Investing security deposits as Berkshire Hathaway does with float

[Nicholas Lohr]

As far as I have read this is a state-by-state law so I am ONLY talking about California here. 

On line D of chapter 49.2 it states that, “Nothing in this Chapter shall preclude a landlord from exercising his or her discretion in investing security deposits.”

And then on line 3 it states, For March 1, 2015 and each year thereafter, the Rent Board shall calculate the rate according to the annual average of the 90-Day AA Financial Commercial Paper Interest Rate (rounded to the nearest tenth)

This is the amount in interest we as landlords are supposed to pay our tenants for holding their deposits. This amount is currently about 1%.

source: http://sfrb.org/chapter-49-san-francisco-administrative-code-security-deposits-residential-rental-property San Francisco, Sacramento

Hypothetically if one had 200 rental units, each with 1500 security deposits, that would be $300,000. Why not invest that money in a relatively low risk SP 500 index fund that has about a 7- 10% return over the long term?

That would be a $18,000 extra bucks a year. (300,000 * .07 = 21,000 – 3,000) The 30,00 being the simple interest we are supposed to pay.

It’s not a ton of money I know but it’s enough for me to want to pose this question.

Now totally I get it, the stock market can crash 10-30 percent in any given year like in 2008, 2001 etc… But even if it did, it has always recovered within a couple years and the chances that there would be some mass exodus from your 200 apartments with everyone demanding their deposits back at the same time and you not being able to refill all the openings is virtually nil.  

Curious if anyone out there has thought of this? Am I missing something? Perhaps what it is I'm missing is that if one had 200 rental units they wouldn't care about 18k?! Guess I'll have to wait and see....

[Bill F.]

@Nicholas Lohr As a fellow fan of BH and value investor I think this is intriguing. 

Off the top of my head I can't think of a lot of reason's why it wouldn't work in CA. 

Lack of expertise due to scale plays a role in people not doing it. General Re has a float of around $18B so they can get some top talent to invest it. They would be a Top 50 hedge fund with that AUM.

Volatility Risk also plays a role for a smaller apartment owners. 

I'd be curious at what size complex and/or dollar amount this became viable if there aren't any other regulatory issues we have missed. 

I'll definitely think over it and ask some friends.