They didn't follow instructions when they signed up to set up auto deductions, so they had a renter's deposit of $280.

I say that because I have no control over the stock market, but I do self manage my single family homes.The absolute safest investment is certificate of deposits or savings accounts that are FDIC insured, but they pay sub 1% return.

I want to deposit the tenants' security deposit in an interest esrming account.

I want to deposit the tenants' security deposit in an interest esrming account.

He wants to keep most of my deposit, deducting for items that were in poor condition when I moved in and only returning 15% of the deposit to me.

You can start the eviction process or consider adding an addendum to your lease to allow it but, get a higher pet deposit to cover 3 cats. 

We would then use these funds for next deposit for rental property in TX.Am I missing anything obvious here?

If your EM/DD deposit is subject to inspection and financing contingencies….who cares?

@Bob OkenwaSo if the tenant deposits a check, should i send a check with the late fee amount with the notice as certified mail ?

Conventional guidelines requires a lease, and no security deposit.FHA requires a lease, security deposit and proof of it being deposited.