Investing Security Deposits?

[Alex SImon]

A friend of mine in a different investing group asked an interesting question and so I'm posting it here in hopes that someone who knows more than me will be able to answer with certainty.  He's very into investing in Cryptocurrency and wanted to know if, as a landlord, you were allowed to invest the monies provided by your tenants as security deposits.  For him, this would take the form of converting the currency into crypto (Bitcoins and such) and holding them in that form while they appreciate in value, then returning the tenants' deposits upon their departure and keeping the excess value for himself.  However, I assume that this could be applied to stocks, mutual funds, or anything else that yielded a profit but carried a small amount of risk, and I'm further assuming that he would have some way of guaranteeing the tenant would receive their deposits back even if he messed up in the market.

Now, I know that in real estate transactions you're not allowed to commingle funds from business and personal accounts, but I'm hazy on the subject of renters' deposits, specifically.  Anyone have any input?  Are landlords allowed to invest their tenants' deposits for financial gain?

[Peter Mckernan]

@Alex SImon Good question! 

I go off my experience as a landlord and my property management experience out here in California; however, as far as I know the laws here that is incorrect information. You and your friend should dive into your states laws on security deposit, and the local laws where the rental(s) are located.

Some local areas, LA for example requires the security deposit to be placed into an interest bearing account, and once they (the tenants) leave the property then the all that money is returned including the interest if there is no damage reported. 

On another note, I would believe that putting that money into another investment is illegal especially a mutual fund. Two issues, if that tenant moves out and there is some type of dispute and the money is not as liquid as it is in a savings/bank account you may be way past the 21 day window of returning the security deposit (that is CA law). That is trouble since you will have to come up with that money, and if not then that person can take legal action. Furthermore, putting it into a mutual fund, unless the tenant signs a five year lease, then there is no use in investing that money for one to two years. This is because there maybe a loss on the money that you have to come out of pocket to meet the initial security deposit and get back to what you owe the tenant. And, there are few and far between mutual funds that allow you to invest less than 5 years minimum.