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Author: Mark Ainely | Partner GC Realty & Development & Co-Host Straight Up Chicago Investor Podcast
I am not an attorney, nor is this legal advice but I share this information with Chicago real estate investors from the view point of an investor myself and someone who sees other investors around Chicago get in trouble because they don't consider all the risks.
If you’re new to investing in Chicago, let me save you from one of the most expensive rookie mistakes I see over and over again, collecting a security deposit.
Even if you follow every rule with good intentions, one missed detail, or one slow piece of mail, can lead to thousands of dollars in penalties, attorney fees, and tenant lawsuits. I’ve seen it happen to smart, organized investors who thought they were doing everything by the book.
I made the mistake myself. I said I can't afford to not have the security deposit to offset the risk so I will follow the Chicago security deposit laws by the book. If you know anything about Chicago what happens on the streets or in reality is things do not always go your way even if you do exactly what you are supposed to do.
In Chicago, we are known for figuring out work arounds or doing things along the lines of how they really go down. This is no different for Chicago Landlords.
It sounds counterintuitive, right? You collect a deposit to protect yourself. That’s what every landlord does across the country. But in Chicago, what’s supposed to protect you can actually destroy your bottom line. Under the Chicago Residential Landlord and Tenant Ordinance (CRTLO), collecting and holding a security deposit exposes you to more financial and legal risk than almost any other part of being a landlord.
In this article, I’ll walk you through why Chicago’s rules around security deposits are so dangerous, how the CRTLO came to be, what specific traps investors fall into, and why non-refundable move-in fees are the only smart alternative if you want to operate safely and profitably in this market.
How We Got Here: The Origins of the CRTLO
To understand why security deposits are so risky, you need to understand the environment they exist in. The Chicago Residential Landlord and Tenant Ordinance was enacted in 1986, during a time when the city was responding to decades of neglected housing, unfair evictions, and poor living conditions. Tenant advocacy groups pushed hard for laws that would protect renters from what they saw as abusive or careless landlord practices.
The result was one of the most tenant-friendly sets of housing laws in the country. The CRTLO gives tenants extensive rights and imposes strict, unforgiving standards on landlords, even for small or unintentional errors.
And here’s the key, intent doesn’t matter. You can make an honest mistake, and you’ll still pay. That philosophy, protecting tenants above all else, has shaped how the ordinance operates today.
If you’re coming from states like Indiana, Texas, or Florida, where landlord laws are relatively flexible, the CRTLO will feel like an entirely different world. Here, the landlord holds all the liability, even for things beyond their control.
I visited my investor buddy in Michigan last year and realized how amazing it is what you get used to here in Chicago. I had a property under contract in Indiana earlier this year and was astonished to see how easy it is to operate as a Landlord but in the end of the day there is huge opportunity in the big city so you need to learn how to work around the risk.
The Hidden Liability of Security Deposits
When you take a security deposit in Chicago, you’re not just holding a tenant’s money. You’re taking on a long list of legal obligations that must be met perfectly, with no margin for error. Fail to check a single box, and you’re on the hook for two times the deposit amount plus attorney fees.
Let’s break down the three biggest risk areas that make security deposits a liability rather than a protection.
1. Interest Payment Requirements:
Under the CRTLO, landlords must pay annual interest on every security deposit they hold. The city sets a new interest rate every year, and it changes based on market conditions. That might sound simple enough—until you try to manage it at scale.
Here’s what makes it a compliance nightmare:
Rates change every year: The city publishes the rate annually, and even missing the update or applying the wrong year’s rate can trigger a violation.
Timing is strict: Interest must be paid every 12 months for long-term tenancies, and again when the tenant moves out.
Payment must be documented: You can’t just apply the interest as a rent credit without a paper trail. It must be documented correctly and provable.
The penalty is severe: If you underpay the interest—even by a few cents—or fail to pay it exactly on time, you can owe the tenant two times the deposit amount plus legal fees.
Because you must disclose the interest rate you must update your lease everywhere as well.
I’ve seen investors lose thousands of dollars over pennies in interest. You can have a perfect lease, handle maintenance flawlessly, and still lose in court because of an administrative oversight.
If you’re managing multiple units or rely on a property manager who isn’t hyper-specialized in Chicago compliance, the odds of perfect compliance every time are extremely low. It’s not about whether you’ll make a mistake, it’s when.
