Holding deposit vs. tenancy deposit: Key differences explained

Whether it’s asking a restaurant to hold your table when you’re running late or requesting a store to hold your items while you continue shopping, the concept of “holding” is something we’re all familiar with. In the rental market, holding takes on a more formal and financial role.

As a landlord, you might ask potential tenants for both a holding deposit and a tenancy deposit. In this guide, we’ll break down these two types of deposits, explaining their purposes and the key differences between them.

What is a holding deposit?

A holding deposit is a payment you can request from a prospective tenant to secure your rental property before they sign the lease or pay the security deposit. It temporarily takes the property off the market, ensuring you won’t rent it to another applicant during this time. This deposit demonstrates the tenant’s serious intent to proceed with the rental.

What is a tenancy deposit?

A tenancy deposit, or a security deposit, is a payment you collect when the tenant signs the lease agreement. This security deposit is paid on top of the monthly rental amount. It allows you to pay for any potential property damage beyond normal wear and tear or unpaid rent incurred during the tenancy.

Key differences between holding deposits and tenancy deposits

While a holding and tenancy deposit may seem similar, they have distinct differences in their purpose, amount, and refund processes.

Purpose:

• Holding deposit: Secures the rental property for a prospective tenant while the tenancy agreement is finalized.
• Tenancy deposit: Protects the landlord against the potential costs of property damage or unpaid rent during the tenancy.

Timing:

• Holding deposit: Paid before the tenancy agreement is signed, typically when the tenant expresses interest in renting the property.
• Tenancy deposit: Paid at the start of the tenancy when the lease is signed.

Amount:

• Holding deposit: On average, holding deposits range from $100 to $400. It cannot be more than one week’s rent.
• Tenancy deposit: Generally equivalent to one to two months’ rent.

Refundability:

• Holding deposit: Refundable if the tenancy agreement is not finalized. If finalized, the holding deposit is usually deducted from the security deposit.
• Tenancy deposit: You will need to return the deposit at end of tenancy, minus any deductions for damage or unpaid rent.

How to implement and manage holding and tenancy deposits

Proper implementation and management of holding and tenancy deposits are crucial for avoiding disputes and ensuring compliance with legal requirements. Follow our residential tenancy-holding deposit best practices below:

Best practices for holding deposits

It’s best to request a holding deposit when a prospective tenant has expressed strong interest in your property and you’re ready to take it off the market temporarily. This deposit helps ensure the tenant’s commitment while you finalize the tenancy agreement.

Before accepting a holding deposit, be sure that you and the tenant sign a holding deposit tenancy agreement. This agreement for holding deposit to secure tenancy should clearly state:

• Landlord and tenant’s names.
• Property address.
• The amount of the holding deposit.
• The duration for which the property will be held.
• Conditions under which the deposit will be refunded or forfeited.
• Any obligations the tenant must fulfill during the holding period.
• The next steps if the tenancy agreement is finalized or falls through.

It’s also essential to keep accurate records of all transactions related to holding deposits. This includes documenting the date the deposit was received, the amount, and any communication with the tenant regarding the status of the property.

Ensure that the deposit is returned or applied according to the terms outlined in your holding deposit agreement and in compliance with local laws. Some states may have specific rules about the maximum amount that can be charged or the timeframe within which a tenancy agreement must be finalized.

Managing tenancy deposits

Tenancy deposits need careful management to ensure that you comply with state laws and the lease terms. In most states, security deposits must be held in a separate, interest-bearing account. This ensures that the tenant’s money is protected and can be easily returned at the end of the tenancy.

Before the tenant moves in, conduct a thorough move-in inspection together. Document the condition of the property with detailed notes and photographs, ensuring both you and the tenant agree on the starting condition.

When the tenancy ends, perform a move-out inspection to assess the property’s condition compared to the move-in report. Carefully document any damages or necessary repairs, using this to calculate any deductions from the deposit.

Communicating with tenants about deposits

Clear communication with your tenants about both holding and tenancy deposits is crucial for fostering a positive landlord-tenant relationship. Setting expectations early helps prevent misunderstandings and ensures everyone is on the same page from the start.

You should provide detailed information about the purpose of each deposit, the conditions for refunds, and the timeframe for returning the deposits. Include this information in both the holding deposit agreement and the tenancy agreement to avoid any confusion.

Alongside written communication, you can also discuss these deposits with tenants during the initial rental process. This allows tenants to ask any questions and fully understand their responsibilities.

Manage holding and security deposits with RentPayment

RentPayment is a rent payment software for landlords that can streamline the process of managing both holding and tenancy deposits. With RentPayment, you can easily track payments and keep detailed records. This software also allows for automated reminders and secure payment processing, making it easier for you to manage your properties efficiently.