Investing security deposits

Property Manager · Denver · Member since 2023 · 43 posts · 19 votes

Hey BP folks! Curious about potentially investing some of our tenant security deposits in CD's. Was thinking of taking about half of the deposits we currently have and doing some short term (12-24 month) CD's as a revenue stream. Does anyone have any experience with this? If so, curious about thoughts and if it is a good equitable transaction. Appreciate it!

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Bob S.

Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes

Quote from @David Walton:

1st off NO, what if you have to evict, then you will get pre-payment for early withdrawal. 2nd so you want to profit on the tenants SD? Why even think about this? Why make more work, things more complicated. ? Why have to (assume you do) talk with tenants about this? PM is complicated enough, why make it more

All the best

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Brian Malavsky
Investor · Wheat Ridge, CO · Member since 2021 · 35 posts · 21 votes
2y
To my knowledge security deposits are required to be in non-interest bearing accounts unless written approval from from the tenant. If they give you approval that interest must be returned to the tenant as you are just holding "their" money. Think of your account holding the deposit as a trust and you are the trustee. You have possession of their money but it is still their money, therefore any interest accrued is entitled to the trustor (tenant). Definitely consult your attorney on this one
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David Walton
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Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Brian Malavsky We actually have an attorney drafted lease that states the following "If the Landlord maintains the Deposit in an interest-bearing bank account, Resident consents to Landlord retaining the interest, except as required by law." We will always give back what is there's, however, per my attorney and our lease, we are okay to keep interest on security deposits.
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Scott AllenBusiness Member
Real Estate Agent · Columbus, OH · Member since 2020 · 449 posts · 471 votes
2y

@David Walton

Attorney's are great - ask a real estate attorney about this though to double check. I think they're supposed to be left in a non-interest bearing account.

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David Walton
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Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Scott Allen We use the largest real estate attorney in the state, Tschetter Sulzer. I would hope they understand the laws enough to draft this language but I’ll certainly double check.
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Brian Malavsky
Investor · Wheat Ridge, CO · Member since 2021 · 35 posts · 21 votes
2y
Quote from @David Walton:

@Brian Malavsky We actually have an attorney drafted lease that states the following "If the Landlord maintains the Deposit in an interest-bearing bank account, Resident consents to Landlord retaining the interest, except as required by law." We will always give back what is there's, however, per my attorney and our lease, we are okay to keep interest on security deposits.

Sweet, didn’t realize you could do so. So what exactly are you asking? Are CD’s a viable option to invest short term?
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Thomas TalbertBusiness Member
Property Manager · Austin, TX · Member since 2024 · 96 posts · 71 votes
2y
In TX you can have them in an "Interest Bearing Account" To my knowledge it is illegal to use them as equity. But your question made me think of another, if the funds can be in an interest-bearing account does that mean you can loan funds? Food for thought.
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David Walton
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Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Brian Malavsky Yes, that’s exactly it. Where are the opportunities to make some additional revenue. Not sure if funds can be utilized in CD accounts or maybe just funding a high interest bearing account. As you know ancillary income opportunities in Colorado are diminishing as each new tenant landlord law passes. Just trying to get creative!
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Brian Malavsky
Investor · Wheat Ridge, CO · Member since 2021 · 35 posts · 21 votes
2y
Quote from @David Walton:

@Brian Malavsky Yes, that’s exactly it. Where are the opportunities to make some additional revenue. Not sure if funds can be utilized in CD accounts or maybe just funding a high interest bearing account. As you know ancillary income opportunities in Colorado are diminishing as each new tenant landlord law passes. Just trying to get creative!
Totally get that! Take what you can get man. I believe there are high interest bearing amounts that are similar to CD rates but they give you the flexibility of having all the funds available to you immediately. Of the tenant has to legally and rightfully break the lease you would have access to those deposits. I’m sure there are other creative ways to put that money to work but I am on the more risk adverse side when it comes to deposits. I’ll be following this convo to see if anyone else comes up with ideas!
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David Adams
Rental Property Investor · Lafayette, LA · Member since 2019 · 40 posts · 42 votes
2y
@David Walton
I will tell you my experience. I’ve been investing locally in residential properties over the last 25 yrs and I have 100 doors . I can count on my right hand how many security deposits were refunded . Tenants either didn’t give proper notice to move , damages above the amount of the deposit , rents or portions of rents due, etc . Might be different elsewhere but that’s how it is here .
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Michael SloanBusiness Member
Property Manager · Richardson, TX · Member since 2023 · 31 posts · 15 votes
2y
@David Walton it varies by state. In TX we can hold the money in interest bearing accounts and keep the interest. You will want to hold enough cash that you can cover a move out without having to redeem the CD early
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David Walton
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Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@David Adams Thank you for your insight!
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David Walton
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Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Michael Sloan Any suggestions on good companies that offer high interest returns?
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Michael SloanBusiness Member
Property Manager · Richardson, TX · Member since 2023 · 31 posts · 15 votes
2y
@David Walton 5% CD’s on a 6 to 10 month term are pretty easy to find. Ally and Discover have pretty good online savings accounts. You can also check bankrate.com
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David Walton
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Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Michael Sloan Appreciate it!
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Bob S.
Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
2y
Quote from @David Walton:

Hey BP folks! Curious about potentially investing some of our tenant security deposits in CD's. Was thinking of taking about half of the deposits we currently have and doing some short term (12-24 month) CD's as a revenue stream. Does anyone have any experience with this? If so, curious about thoughts and if it is a good equitable transaction. Appreciate it!