2. Timeline Requirements: One Day Late Can Cost You Double
When a tenant moves out, the CRTLO gives you exact deadlines for returning the security deposit and for providing itemized statements if you’re deducting damages. These deadlines are unforgiving.
Here’s the timeline:
30 days to provide an itemized list of any deductions, with supporting invoices or receipts.
45 days to return the remaining portion of the deposit.
If you miss either of those by even one day, you owe double the entire deposit. not just the portion you kept.
Sounds easy enough to manage, right? In practice, it’s a logistical minefield:
Tenants move without providing forwarding addresses.
Mail gets delayed.
Contractors take longer than expected to submit invoices.
A weekend or holiday can throw off your calendar.
Administrative staff or third-party managers misunderstand the timing rules.
And here’s the kicker, the court doesn’t care why it happened. Even if you can prove you mailed the check on day 45 but the tenant claims they got it on day 47, you can lose. The law doesn’t factor in mailing delays or “good faith” efforts.
Imagine managing ten units and one tenant moves out the day before Thanksgiving. Between inspections, invoices, and holiday office closures, you’re suddenly out of compliance. That’s all it takes for a lawsuit.
3. Itemization and Documentation: The Burden of Proof Is on You
If you plan to withhold any portion of the security deposit for damages, you must provide a detailed, itemized statement within 30 days of move-out, accompanied by receipts or estimates. The CRTLO’s standard for what qualifies as “itemized” is extremely high.
If you think “replace damaged blinds for $40” is sufficient, think again. You need to document who did the work, when, what materials were used, and the actual cost—not an estimate pulled from memory.
Landlords must also prove that the damage was beyond normal wear and tear, a subjective standard that usually favors tenants. If the tenant disputes the charges, the case often goes to court, where judges tend to side with renters, especially when they’re represented by free tenant legal services (and many are).
Even when the damage is legitimate, landlords lose because their paperwork isn’t airtight. Missing a receipt, using the wrong form, or failing to provide a copy within the deadline can invalidate your entire claim.
Chicago Tenants Have This & Chicago Landlords Don’t: Free Legal Help
In many cities, landlords have the upper hand simply because tenants can’t afford to fight back. Chicago is the opposite. There’s a robust network of free legal services ready to help tenants challenge landlords on even minor technicalities.
Organizations like the Legal Aid Chicago, Metropolitan Tenants Organization (MTO), and the Lawyers’ Committee for Better Housing (LCBH) actively assist tenants in pursuing CRTLO violations. Their funding comes from grants and city programs that encourage tenant advocacy.
Here’s what that means for you as an investor:
Tenants don’t need to pay for lawyers.
Landlords pay their own and the tenant’s attorney fees if they lose.
Small mistakes become profitable lawsuits for tenants.
There is law firms set up only to chase these types of cases against Chicago Landlords.
Even if you win, the time, stress, and legal fees often outweigh the deposit amount in question. I’ve seen landlords who tried to “do the right thing” spend months in court defending against a $500 deposit claim that turned into a $5,000 problem.
This isn’t about bad tenants, it’s about a system designed to make landlords strictly accountable. If you’re operating from out of state or using a generalist property manager unfamiliar with Chicago law, you’re stepping into an uneven playing field.
Other CRTLO Security Deposit Requirements
The three risk areas we’ve covered, interest payments, timelines, and itemization are the biggest traps. But they’re not the only ones. The CRTLO layers in additional technical requirements that most out-of-state or first-time Chicago landlords have never even heard of. Any one of these can trigger a violation, even if the deposit amount itself is small.
Here’s a quick rundown of other critical rules every landlord must follow if they decide to hold a security deposit in Chicago (and why most smart operators choose not to).
1. Separate Bank Account
Security deposits must be held in a separate, federally insured, interest-bearing account located in Illinois. You can’t just mix it with your operating funds or keep it in an account that also holds rent payments. Every deposit must be traceable to that specific account, and if you ever get audited or taken to court, you’ll have to prove the money was never commingled. Even a one-day delay in transferring funds into the correct account can be ruled a violation.
2. Written Disclosure of the Account
At the time the tenant pays the deposit, the landlord must provide written notice that includes:
The name and address of the financial institution,
The exact name of the account, and
A statement of the tenant’s right to receive annual interest.
