Investor · Orlando, FL · Member since 2016 · 162 posts · 125 votes
I own several rental properties and tenants have given me 1st months and security deposit when they have moved in, I now am holding a lot of security deposits that have amounted to a good amount of casht, I understand that security deposits can not be touched until they move out, is there a way that I can send tenants a letter or something telling them that we are going to use it for there lasts month rent instead and then I should if I am correct be able to use the funds ?
Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y
I would be very cautious about this type of business practice. I am not an accountant or a lawyer but I would say that could be very close to being considered Co-Mingling of Funds which is illegal.
You are holding the security deposit as part of the contract you and they signed. In a contract it is a bi-lateral agreement, meaning you perform and they perform... If they do not perform then it is spelled out in contract of what will happen next. You do not have the right to change the contract at your own discretion or own needs, just as they cannot change the wording of the agreement either or you can evict etc...
You are holding that in lieu of them not performing to the contract agreement. It is not to be used as any type or form of payment.
I have seen recently some judges have actually asked the landlord to see the paper trail that shows from the time of accepting the deposit to sitting in a separate account and that it has never been touched till the time that was returned.
Also I would suggest you create an itemized list of what you will deduct from the security deposit that they have to sign and acknowledge of these fees, if you would like what we use or anyone would simple message me and I would be happy to share.
If you decide to go down this path I would make sure you have full disclosure upfront, and also I would discuss this with your real estate attorney to have them sign off that you are not violating any laws or have any tax implications on this matter related to your state tax or federal tax laws.
Investor · Normal, IL · Member since 2017 · 89 posts · 75 votes
9y
I wouldn't do that. What if you find damage after they move out? You would have a hard time collecting it. A security deposit is there so you already have funds to cover it.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
9y
Scott Ray Bad idea Scott. You need that security deposit. I never spend last months rent or non refundable damage deposits until the tenant leaves. Then it goes straight to reserves What are you talking about a few thousand dollars? I have 9 doors. Deposits are only about 7K. If you don't have the discipline to hold money and not spend it your gonna struggle with accumulating wealth. If you don't have reserves your gonna have trouble with that eventually as well. RR
Investor · Orlando, FL · Member since 2016 · 162 posts · 125 votes
9y
Hey, I appreciate the feedback so far, I am a very experienced investor/property manager, so I understand the issues about the way a tenant may leave a property I am okay with what is going to come of that. I am asking more about the proper legal way of doing this and if it is legal to use the funds after switching it to lasts months, for what I would like to use it for or will the last months rent have to be held in a bank account also, its not a couple thousand I own a lot of houses and want to use the last months rent to buy another property
Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y
I would be very cautious about this type of business practice. I am not an accountant or a lawyer but I would say that could be very close to being considered Co-Mingling of Funds which is illegal.
You are holding the security deposit as part of the contract you and they signed. In a contract it is a bi-lateral agreement, meaning you perform and they perform... If they do not perform then it is spelled out in contract of what will happen next. You do not have the right to change the contract at your own discretion or own needs, just as they cannot change the wording of the agreement either or you can evict etc...
You are holding that in lieu of them not performing to the contract agreement. It is not to be used as any type or form of payment.
I have seen recently some judges have actually asked the landlord to see the paper trail that shows from the time of accepting the deposit to sitting in a separate account and that it has never been touched till the time that was returned.
Also I would suggest you create an itemized list of what you will deduct from the security deposit that they have to sign and acknowledge of these fees, if you would like what we use or anyone would simple message me and I would be happy to share.
If you decide to go down this path I would make sure you have full disclosure upfront, and also I would discuss this with your real estate attorney to have them sign off that you are not violating any laws or have any tax implications on this matter related to your state tax or federal tax laws.
Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y
I would be very cautious about this type of business practice. I am not an accountant or a lawyer but I would say that could be very close to being considered Co-Mingling of Funds which is illegal.
You are holding the security deposit as part of the contract you and they signed. In a contract it is a bi-lateral agreement, meaning you perform and they perform... If they do not perform then it is spelled out in contract of what will happen next. You do not have the right to change the contract at your own discretion or own needs, just as they cannot change the wording of the agreement either or you can evict etc...
You are holding that in lieu of them not performing to the contract agreement. It is not to be used as any type or form of payment.
I have seen recently some judges have actually asked the landlord to see the paper trail that shows from the time of accepting the deposit to sitting in a separate account and that it has never been touched till the time that was returned. Also I would suggest you create an itemized list of what you will deduct from the security deposit that they have to sign and acknowledge of these fees, if you would like what we use or anyone would simple message me and I would be happy to share.
If you decide to go down this path I would make sure you have full disclosure upfront, and also I would discuss this with your real estate attorney to have them sign off that you are not violating any laws or
Investor · Orlando, FL · Member since 2016 · 162 posts · 125 votes
9y
Hey Steven,
I think you help me clarify this issue more, I will leave it the way it is, in an separate bank account for security deposits. It's not that important to me at the moment. Thanks everyones feedback.
Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
9y
@Scott Esmail Glad to know you have the security deposits in a separate bank account and are planning to keep it that way. Don't touch that money until the tenant has moved out and you're preparing your final reports on the property condition and return of deposit. Not only is that the best business practice, but in some jurisdictions the law requires it.
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
Glad you got this resolved. For the future, bear in mind that you can't unilaterally change a contract. Sure, credit cards do it with their privacy policies or interest policies, etc., but as a consumer, you're given a certain period of time to decide you don't like it and cancel the account. Your tenant doesn't have that luxury.