Rental deposits are the key to avoiding tenant troubles
Category General News
Rentals remain one of the most popular ways for investors to tap into the real estate market and generate steady income. But as the cost of living crisis squeezes consumers, there's been a sharp rise in searches for "no deposit" flats and apartments - tempting both tenants and some landlords to skip the upfront payment. While waiving rental deposits might seem like a fast way to attract tenants, it's a move that can backfire. Also known as damage or security deposits, these have become standard practice for good reason and one that landlords should consider when renting out their properties.
Rental deposit benefits for landlords
A rental deposit acts as a safeguard against property damage, unpaid rent (where permitted), or early lease cancellations - offering protection that kicks in once the lease ends. While not compulsory, it is a must-have financial cushion to protect a landlord's property asset and income stream.
The deposit can be used for the following costs:
Settle unpaid rental or utility bills at the discretion of the landlord or property manager. In some instances, this is not allowed as there may still be outstanding utility/maintenance repair charges, which are harder to recover once a tenant has moved out. Prospective tenants should have a good understanding of the terms of their lease agreement and enquire further if any parts are unclear
- Recover costs for damage to the property beyond normal wear and tear
- Offset cleaning costs if the property requires more than a standard cleaning
- Cover potential losses if the tenant has breached their contract (e.g., early rental cancellation without proper notice)
- Replace lost keys
- Fund the costs of a legal eviction of a tenant
The deposit cannot be used for the following costs:
- Handle general maintenance and upkeep of the rental
- Account for fair wear and tear from normal use of the property
- Impose penalties for late rental payments
- Repair or clean parts of the property not damaged by the tenant
- Attend to any parts of the property not highlighted in the entry inspection
- Finance improvements or upgrades to the property
With the rules of deposit use understood, landlords need to turn their attention to setting a fair and effective deposit amount.
How much should the rental deposit be?
The lease agreement should clearly outline how much a tenant is expected to pay as a deposit. While the Rental Housing Act doesn't prescribe a set amount, the right figure will depend on a landlord's unique situation.
Generally, landlords use one to three months' rent as a standard safety net. But setting the right deposit requires more than just following a rule of thumb. According to PayProp, landlords should weigh several factors, including the local demand for properties, the affordability level in their market, and what's considered standard practice in their area.
It's also considered good practice to request two deposits when signing a lease: one to cover potential damages and the other to cover services. Since municipal bills often take time to arrive, this ensures tenants can still get back their damage deposit if cleared, without waiting on final service balances.
The rental deposit process for landlords
Once a landlord has set the right deposit, it's essential to follow the proper process for handling it throughout the lease.
1. Setting up the rental deposit: Before a tenant moves in, the Rental Housing Act allows landlords to request a deposit, which must be placed in an interest-bearing account at a financial institution for the duration of the lease. The rental deposit remains the property of the tenant even though it's paid to and managed by the landlord or their managing agent.
An important, but often neglected step, is for the landlord and tenant to carry out a detailed joint incoming inspection, carefully noting any existing issues in a written report. When the lease ends, an outgoing inspection should be done, comparing the property's condition against the original report to fairly assess any tenant liability for damages. This careful setup helps protect both parties and reduces disputes when it's time to settle the deposit.
2. Managing the rental deposit: Effective management of the rental deposit goes beyond simply holding the funds. If a tenant requests proof of the interest accrued during the lease, the landlord is legally obliged to provide it - a letter from the relevant financial institution confirming the interest will suffice.
It's also smart practice to maintain a consistent damage deposit ratio as rent increases (typically when leases renew), ensuring that the deposit keeps pace with rising repair costs; this can be done by applying the original ratio to the new rental amount, but the top-up requirement must be clearly outlined in the lease agreement.
Importantly, landlords should avoid letting tenants use their deposit in place of rent, as this weakens their legal position in a breach of contract and often leaves insufficient funds to cover any end-of-lease damages.
3. Paying out the rental deposit: When the lease ends and there are no damages beyond normal wear and tear, the landlord is required to refund the tenant's full deposit - plus the accrued interest - within seven days of the lease's termination. However, if there are damages or unpaid rent, the landlord has up to 14 days after the lease ends to return the balance of the deposit, once allowable deductions have been made.
If deductions are made for repairs, the tenant has the right to see at least two comparative quotes and the final receipts for the completed work, although they cannot insist on using their own contractors or dispute the chosen pricing.
Leave rental management to the professionals
Managing a rental property can quickly become a complex and time-consuming task for landlords, from advertising listings and screening tenants to handling deposits, inspections, maintenance, and compliance. That's where Kellaprince Properties steps in. Our experienced team takes care of the entire rental process for you: we'll expertly list your property, find and vet reliable tenants, and handle the day-to-day management, so you can enjoy the benefits of your investment without the admin headaches. Contact our team today and let us make the rental process effortless.
Author: Kellaprince Properties