Investing the security deposit.

[Brian Adams]

Hello BPers. This is my first post. I have been looking tirelessly for good forums with some real life lessons on landlording/property management straight from the trenches, and this has been the best site I've found thus far.

My question is: what do property managers do with the security deposits? It seems to me that, like a bank, only a fraction needs to be kept on hand for paying either for repairs, unpaid rents, or returning at the end of the lease. I assume management companies invest some portion of these funds. In what manner, and what proportion? Just an interest bearing savings account, or do managers get a little more creative? I am from Texas where there are no regulations that I know of that requires for the landlord to pay interest, safeguard, or other otherwise account for these funds during the term of the lease.

Thank you very much.

[Bill Gulley]

Begin by realizing a security deposit is not your money, it is an amount held in trust, which is the concept in all states. State law governs the treatment of funds held in a trust or as a deposit. "Trust" here doesn't mean a Trust entity like a Land Trust, but in a fiduciary trust position of the one who holds those funds.

Banks may not pay interest on trust accounts or escrowed funds in some states, in some states where interest is paid there are often laws that award the interest to the tenant. Many lease agreements are made so that in the even any interest is paid on deposits that such is due the landlord for the maintenance of that account.

Even if your state doesn't address the treatment of escrowed funds (doubt that is the case) I'd suggest you address the payment of any interest on accounts by agreement giving a reason for your entitlement to the amounts paid. :)