This disclosure has to be attached to the lease or receipt. Forget to include it? That’s an automatic CRTLO violation. Change banks during the lease term? You’re required to notify the tenant within 14 days in writing. If you don’t, you’re again exposed to the “double deposit” penalty.
3. Transfer of Ownership Rules
If you sell the property or your management company changes, the new owner or manager inherits all liability for existing deposits. That means if the previous landlord made a compliance error, you’re still on the hook. Unless you confirm that every deposit was handled and documented properly before the sale closes, you’re buying their risk. I’ve seen investors acquire buildings thinking they were buying cash flow—only to inherit multiple potential lawsuits because of improper deposit handling from years earlier.
4. Receipts Must Meet Specific Standards
Every deposit payment must come with a signed, dated receipt that includes:
The amount paid
The name of the person receiving it
The name of the landlord
A description of the rental unit
The date it was received
If you’re collecting deposits electronically (like through Zelle or AppFolio), you must still issue this receipt separately in writing. Screenshots or automated payment confirmations aren’t considered compliant documentation.
5. No “Last Month’s Rent” Loophole
Some landlords try to sidestep CRTLO rules by calling part of the upfront payment “last month’s rent” instead of a deposit. Chicago courts have ruled against this practice repeatedly.
If the money functions in any way like a security deposit, meaning it’s held to protect against unpaid rent or damage—it’s treated as a deposit under the CRTLO and subject to all its rules.
Non-Refundable Move-In Fees
Now for the good news: you can eliminate all of this risk by never collecting a security deposit in the first place.
Instead, collect a non-refundable move-in fee.
Here’s how it works: Instead of holding a deposit you might have to return (and track interest on, and document, and itemize deductions from), you simply charge a flat move-in fee, usually $400–$1000 depending on the property size and rent level. This fee is disclosed in the lease as non-refundable and covers administrative and turnover costs.
TIP: You are not able to collect non refundable move-in fees that exceed more then 49% of one month's rent otherwise it is considered a security deposit no matter what you have written in your lease or advertising.
Pros of Move-In Fees
Avoids the RLTO penalties tied to security deposits (double damages and attorney fees for mistakes).
Simplifies your accounting, no separate bank account or interest tracking required.
Gives landlords immediate funds to cover cleaning or admin costs.
Lower upfront cost for tenants, making your rental more attractive.
Cons of Move-In Fees
Non-refundable tenants don’t get it back even if they leave the unit spotless.
Smaller amount than a deposit means less coverage if a tenant causes significant damage.
Can be seen as a “junk fee” if not clearly explained in the lease.
In short, non-refundable move-in fees are the modern workaround for Chicago landlords who want to reduce legal exposure and simplify their rental process, just be sure to keep it reasonable and transparent.
Risk Vs. Reward
When you stack all of these rules together, it becomes clear that holding a security deposit in Chicago is less about protecting your asset and more about managing legal exposure.
Each rule sounds manageable on its own, but in combination, they create a system that demands flawless documentation, timing, and execution—something that’s nearly impossible to maintain consistently, especially for investors managing multiple properties or using third-party managers.
This is why virtually every experienced property manager in Chicago, including GC Realty & Development, advises against taking deposits at all. The compliance burden simply isn’t worth the risk.
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Don’t Want To Go At This Alone?
We’ve shared a lot of information here on investing in real estate locally in Chicagoland. If you live outside the area, it may seem overwhelming for those wanting to invest in the Chicago market. But we really just look at it as a team sport.
Who’s on your investing team? Do you even have a team? GC Realty & Development, LLC has a dedicated team of professionals willing to share decades of experience in all facets of real estate investment. We handle everything from brokerage, leasing, and property management. Whether you hire us or not, we’re happy to provide our resources and expertise.
What gets me up in the morning and keeps me going 12 hours a day is the ability to add value to local area investors in Chicago and beyond! Those who connect with me often hear me say that our goal is to bring value to everyone we come in contact with.
We hope that in return, they will one day hire us for our tenant placement or property management services, refer us to someone they know, or leave a review about our services. We would clearly love all three; however, we’re happy whenever we get the opportunity to help!
Reach out today!
Partner / Co-Host of Straight Up Chicago Investor Podcast
