Tenant Security Deposits Need to be in Savings Account???

Question

I have been investing in real estate for about 4 years now and now own 12 rental properties. I do a pretty good job of keeping the units full, but obviously we all have some short term vacancies here or there. Well I guess what I am wanting to get to is do you guys keep all your damage/security deposits in a savings account? With a $1000 security deposit each, that would mean there is an untapped reservoir of $12,000 just sitting there not doing anything...

I am thinking it wouldn't be unreasonable to use 1/2 that or more towards a better investment rather than just sitting in the bank. God forbid if I had 6 tenants that all wanted their security deposits back all at the same time and I didn't have replacement renters...

What are your thoughts?!

Kevin Harrison · Answer

I don't see any harm in keeping it in a high yield savings account, as always check with state regs to make sure this is legal. But you can definitely not "invest" this money in any way shape or form. As a matter of fact I would even advise aginst "money market" or similar accounts.

not a lawyer, CPA Etc

not a lawyer, CPA Etc

Andy D. · Answer

@Lynn M.:

http://apps.leg.wa.gov/rcw/default.aspx?cite=59.18...

@Kevin Harrison The (potential) problem with the not only having it in a bank/checking account but investing it is that cash on an account is FDIC insured (up to a certain sum). If you use that cash to invest it into something else then you convert that cash into a security, such as, for instance, a mutual fund, shares, bonds. It's "security" meant in the financial sense, not as in "safety".

"Money market" is, typically, also a fund and therefore a type of security (I shall keep it simple here). One therefore now bears the risk of the issuer: should that issuer go bust then the security is worthless (Lehman, anyone?) or at least worth less than what you invested in initially. And now you, as a landlord, have a problem because you, in essence, didn't properly fulfill your duties as trustee of these security deposits which you hold in trust for the tenant. That's why it's best to keep that money in cash on a checking account. Then again, FDIC also insures money market deposit accounts.

I recommend following the KISS principle. :-)

Lynn McGeein · Answer

It's my understanding that in WA state (just sold our one investment property there), not only must security deposits be held in an account, but you must notify the tenant of the financial institution where it is being held, and if you move the money during the lease term, you must give them written notice of where their money was moved to as well.    You may want to read the landlord tenant laws for your area as they are usually very clear about exactly what rules the landlord must follow regarding the security deposit.

Kelly N. · Answer

It's not your money to invest.

Paul Brockmann · Answer

in MA, when collecting a security deposit, you must place it in its own security deposit and provide proof.  Otherwise, the tenant can get 3X the amount.

Nghi Le · Answer

It's not your money, although you can use it to fulfill reserve requirements to acquire more properties (instead of your own funds). Plus if you're putting the money in a credit union or small/local bank, and they see a large amount of money sitting in the bank, they might give you a nice line of credit that you can invest with.

Mike Hanneman · Answer

In some states any interest earned on the security deposit has to be given to the tenants as well.

Kevin Harrison · Answer

If you read my comment carefully you will see that I said I would advise AGINST putting it into a money market account or similar.

Robby B. · Answer

Thanks all for your insight and quick responses! I guess I just get to keep looking at a big savings account, and find another source of money. Not like the $6k woulda got me too far anyway.

Andy D. · Answer

Just for the sake of it: since tenant is not giving landlord numbered bills which tenant is expecting to receive back exactly the same and nor is the landlord required to give back the "exact same thing" (because, with cash/money, there is no such thing) one could, technically, have money of tenant A in the "general security deposit account" and also the money from tenant B and so on. And then simply give back $x to tenant A from the (big) security deposit pool. No need to have separate accounts for each unit. And I go one further even: as long as landlord is able to repay the security deposit to the tenant then no one will ever question the source of that payment. It could have come from the landlord's private account or from him selling his yacht or take it out of the rental income of another unit that he has etc etc. Would that be legal? Absolutely not. Would it at least be clever? Obviously not as it is illegal and is (also therefore, of course) exposing the landlord to a high risk and could quickly turn into a ponzi scheme. Because, you know, Murphy's law...

What @Mike Cumbie described is what I would call "best practice", especially when looking at this from a "proper book keeping" point of view. Run a clean ship and you will avoid unnecessary hassles. Jm5c.

Tenant Security Deposits Need to be in Savings Account???

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