Investing security deposits in the stock market.

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Investing security deposits in the stock market.

Emanuel Ohunwu
Rental Property Investor 路 Dallas, TX 路 Member since 2019 路 88 posts 路 55 votes

Has anyone ever considered placing security deposits in the stock market? I'm talking about dividend paying stocks such as Google, Apple or

Microsoft. It's an idea I've been playing with. My rental property is in Fort Worth, TX and I haven't seen any regulations against it. The only risk is if there is a market downturn as tenants are leaving a rental property. I only own one duplex so I could afford to pay out of pocket for any deficit from investing the security deposit.

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker 路 Cody, WY 路 Member since 2010 路 28k+ posts 路 41k+ votes
6y

The security deposit is not your money. It is the Tenant's money, held by you in case the tenant fails to abide by the contract. You shouldn't be spending it, gambling it, or investing it.

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker 路 Cody, WY 路 Member since 2010 路 28k+ posts 路 41k+ votes
    6y

    The security deposit is not your money. It is the Tenant's money, held by you in case the tenant fails to abide by the contract. You shouldn't be spending it, gambling it, or investing it.

    The DIY Landlord Book4.7248 Reviews
    WebsiteView Page
    14Reply
  • James Wise
    Real Estate Broker 路 Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH 路 Member since 2013 路 30k+ posts 路 20k+ votes
    6y
    Originally posted by @Emanuel Ohunwu:

    Has anyone ever considered placing security deposits in the stock market? I'm talking about dividend paying stocks such as Google, Apple or

    Microsoft. It's an idea I've been playing with. My rental property is in Fort Worth, TX and I haven't seen any regulations against it. The only risk is if there is a market downturn as tenants are leaving a rental property. I only own one duplex so I could afford to pay out of pocket for any deficit from investing the security deposit.

     I don't know about a regular citizen but as a licensed broker and property manager the state of Ohio requires us to keep all tenant security deposits in a non interest bearing trust account.

    2Reply
  • Cameron TopePro Member
    Property Manager 路 Katy, TX 路 Member since 2015 路 1k+ posts 路 1k+ votes
    6y

    Emanuel, You have your answers from @Nathan Gesner & @James Wise. A licensed property manager or member or NARPM must hold deposits in a trust account and therefore cannot invest it. 

    But you're not a licensed agent or broker so you (as just the landlord) simply have the obligation to return the deposit (minus any necessary deductions) after the lease. There's nobody to stop you but ethically I wouldn't do it. 

    [email protected]832-770-7090
    2Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider 路 Cleveland, OH 路 Member since 2016 路 4k+ posts 路 1k+ votes
    6y
    Originally posted by @Emanuel Ohunwu:

    Has anyone ever considered placing security deposits in the stock market? I'm talking about dividend paying stocks such as Google, Apple or

    Microsoft. It's an idea I've been playing with. My rental property is in Fort Worth, TX and I haven't seen any regulations against it. The only risk is if there is a market downturn as tenants are leaving a rental property. I only own one duplex so I could afford to pay out of pocket for any deficit from investing the security deposit.

     Be very careful with that. I know in Ohio we have to keep them in trust accounts and if you mess with that money you can get in trouble.

    1Reply
  • Bob Prisco
    Specialist 路 Cleveland, OH 路 Member since 2018 路 1k+ posts 路 666 votes
    6y

    @Emanuel Ohunwu  HELL NO!! You want to go to jail  or serious trouble ? Its not your money, its the tenants. Must be in an IOTA acct!

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  • Emanuel Ohunwu
    OP
    Rental Property Investor 路 Dallas, TX 路 Member since 2019 路 88 posts 路 55 votes
    6y

    Thanks everyone for the replies. I discovered some other threads about the subject and decided against it. I always like to think of different ways to make extra money and was curious if anyone has ever thought of this.

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  • Emanuel Ohunwu
    OP
    Rental Property Investor 路 Dallas, TX 路 Member since 2019 路 88 posts 路 55 votes
    6y

    @James Wise As a regular citizen in Texas I just have to keep it in a separate account from my personal funds, which is where my tenants security deposit is kept. I've read some states or cities require interest to be paid on security deposits. That's also not the case in Fort Worth or Texas.

