Best online banks to hold security deposits?

16 Replies

Hi all,

I am from Massachusetts, and in this state landlords need to hold their security deposits in interest accruing accounts - Does anybody know any good online banks that provide this service? Or should I look into a big branch bank/ local banks? 

Cheers! Bill

It needs to be in a bank in Massachusetts, I use a local bank.

@Bill Womeldorf , like Mike mentioned I also use a local bank. I would make sure to bring the following. this is everything our bank needs in order to setup the account. 

License info

  • License #
  • DOB
  • Exp Date

Copy of lease

W-9 Form

  • Signed
  • Ss#
  • Current address
  • SCAN License

@Bill Womeldorf , as @Mike Hoefling mentioned you must use a Massachusetts bank and provide proof to the tenant that the funds are in an interest bearing account. A local bank - Chicopee Savings has a specific account for that where they will have the account in the tenant's name (managed only by you) and handle the admin (i.e. send periodic statements of interest accrued to the tenant). Lie @Rob L. stated you will need all the info he outlined of the tenant. I have one at Easthampton Savings bank too. Any other local bank will have similar products - Westfield Bank, Florence Savings, Monson Savings, etc. Email me and I can give you specific contacts.

Copy of the front and back of the license, I always have to go back because I forget that part.

Great information everyone!

@Bob Couture

How periodically should I send these statements to the tenants? Every month or quarterly? (Or more likely, would you suggest having it automatically setup that the bank sends them statements every month on the updated balance?) 

I don't think there is a requirement to send it out periodically. The bank does that as a service. You are just required to show that it is in an interest bearing account within 30 days and then show/pay accrued interest when they move. RHAGS and WMASS REIC would be a great resource for this question and local bank referrals too.

so how does it work if you have 20 tenants that have been there for years and you have to add on the interest to their initial deposit?

how do you know who is owed 55 cents and who should get 52 cents?

@Bill Womeldorf you dont send statements. You give your tenant the bank name and account number after you take the deposit. Thats the end of it. When they move out you refund the deposit plus interest less damages. 

@George P. you deposit the sec dep check and you note the interest rate the account pays. When you return the deposit you figure out the time it was in the bank and the interest rate and withdraw that amount. It seems like a lot of work right? Lots of paperwork. I stopped taking security deposits 10 years ago. Its not worth the hassle. I screen my tenants. I play the averages. I dont want to deal with MA security deposit laws nor do I want a tenant to hold them against me. @Bill Womeldorf

MA security deposit laws are tricky and complicated and open to interpretation. Which is where people can get into trouble. If the judge finds you did something wrong, you are liable for 3X damages (3X whatever you took for security deposit). My own real estate attorney doesn't take security Deposits for that reason.

I am by no means a lawyer or an expert, however, after reading the laws pertaining to this subject, here is my conclusion:

Security Deposits may be taken upon signing the lease, in an amount that is no greater then 1 months rent.

The security deposit must be placed into an interest bearing account, and held within the Commonwealth. (No large banks, a bank that originated and currently resides in Massachusetts)

Interest on BOTH security deposit and last month's rent, must be either paid, or credited to the tenant annually on the anniversary date of the lease signing in an amount up to 5% (chances are the security deposit will only yield like .05%, which is like $0.20 annually. However, if you don't put last month's rent in the account as well [you are not legally required to] it is safer to pay the 5% then nothing)

You are required to give the tenant information such as, the name of the bank, address, phone number, account number, date deposited, and interest amount (am I missing anything guys?)

It is your best bet to keep the money in an escrow account for that specific tenant. They would be the beneficiary of the account for both tax reasons and upon your death they can claim their money

I'm with you @Rob Beland security deposits are a time suck and if you don't follow all the rules governed by the state its also a liability. Now, I haven't been burned yet but I still think its worth while to take a security deposit. My reasoning is because I like to be paid for my time (well I like to pay other people) to fix any damages that are incurred during the tenants stay at one of our properties. 

I believe in systems and as long as you setup the correct system that follows the law to a T then it is certainly beneficial to accept security deposits. I think its crazy to forgo a security deposit out of fear of a potential fine...that could and probably wont ever happen. But, I can guarantee you tenants will damage units with a much higher probability then you getting fined for incorrectly handling a security deposit. 

Good points @Rob L.

 With 25+ units and at least one turnover every other month to three months the amount of time and effort I would spend managing a bank account is just not worth it.

  @Rob Beland I hear you....It's one of the first things I plan to outsource! 

@Bill Womeldorf I use Santander but they're getting to be a pain with trumped up fees...

One problem is, I don't have checks for each Sec Dep account so I need a bank check, then it's hard to trace.

The Junkyard Dog said when you need to pay back the Security Deposit you transfer it to a checking account and write a check that will show on your statement when cashed.

Maybe @Rob Beland is right.

@Michael Buckley

 The security deposit needs to go into a specific type of account because of the fact that it isn't your money. It still belongs to your tenant. It doesn't show up on your balance sheet. If you get caught running a ponzi scheme and the feds come in and seize all of your assets and throw you in the hoosgow they wont be able to touch this money.

Ori ginally po sted  by @Rob Beland :
 @Michael Buckley

 The security deposit needs to go into a specific type of account because of the fact that it isn't your money. It still belongs to your tenant. It doesn't show up on your balance sheet. If you get caught running a ponzi scheme and the feds come in and seize all of your assets and throw you in the hoosgow they wont be able to touch this money.

 That's what I was saying. A dedicated escrow account, where the tenant is the account beneficiary. I currently use Chicopee Savings Bank

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