What do landlords actually do with security deposits?

32 Replies

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!

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.

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

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 ! 

 

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?  

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.

@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. 

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. 

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.

@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?

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.

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!

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.

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