    1Reply
  • Emanuel Ohunwu
    OP
    Rental Property Investor 路 Dallas, TX 路 Member since 2019 路 88 posts 路 55 votes
    6y

    @Bob Prisco 馃ぃ馃ぃ馃ぃ馃ぃ馃ぃ Calm down! You make it sound like I'm friends with Bernie Maddoff.

    1Reply
  • Ned J.Pro Member
    Investor 路 Manteca, CA 路 Member since 2017 路 1k+ posts 路 2k+ votes
    6y
    The interesting thing is what do you think all the banks do with all the $$ you have "deposited" with them? Its not sitting in some vault waiting for you stop by and pick it up :) Obviously they are government regulated and FDIC insured so they have guaranteed you can get your $$ when you want it...... which is the big difference with a private person. You start gambling that $$, you had better be in the position to pay it back anyway if your lose their $$. That's why many states require you to keep it in some separate account to emphasize that's its not your to screw around with.... So bad idea......
    0Reply
  • James Wise
    Real Estate Broker 路 Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH 路 Member since 2013 路 30k+ posts 路 20k+ votes
    6y
    Originally posted by @Emanuel Ohunwu:

    @James Wise As a regular citizen in Texas I just have to keep it in a separate account from my personal funds, which is where my tenants security deposit is kept. I've read some states or cities require interest to be paid on security deposits. That's also not the case in Fort Worth or Texas.

     If your state requires you to separate the tenant's funds from your personal funds I don't see how it'd be legal for you to use the tenants funds for your personal investing.

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  • David MartinPro Member
    Cypress, TX 路 Member since 2016 路 137 posts 路 119 votes
    6y

    @Emanuel Ohunwu texas property code related to security deposits.

    https://statutes.capitol.texas.gov/Docs/PR/htm/PR.92.htm#C

    1Reply
  • Emanuel Ohunwu
    OP
    Rental Property Investor 路 Dallas, TX 路 Member since 2019 路 88 posts 路 55 votes
    6y

    @David Martin Thanks for the link! Looks like there some other important statues included. Really helpful!

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  • Emanuel Ohunwu
    OP
    Rental Property Investor 路 Dallas, TX 路 Member since 2019 路 88 posts 路 55 votes
    6y

    @James Wise I made some money doing options trading, which I put some of the towards my 1st rental property. I was just playing with the idea of using the security deposit in dividend paying stocks. I figured I'd ask Biggerpockets before paying my CPA and lawyer for their advice on the matter. I'm always looking for different ways to make money. Legally of course.

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  • Jeff TumbarelloPro Member
    Real Estate Broker 路 Fort Myers, FL 路 Member since 2008 路 1k+ posts 路 323 votes
    6y

    It's not your money, it's theirs held in escrow. They would be entitled to the gains in some states. Which would make you the greatest landlord ever for tripling their security deposit lol. 

    0Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper 路 Austin, TX 路 Member since 2013 路 4k+ posts 路 4k+ votes
    6y

    In Texas and I am speaking of Texas only, it is perfectly legal to do anything with the deposit that you wish. You can play the market or head to Vegas or the bar if you wish. A landlord has no obligation to keep in a separate account .  Obviously, the landlord is required to refund the deposit minus any deductions at the end of tenancy 

    4Reply
  • John Fitch
    TX 路 Member since 2018 路 19 posts 路 4 votes
    6y

    @Greg H. Because Texas is Awesome

    0Reply
  • Ron Singh
    CA 路 Member since 2014 路 244 posts 路 47 votes
    6y

    @John Fitch ..... because they don't call 911.

    1Reply
  • Nick Gann
    Real Estate Agent 路 Murfreesboro, TN 路 Member since 2019 路 194 posts 路 181 votes
    6y

    @Emanuel Ohunwu

    About the only option you have is to escrow it in an interest earning account. Anything else is going to open a problematic situation for you. If you make bad investments and lose that money youre going to have problems.

