How do I handle the Security Deposit

21 Replies

I'm in Texas and I have 2 rentals. I have both houses leased but I don't have any specific place where I've saves the security deposits. 

What exactly is the legal protocol I need to be following with regards to the security deposit? Thanks

Check the Texas state website, there should be some info. There are tons of Lone Star state residents on here that I am sure will chime in as well.

I am not sure if you own the property, but there is a very important and dangerous term you need to learn very quickly. It is called "Co-Mingling of Funds". As a property manager we keep those funds in a separate escrow account, untouched by us or the owner.

A good way to look at it is that money is not the owners money and it is not the property managers money. It is the tenants money that we are holding incase they do not perform per the contract, whether that is by vacating early or not returning the property in the property condition (minus wear and tear). The  owner does not have any rights to that money unless the tenant does not perform via the agreement then that is a different story.

In short, put it in a separate account and do not touch it.

in Massachusetts it must be deposited into an escrow account and you must give your tenant a deposit slip of the account bank within 30 days of depositing it.if you do not do this the Massachusetts courts will award the tenant treble damages no ifs ands or buts about it.

Hello Wilco,

I am going to agree with Steve Rozenberg post.

Private owners do not have the same requirements as real estate agents and property managers in Texas, but you are liable to the tenants for the return of the security deposits. Like Steve I would also recommend that you open a separate account and nickname it security deposit trust account to keep all your security deposits in that account.

@Wilco Ravestijn

Co-mingling is a realtor specific issue.  That being said put the money away in a bank account and tell the tenant which bank the money is residing in.  That should cover you unless Texas also requires you to give them the account number.  

There may also be an interest payment due to the renter when you check their money out of the bank.  Most renters don't know about it, but that doesn't mean you aren't obligated to give them those pennies.  Again, check with TX state laws.

DO NOT TOUCH those funds.  Ever.  I have a friend of mine in the middle of a court battle because he was late drumming up the security deposit for a tenant.  It is not a good thing.  He is going to lose the case and it's going to cost him thousands above and beyond the security deposit.

We were advised to set up a separate security deposit trust account.  In that account we hold all security deposits, separate from our operating account.

I have always created a savings account and a checking account for every rental . Security deposit goes into saving and rent expenses into checkinng. The key is going to be local laws since every state governs the security deposit differently 

Texas Law does not require owners to have a separate account nor pay interest on security deposits for their own properties.  You can use it to go on vacation ! I am joking everyone before you blast me

Since you are in the best case going to have to return it someday or in the worst case use the deductions to make repairs, it is best to save it in a different account

I've actually been curious about this, too, as it relates specifically to Texas. I know property managers are required to keep it in a separate escrow/trust account, but I haven't seen anything in the Texas Property Code that specifies you have to do the same thing as an owner who self-manages. 

I think it wise to keep it somewhere separate, but wasn't sure if just keeping it in my business savings account (as opposed to my business checking account where rental income/expenses are) was enough or if I needed to open a trust account (which means creating a trust). 

Looks like @Greg H. 's post answers my question. He must have been typing at the same time I was. 

Ok, First make sure you never not ever touch that money unless you legally can. I am not an attorney of course so my best recommendation is to consult a real estate attorney in your area but generally you are required to deposit the money in a separate account and also to pay the tenant any earned interest on that money. Like others have mentioned you have to look at, think of and manage that money as belonging to the tenant. It is not yours and you are legally responsible for managing it. You should also  let the tenant know where you have deposited that money and it does not make sense to tell them where if you are not going to give them the account number although you certainly do not need to give them access to the money because it is your security against damages by the tenant to your building or perhaps including in lieu of rent not paid. 

As a landlord you are doing business and maybe should in addition check to see if you should also get and have at all times a business license in your city. Some cities have been citing and fining landlords that have failed to get a business license. I am sure most avoid this. 

@Wilco Ravestijn

All the responses given here were by well meaning people. However, the answer I gave you was for Texas and although I threw a joke in there my answer is state specific and I have been a Broker in Texas for over 20 years. You are not required to maintain a separate account nor pay interest or have a business license in Texas for your properties

@Greg H. is right. If you are a responsible person with a small rental business, and if you have enough money that you are never going to find yourself without sufficient funds to refund a security deposit when it's due, then there's really no need to create a separate account. You might want to do that for accounting convenience, but you also can just put the money in whatever account draws the most interest. Where you put the money is not the tenant's business. See http://www.nolo.com/legal-encyclopedia/texas-security-deposits-36234.html .

A lot of extreme answers here. There is typically NO requirement for an owner to keep a separate account for any security deposit money. You can handle it like any other money if you are the owner of the home. You are liable to pay it back, but it is NOT a trust or escrow account situation, like it would be for a licensed real estate professional dealing with something like earnest money. It may be best practice for you to keep it in a different account, but there is not a legal requirement in most states, that I'm aware of.  

Originally posted by @Aaron Montague :

@Wilco Ravestijn

... he was late drumming up the security deposit for a tenant. ...

Make sure the bank you use will not allow a landlord tenant account or escrow account to go dormant. That will potentially delay your getting to those funds when the time for that comes. Landlord tenant accounts generally have no activity which is usually what causes the bank to put the account into dormant status. 

Commingling of the tenant security deposit with any of the landlord's funds / bank accounts is a bad idea - regardless of whether your local law allows that. What happens when there is a judgment against the landlord? Bank accounts of the landlord can be garnished. What happens when the landlord dies? Bank accounts of the landlord become subject to death taxes and the heirs will want to get their cut. 

 @Greg H. :

So where do you recommend I go on vacation with that security deposit. :-) 

Great advice everyone thank you. I have commingled the money which because I'm the owner should not be a huge issue. But to be safe, I will open up 2 separate accounts and use the positive cash flow to save up the security deposit that was used for my vacationing. 

Thank you all for your expertise.

You really should know the landlord/tenant laws in your state if you're in this business. In the absence of specific guidance on this issue, I'd do a separate account for security deposits.

Hello,

You should have the security deposit allocated to a specific business account. 

Check local laws, both state and city, that will explain what you can and can't do. Some areas are landlord friendly but but ignorance isn't a legal defense. Some cities have specific laws around the handling rental of deposits. The best way I've found is the savings\checking accounts approach. 

A TX specific answer was already given, but I just wanted to chime in and say that in NC, even owners must keep the security deposit in a separate trust account. This is just mentioned as a reminder to always check your own state's laws regarding issues.  States are all VERY different from each other when it comes to landlord/tenant law!

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