What do landlords actually do with security deposits?

Member since 2019 · 1 post · 0 votes

Hey all, I'm wondering what you all do when given a security deposit. Do you immediately put it in an escrow account or do you just keep it in your personal account? I've heard about landlords that pocket the deposit and then pay back their tenant when the lease is over- is this common? Overall, I'm curious what the community actually does.

Thanks!

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Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

Immediately Spend it on malt liquor ,lotto tickets ,and Newport’s

24 Reply

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Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
Either let the management company hold it or put it in a separate account.
0 Reply
Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
6y
Hopefully you're not mixing personal and business funds. I would put the deposit in a business account with a local lender. I'd also put any cash-flow into that account to build my reserves.

Unexpected repairs and CapEx happen. The property should pay for it's self.
4 Reply
John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
6y
Most states dictate how it is handled. Refer to your state laws.
6 Reply
Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
6y
@Matthieu Oliveira I put it in an interest bearing account
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2 Reply
Dennis M.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
6y
Immediately Spend it on malt liquor ,lotto tickets ,and Newport’s
24 Reply
Kris L.
San Antonio, TX · Member since 2019 · 930 posts · 836 votes
6y
Is the answer supposed to be anything but keep it in a separate account in case there are outstanding damages on tenant moveout?
0 Reply
Josh C.Pro Member
Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
6y
Guys you really shouldn’t mess this up. Lots of bad advice here. As mentioned above it depends on state law. Here in Indianapolis you must keep in a separate account that’s non interest bearing. Not your operating account. Other states say must be interest bearing and pay the tenant. It’s not your money, it’s the tenants. But law firms specialize in this and sue the landlord and the penalties can be rough. 3x SD in Chicago I’ve heard.
@Jaron Walling FYI
10 Reply
Josh C.Pro Member
Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
6y
@John Thedford
Tried to tag you but wouldn’t let me. Good advice here. New investors should spend time or money (pay attorney for time) and learn some basics.
0 Reply
Mike CumbieBusiness Member
REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
6y
Yup separate account, remains untouched until after move out (refunded minus repairs) or sale of property to be given to new owner.
2 Reply
Justin Polston
Property Manager · Shelbyville, IN · Member since 2014 · 303 posts · 161 votes
6y
@Josh C.
Great point but to add to it, if it is interest bearing, you just have to disclose that, otherwise it's ok the way I understand it. Guess we could actually look it ip...
0 Reply
Account Closed
Member since 2018 · 127 posts · 106 votes
6y
In Missouri, I have mine in a business savings account.
1 Reply
Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Matthieu Oliveira
Hold in a separate account, as required by state law. It’s not your money.
1 Reply
Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Dennis M.
I actually believe you. Although I pictured you as more of a Natty Light guy.
0 Reply
Dennis M.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
6y
Originally posted by @Anthony Wick:
@Dennis M.
I actually believe you. Although I pictured you as more of a Natty Light guy.

Haha nope I don’t touch alcohol ( poison to the body) I can’t stand cigarettes or smoke and I never bought a lotto ticket in my life . I’m actually a super nice guy .. you’d like me I promise !

2 Reply
Brendan O'Donoghue
Rental Property Investor · Fort Ann, NY · Member since 2017 · 25 posts · 4 votes
6y
Originally posted by @Mike Cumbie:
Yup separate account, remains untouched until after move out (refunded minus repairs) or sale of property to be given to new owner.

@Mike Cumbie - seeing as you’re in NY, do you know if it can or has to be an interest bearing account?
0 Reply
Alan Beron
Attorney · Chicago, IL · Member since 2015 · 12 posts · 1 vote
6y
Per Section 5-12-080(a)(1) of the Chicago RLTO, security deposits shall not be commingled with the assets of the landlord. Landlords shall hold all security deposits in a federally insured interest-bearing account in a financial institution located in Illinois. Section 5-12-080(f)(1) states the penalty for noncompliance as two times the security deposit plus interest.

Do all Chicago landlords comply? Of course not. Some commingle and never have an issue. Plenty of others have stopped collecting security deposits altogether, and instead collect non-refundable move-in fees to avoid having to comply with the various issues surrounding security deposits.

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Kyle J.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y
@Matthieu Oliveira The answer to the question varies greatly based on individual state/local laws depending on where the rental property is located.

For example, see the post above and how specific the law is with regard to how the security deposit must be handled in Chicago and the penalty for not doing so correctly. Then compare that to my state (California) which has zero state laws on how/where to hold security deposits (though some cities do).

Bottom line, it just depends, but you definitely want to know the law wherever you’re at and be sure to follow it.
0 Reply
Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
6y
Originally posted by @Matthieu Oliveira:
Hey all, I'm wondering what you all do when given a security deposit. Do you immediately put it in an escrow account or do you just keep it in your personal account? I've heard about landlords that pocket the deposit and then pay back their tenant when the lease is over- is this common? Overall, I'm curious what the community actually does.