    0Reply
  • David MartinPro Member
    Cypress, TX 路 Member since 2016 路 137 posts 路 119 votes
    6y

    @Emanuel Ohunwu disclamer and all... I'm not your lawyer, so you know, I don't give legal advice, and things I say you should consider stupid internet rumors.

    The way that statue reads to me is... you can really do whatever you want with it, but if the tenant files a demand for it and you can't product it in the needed time, you'll end up owing them triple the deposit as a penalty, so you should probably make deep considerations on the risk profile, as if you can't produce it quickly, it gets even more expensive, very fast.

    1Reply
  • Filipe Pereira
    Property Manager 路 Windsor Locks, CT 路 Member since 2016 路 1k+ posts 路 1k+ votes
    6y
    Originally posted by @Emanuel Ohunwu:

    Has anyone ever considered placing security deposits in the stock market? 

    It's thoughts like these that made states like CT pass laws requiring security deposit funds to be held in Interest Bearing Escrow Accounts in the name of the tenant (which I'm a big fan of). The funds never hit the landlord's account, and should the landlord ever go bankrupt the tenant's money is safe because it's in the tenant's name, after all.  

    1Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper 路 Austin, TX 路 Member since 2013 路 4k+ posts 路 4k+ votes
    6y
    Originally posted by @Filipe Pereira:
    Originally posted by @Emanuel Ohunwu:

    Has anyone ever considered placing security deposits in the stock market? 

    It's thoughts like these that made states like CT pass laws requiring security deposit funds to be held in Interest Bearing Escrow Accounts in the name of the tenant (which I'm a big fan of). The funds never hit the landlord's account, and should the landlord ever go bankrupt the tenant's money is safe because it's in the tenant's name, after all.  

    Definitely illustrates the difference between Texas and Connecticut as Texans are not fans of over regulation. There is not a problem with deposits being refunded in our state and if it occurs the former tenant has a clear path for recovery of triple damages through small claims court and subsequent lien as it would be non exempt property  

    2Reply
  • David MartinPro Member
    Cypress, TX 路 Member since 2016 路 137 posts 路 119 votes
    6y

    @Filipe Pereira Agreed, the escrow seems the most sensible and likely to be void of a load of different booby traps that I'd much rather avoid as a landlord. Can be done, and should be done, are two wholly different POV's. lol

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor 路 Sioux Falls, SD 路 Member since 2015 路 9k+ posts 路 18k+ votes
    6y

    @Emanuel Ohunwu just because you can do whatever you want with the security deposit, doesn't mean it is best practice. My recommendation is to place the money in an FDIC insured account. There are high yield savings that pay near 2%, so you can get some interest, but also keep the money secure.

    Note that Texas law states, "The tenants claim to the security deposit takes priority over the claim of any creditor of the landlord, including a trustee in bankruptcy." They will get their money from you one way or another. 

    0Reply
  • Account Closed
    Member since 2020 路 24 posts 路 16 votes
    6y

    I think regardless of whether you are a licensed agent or not, many states will require you to have it in an interest bearing account. As someone said, it is not your money! It is technically a type of escrow account being held by you, but the ownership of the money is not transferred to you.  Some states also require to show a bank statement to your tenants on a monthly or quarterly basis showing the funds are in an interest bearing account. In NJ they automatically get it from the bank every quarter, when you open a landlord/tenant account. 

    0Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper 路 Austin, TX 路 Member since 2013 路 4k+ posts 路 4k+ votes
    6y
    Originally posted by @Joe Splitrock:

    @Emanuel Ohunwu just because you can do whatever you want with the security deposit, doesn't mean it is best practice. My recommendation is to place the money in an FDIC insured account. There are high yield savings that pay near 2%, so you can get some interest, but also keep the money secure.

    Note that Texas law states, "The tenants claim to the security deposit takes priority over the claim of any creditor of the landlord, including a trustee in bankruptcy." They will get their money from you one way or another. 

    I do agree with you.  Just because you can do something does not mean you should

    As to whether a tenant will actually collect?  With any small claims action in Texas, my standard answer is you will not.  For example, a landlord has almost zero chance to collect from a tenant.  However, in this case it would make it to the probable category as the rental property itself most likely falls into to the non-exempt category of assets protected by Texas aw 

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