Arkansas is widely regarded as one of the most landlord-friendly states in the country, but that reputation does not exempt property owners from strict security deposit rules, according to Jerry Larkowski, Managing Broker at ESQ. Realty Group, LLC in Little Rock and a licensed attorney.
Larkowski acknowledges the state’s landlord advantages: no rent control, favorable timelines for evictions, and a criminal “failure to vacate” statute for nonpayment of rent, though he notes it is rarely used in Pulaski County and faces constitutional questions. However, he warns that security deposits are a common area where landlords cut corners and face legal consequences.
One frequent mistake is charging more than the law allows. Arkansas caps security deposits at two months’ rent. While the statute exempts individual owners with five or fewer units unless they use a third-party manager, most out-of-state investors hire local property managers, so the deposit rules generally apply to them. “The vast majority of out-of-state investors I see use local property management companies,” Larkowski says. Self-managing investors from another state need a plan for holding and returning deposits.
Another error is mixing deposit funds with operating cash. Although Arkansas law does not require a separate account, Larkowski advises keeping deposits apart from rent and expense accounts. “It would be wise to keep that money in a different account than the bank accounts that they use to collect rent and pay expenses from,” he says. “The reason for that is that you need to be able to refund those security deposits when they move out.” A deposit spent on repairs or mortgage payments is still owed to the tenant.
Treating the deposit as last month’s rent is another pitfall. Larkowski says that works only if both parties agree. The deposit is not a substitute for the final rent payment. Arkansas law requires landlords to return the deposit within 60 days after the tenancy ends and possession is returned. Deductions for unpaid rent or tenant-caused damage must be itemized in a written notice sent with any remaining balance. For example, a $2,000 deposit with $1,100 in repairs leaves $900 to be returned.
Larkowski admits many landlords skip these steps, but trouble arises if a tenant sues. A tenant who proves wrongful withholding can recover twice the amount plus attorney’s fees. Sometimes damages exceed the deposit, but Larkowski says suing for the balance rarely makes sense. “It’s really hard to get money out of people, assuming that they win,” he says. “By the time they hire an attorney and pay filing fees and service fees and take time out of their day, to most of them, it’s just not worth it.”
For investors evaluating rental property in Central Arkansas, current listings are a starting point, and a clear deposit process should be part of the plan before the first lease is signed. In a state that gives landlords significant latitude, the deposit is one of the few places where the law demands a receipt.