Thanks!

So your question, which most gloss over, is what do some of you ACTUALLY do. Not some property code bylaw. And personally I don’t think you need to contact a damn attorney about how to handle a deposit. I mean common.

It’s simple. The deposit is their $. You’re just holding it. So IMO put it in your operation account or under your mattress. Any modern property management will keep tract of what $ in what account is available cash or a liability.

So long as you abide by the property code in terms of returning it when required, that’s what matters.

Personally I put it in my operations account. Why? Because my tenants pay online and my online payments go to one account. Or they’ll give a cashiers check for deposit for rent, making two different accounts silly.

Is this what I’m “supposed” to do? No clue. Don’t care. I make sure I give tenants their deposit back when I’m required so it’s never been an issue.
2 Reply
Lynnette E.
Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
6y
In Tennessee one is to put the security deposit into a separate account for security deposits and the tenant is to be told where the account is located. That is what I do. I have one account and al the security deposits go into that account. Each tenant is told which bank has that account, but not the account number or anything else.
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
6y
@Matthieu Oliveira welcome to BP

Most states take security deposits pretty seriously. In Maryland and I suspect many states, you are subject to triple damages if you do not handle security deposits correctly.

Frankly I think the cavalier attitude @Cody L. expresses is pretty irresponsible. (Cody normally gives pretty good advice.) You don't say where you are from but if you are from a liberal area like CA or MD, you are not only doing yourself a disservice, you are doing a disservice to the investor community. To act irresponsibly with a security deposit only reinforces the impression that all landlords are slumlords.
Now to answer your specific question about what do most landlords actually do, many just co-mingle the security deposit with other funds. So I ask you, do you want to be an irresponsible slumlord or do you want to be a professional?
1 Reply
Mark Fries
Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
6y
@Cody L.
Agree 100%....do whatever you want with it...as long as you do the right thing when they move out nobody gives a s*** where its stored.
0 Reply
Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
6y
A good many banks offer security deposit accounts at no charge if you have your operating/business account with them. Makes transfer upon a sale with multiple units/accounts a breeze.
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Account Closed
Member since 2019 · 21 posts · 12 votes
6y
Hello Matthieu! Each City and States have different laws so check with them but I would open a security account and do not treat it like income and do not agree with those that treat it as income. Make deposits for that 100%. You should know what is right and do not follow the crooks or dishonest people. I would not treat it like income unless I was rich and could always come up with what is expected without any grief. Good luck to you!
0 Reply
Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
6y
Originally posted by @Ned Carey:
@Matthieu Oliveira welcome to BP

Most states take security deposits pretty seriously. In Maryland and I suspect many states, you are subject to triple damages if you do not handle security deposits correctly.

Frankly I think the cavalier attitude @Cody L. expresses is pretty irresponsible. (Cody normally gives pretty good advice.) You don't say where you are from but if you are from a liberal area like CA or MD, you are not only doing yourself a disservice, you are doing a disservice to the investor community. To act irresponsibly with a security deposit only reinforces the impression that all landlords are slumlords.
Now to answer your specific question about what do most landlords actually do, many just co-mingle the security deposit with other funds. So I ask you, do you want to be an irresponsible slumlord or do you want to be a professional?

All my advice comes via my cavalier attitude as that's how I run my business, and I'm answering based on my own frame of reference. So my answers should come with the disclaimer that it's irresponsible and not likely what a book or attorney would say.

That said, I don't see how my keeping the deposits in my operation accounts makes me an "irresponsible slumlord". When someone moves out, they get their deposit back. Period. We don't nitpick the little things we could. Or wait the full amount of time allowed. When someone drops off the keys, we give them their deposit and wish them the best on their new place.

We just have the deposit come in and out of the same account that rent and all bills come in and out of. Otherwise it would be a bunch of extra work that I quite frankly don't feel like doing. So if the question is "What do landlords actually do" - then I'm going to answer what I actually do.

(Given that I've had 1000's of tenants over the last decade and never had a SD claim against me I think I've been pretty responsible)

Edit: Per the comment above mine, I do not treat it like 'income' (or the return as a cost). Just because it comes in/out of my operations account, it doesn't show up on my NOI when received or returned. Because when we take it in, it's under the security deposit GL. So it's not income and shows up on our books as a liability. Which is why I pointed out that no matter what bank account it's in, as long as you're using modern property management software (correctly) it'll keep track of it correctly. Same with managing multiple properties (for multiple owners) out of one account. Software can take care of that.
1 Reply
Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
6y
@Cody L. I didn't say YOU were a slumlord. I don't believe that. And I suspected before you wrote it that you pay security deposits back in a responsible fashion. But I still say not knowing the law or caring about it is cavalier. But most importantly I don't think it is good advice to give a new investor.
Regarding my last comment about slumlord vs professional - that is Hyperbole to make a point. It was not aimed at you specifically.
I stand by my post. I figured you could handle it.
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