not paying thousands in rent). The average interest rate in varies from year to year, may be set by state law or may not apply at all to your rental.

If you provide a security deposit to your landlord DO SO BY CHECK OR MONEY ORDER. Keep a copy for your records. Many states require the landlord to provide you a written statement (which may be in your lease) where your security deposit is held. Many states also require the landlord to credit you each year with the interest earned on your deposit.

THE SECURITY DEPOSIT CALCULATOR

Generally, interest on a security deposit is called SIMPLE INTEREST.

To calculate what you may have earned or have to return we use the simple interest formula: Principal x Interest (for a full year)

Example of Calculating Security Deposit Interest FULL YEAR

Principal (the deposit) = $1,000

Interest = 1% which we change to .010

$1,000 * .01 = $10

Example of Calculating Security Deposit Interest PARTIAL YEAR

$1000 * .01/12 * 7 (or any number of months) = 

ARE YOU ENTITLED TO INTEREST ON YOUR SECURITY DEPOSIT

Each state and many cities and towns may have special rules depending on a number of conditions. Some of them can make your head spin.  Look at your STATE LAW to see if your unit qualifies and how your town, city or state rules impact you - either as the landlord or tenant.

Some examples that may or may not apply to you:

 - Owner Occupied, 1-4 units n/a  - Short term rental 
YOU SHOULD ALWAYS ASK FOR A RETURN OF THE SECURITY DEPOSIT in WRITING

In many states, you must send a DEMAND LETTER - which is simply a letter requesting your landlord return your security deposit. EVEN IF you do not have to in your state, you should do it anyway. Send it CERTIFIED MAIL. ALWAYS PROVIDE YOUR NEW MAILING ADDRESS. IF you fail to REQUEST YOUR SECURITY DEPOSIT be retuned, you may forfeit your right to it. Look at your STATE LAW.

ALWAYS DEPOSIT YOUR TENANTS SECURITY DEPOSIT 

Be smart. ALWAYS deposit YOUR TENANTS SECURITY DEPOSIT (it's the tenant's money til they move out) in an INTEREST BEARING ACCOUNT and NOT IN YOUR ACCOUNT. Go to the bank and ask to open a LANDLORD TENANT ACCOUNT. Smaller landlords will have separate accounts. Larger landlords MIGHT have one overall security deposit account.

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