1st off NO, what if you have to evict, then you will get pre-payment for early withdrawal. 2nd so you want to profit on the tenants SD? Why even think about this? Why make more work, things more complicated. ? Why have to (assume you do) talk with tenants about this? PM is complicated enough, why make it more
All the best
2 Reply
David Walton
OP
Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Bob S. As I mentioned in my initial post - we wouldn’t take the entire SD balance, maybe half but this amount is truly unknown until we consult with a financial specialist. This way, we have funds available should we need them for said eviction, move outs, etc.

Yes, we are absolutely, 100% looking for new and unique ways to make ancillary income. I am not sure what limitations you have in Cleveland but it’s becoming more difficult to find make profits in Colorado (disassembling fees, caps, etc.).

Finally, as I mentioned in a reply, we do not have to notify the tenants, it’s already listed in our lease which was written by a reputable real estate attorney.

I appreciate the concern but it’s honestly not that big of a hassle in my opinion, and by me bringing it to BP folks for ideas, I am truly interested in pursuing for my business. Personally, I think it’s important to continue to stay creative and generate new ideas on all facets of the business as legal restrictions continue to present themselves.

Have a good one!
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Bob S.
Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
2y
Quote from @David Walton:

@Bob S. As I mentioned in my initial post - we wouldn’t take the entire SD balance, maybe half but this amount is truly unknown until we consult with a financial specialist. This way, we have funds available should we need them for said eviction, move outs, etc.

Yes, we are absolutely, 100% looking for new and unique ways to make ancillary income. I am not sure what limitations you have in Cleveland but it’s becoming more difficult to find make profits in Colorado (disassembling fees, caps, etc.).

Finally, as I mentioned in a reply, we do not have to notify the tenants, it’s already listed in our lease which was written by a reputable real estate attorney.

I appreciate the concern but it’s honestly not that big of a hassle in my opinion, and by me bringing it to BP folks for ideas, I am truly interested in pursuing for my business. Personally, I think it’s important to continue to stay creative and generate new ideas on all facets of the business as legal restrictions continue to present themselves.

Have a good one!

Well when it comes to OPM, I do not mess with it. PM is profitable enough.
All the best
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David Walton
OP
Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Bob S. To each their own! All my best!
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Bill SchrimpfBusiness Member
Real Estate Agent · Reno, NV · Member since 2014 · 349 posts · 189 votes
2y
@David Walton - Are you licensed? I NV, if your licensed, investing the deposit would be a violation of law. Unlicensed, that might be a different thing...
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David Walton
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Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Bill Schrimpf I am licensed in Colorado. The law states we can put in a normal account, interest bearing, or surety bond, just as long as it’s a separate account from our operational account. From what I understand, CD’s are considered a savings account so it wouldn’t be an investment.
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Austin F.
Investor · MI · Member since 2015 · 227 posts · 478 votes
2y

I too have been considering this. Would like something like a high yield savings account where I can easily transfer money in and out (of course with limits etc). Not sure what type of fund to look at.
Edit to add: Don't need highest rate of return, would bee perfectly content with 4% or so if it were easy, and pretty liquid. My local bank where I keep everything else offered me 1.5%, not worth it at that point.
1 Reply
David Walton
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Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Austin F. Exactly! ! A lot of banks, credit lenders, and credit unions are offering ~5% on CD’s right now which is the best high yield I can find at the moment. Now, this of course depending on the amount you put in and terms. I have seen decent rates at 10 and 12 month terms and you still avoid penalties if you need to withdrawal. Just need to be cognizant about how much you decided to move over.
Keep me posted if you find any really good offers out there!
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Bill S.Pro Member
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Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
2y
@David Walton Colorado requires that security deposits held by brokers be held in a "Trust Account". This is a special type of account. Since it is a "trust account", if you go bankrupt, the creditors cannot access the funds in that account as it is not your money. I would suggest that you get with an attorney that represents real estate agents and run your plan by them. Frascona Joiner Goodman & Greenstein PC up in Boulder is a great place to start. While I use Tschetter Sulzer as my attorney for Landlord Tenant issues, I don't think they regularly practice in the area of Real Estate Agent representation. I would completely agree with the idea of putting at least some of the funds in an interest bearing account if you were self managing and not a licensed agent.

On a personal note, I was audited by the state and found out that the bank I opened my "trust" accounts with for my brokerage with did not actually open true "trust accounts" for me. The lackey that opened the accounts added the label "trust account" and thought that was all that was needed. I did not know what was done. Fortunately I was not using my brokerage to manage my own property and I was not doing any property management for others so I was not required to have the trust accounts that I thought I had but didn't have.

I do know that not all banks will set up true trust accounts so finding one that will pay interest might be a bit of a challenge.
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David Walton
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Property Manager · Denver · Member since 2023 · 43 posts · 19 votes
2y
@Bill S. Thanks for sharing your insight. We do have all SD’s in a trust account. We use Enterprise Bank & Trust who is well known in the PM world. We’re still weighing all options at this point and of course wouldn’t do a tubing without proper legal advice.
1 Reply
Alex L.
Rental Property Investor · Youngstown, OH · Member since 2023 · 128 posts · 124 votes
2y
I love investing in Ohio, because the security deposit laws are so vague and bare bones. They don't even require them to be held in an account; I could keep them under my mattress for all the state cares for. I always put them in a high-interest savings account, and love the extra bit of money I get from it.
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