Arkansas has a reputation as one of the most landlord-friendly states in the country, but that reputation does not exempt landlords from clear legal requirements around security deposits. Jerry Larkowski, Managing Broker at ESQ. Realty Group, LLC in Little Rock, a licensed attorney and rental property owner, warns that owners who cut corners on deposits can face significant penalties. The implications are particularly important for out-of-state investors, who often rely on local property managers and may not realize that Arkansas deposit rules still apply to them.
Arkansas caps security deposits at two months' rent. The statute's deposit rules do not apply to an individual owner with five or fewer rental units, unless those units are managed by a third party for a fee. That exception matters because most out-of-state investors hire a local property manager, which means the deposit rules generally apply to them even if they own only one or two homes. Larkowski says the vast majority of out-of-state investors he sees use local property management companies, which handle deposits for them. Investors who self-manage from another state need a plan for holding and returning that money.
Arkansas law does not require landlords to keep deposits in a separate account, but Larkowski recommends it anyway. "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 that has been spent on a roof repair or a mortgage payment is still owed to the tenant. Keeping it separate makes it much easier to return on time.
Another common mistake is treating the deposit as last month's rent. When a tenant gives notice, a landlord might walk the unit, see it is in good shape, and agree to apply the deposit to the final month's rent. Larkowski says that works only when both sides agree to it. The deposit is not meant to be a substitute for the last rent payment. The process Arkansas law lays out is more specific. Within 60 days after the tenancy ends and the tenant turns over possession, the landlord must return the deposit. The landlord may keep money for unpaid rent and for damage caused by the tenant's failure to follow the lease, but those deductions must be itemized in a written notice sent with any remaining balance.
Larkowski walks through a simple example. A landlord holds a $2,000 deposit, and repairs after move-out cost $1,100. Once the contractors are paid, the remaining $900 goes back to the tenant. He acknowledges that plenty of landlords skip these steps, and that trouble usually comes only if a tenant takes it to court. He does not recommend taking that chance. A tenant who proves money was wrongfully withheld can recover twice that amount, plus attorney's fees.
Sometimes the damage is bigger than the deposit. If the repairs in Larkowski's example came to $3,300, the landlord would be $1,300 short. Arkansas landlords can sue for that balance, but Larkowski says it 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." That makes the deposit, the move-in inspection, and tenant screening the landlord's real protection.
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 this much room, the deposit is one of the few places where the law asks for a receipt.
