How Are You Holding Security Deposits?

33 Replies

Are You Holding Security Deposits in Separate Accounts?

The owner I worked for in CA just put them all in his operating account, which is legal in CA - at least in Santa Clara, CA.  It was also not required to pay interest on the deposits.

No. This is state specific. Some states require separate accounts but Oregon does not. My only obligation is to have it available within 30 days of notice to vacate. In the meantime it spends like any other money @Steve Rozenberg .

In MD it needs to be in a separate account and it accrues interest. We have to pay the tenant more interest than we could ever earn on the money. In many states this is controlled by state law. 

I keep all security deposits in a special trust account. They are not touched until the tenant moves out. If I ever get sued (knock on wood), this account cannot be levied, because it isn't my money. It belongs to the tenants. 

In NJ, they must be kept in interest bearing accounts, so they're separate. In FL, they are all in one tenant security deposit account - no interest.

No co-mingling with the landlord's personal funds in either state. 

I tried the "cash under the mattress" approach, but my bed was feeling kind of lumpy, so I decided to stick the money in the bank.  Works much better.  :)

Just kidding, in WI you are not required to put the money in a separate account or even an interest bearing account.  So you can earn interest on the money.

I put them in a savings account that only holds security deposits.

No co mingling with personal accounts and must pay interest. It is what it is.

In New Hampshire, we have two choices.  An interest bearing escrow account (with all that an escrow account implies) or posting a bond with the town or city, which costs money and in any case, the town clerk will look at you with a befuddled look on her face if you try.

So, separate, interest-bearing escrow accounts.

@Steve Rozenberg @Jeff S.

The specifics do vary state by state and it depends if you're self managing your own properties or if you are a property manager for other people's properties.

In Oregon it comes down to the custody of the security deposits. If a property manager retains the custody of the tenant security deposit then they are required to establish and maintain a tenant security deposit account that is separate from the property owner's trust account.

There are no rules in Wyoming on how you keep them until they move out.  I still keep them in a separate account as it is not my money to spend.

Out of curiosity, no one here mentioned staying away from security deposits.  I've been taught not to collect security deposits, at least not here in Chicago.  They say your better protected by collecting a non-refundable move in fee.  Just a thought.  

Colorado has no requirements for security deposits except that you send the accounting and funds (if warranted) within 30 days (60 days if you specify so in your lease).

If you are licensed and managing properties for others you must have a separate trust account for security deposits and you can keep any interest that might be earned on it. Same time frame requirements for sending back the accounting and funds if due. 

Fees are illegal in Oregon @Marcin Talaga . That is why we can charge "pet rent" which makes tenants even madder. Since this is the case refundable deposits are a big deal and needed. 

Of course property managers need trust accounts Neal C.as they are licensed and regulated and would have the opportunity to run off with and spend large sums of money. 

In MN, you hsve to pay 1% simple interest.  I don't think it has to be in a trust account if you aren't licensed.  If you are licensed, it has to be in a trust account.

Correction on my post for Colorado. A licensed agent CANNOT keep interest. Somehow the "not" disappeared. 

Also as a point of clarity. The first paragraph is for property you own in your name whether you are an agent or not.

This is VERY VERY state specific!! 

I personally keep them in separate accounts because that is the easiest since it follows the stricter states. That being said it is VERY important that you check your LOCAL area both state and county for their rules.

Originally posted by @Steve Rozenberg :

Are You Holding Security Deposits in Separate Accounts?

YES! Our state laws require them to be segregated. Your state laws probably dictate the manner in which they are held.

Originally posted by @Marcin Talaga :

Out of curiosity, no one here mentioned staying away from security deposits.  I've been taught not to collect security deposits, at least not here in Chicago.  They say your better protected by collecting a non-refundable move in fee.  Just a thought.  

Funny @Marcin Talage, being from Chicago I've heard the same thing. Even my real estate agent doesn't collect them for his properties. He's only been sued once in 18 years but the security deposit was what caused him to pay out.

@Marcin Talaga @Phillip Faries

 We do all we can to collect $500 non refundable move in fee vs security deposit within the Chicago city limits but sometimes we get push back from better tenants.  An applicant yesterday said "why would I pay $500 and not get it back vs just let you hold $1300 of mine and I do what I am supposed to as a tenant and I get 100% of it back." Now a tenant like that to me doesn't scare me holding a security deposit because more than likely with his no pets, 800 credit score, worked at same job for 27 years, lived at last place for 16 years, and makes good money I will cut him a check for the full amount when he leaves and as long as I have a reminder system to pay his interest each year all is good with the Chicago deposit laws.   So we offer each option but prefer move in fee because it becomes instant capitol and we avoid a lot of responsibility/risk as a company. 

Also, these Chicago security deposit laws are only for residential and not commercial.

Recently in Chicago they passed an ordinance that you cannot collect a non refundable move in fee for more than 50% of the monthly rent payment.  So for $900 rental I am unable to collect a $500 non refundable move in fee and only able to collect a max of $450.  

In Chicago Suburbs for our operation it simply goes into the owners account and is earmarked as such but never any interest is paid for commercial or residential.

I'm an investor in Chicago, and currently rent out (2) SFH where I collected security deposits. Both are kept in separate money market accts with PNC under tenant's names. Right now I am being hit with monthly fees because accounts dont meet mininum balance requirments ( under 2k). Bank can't seem to find a solution other than asking me to use my own funds to bring both accts to proper minimum limits, so I'm looking for alternative banking method for security deposits only. Any suggestions are greatly appreciated. Thanks!

Originally posted by @La Veda Underwood Bruce :

I'm an investor in Chicago, and currently rent out (2) SFH where I collected security deposits. Both are kept in separate money market accts with PNC under tenant's names. Right now I am being hit with monthly fees because accounts dont meet mininum balance requirments ( under 2k). Bank can't seem to find a solution other than asking me to use my own funds to bring both accts to proper minimum limits, so I'm looking for alternative banking method for security deposits only. Any suggestions are greatly appreciated. Thanks!

Do not use any MMA to hold a security deposit unless it meets the minimum monthly account balance for no fees. The fees will exceed any interest earned. 

Instead, look for a plain savings account or plain checking account - whatever has a low enough minimum balance to avoid monthly fees. 

The other problem is that banks will allow these accounts to go dormant. You don't want that. And it sounds like you need to specifically ask for landlord tenant account or an escrow account - it has to be set up so tenant can't access the account for withdrawals. 

Steve, thanks for your reply. I have an llc operating acct, in additional to rental operating acct, plus these 2 money market accts which are escrow accts in tenants names (they can't access) all linked together. For whatever reason bank doesn't have a business product for separate security deposit accts that have minimums less than 1500 since Chicago landlords are veering away from collecting deposits. This according to rep I've been working with. I'm thinking of closing these accts and trying my luck with an online bank. Just not sure where to look. Deposits are 1250 & 1300. And I can't wrap my mind around just accepting move-in fees since these are both new rehabs. I'm a newbie btw. 1 1/2 yrs. Thanks again!

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