Security deposit in a high yield account

[Brian Warren]

I understand that I need to hold the tenants security deposit in a separate account... I was thinking of putting into a high yield savings account 1.9% or possibly putting into a 12 month certificate of deposit at about a 2.1% yield, Has anyone ever done this? Does anyone have a strategy that they feel strongly about? Or is this just not worth the hassle? My line of thinking is that they will be signing a 1 year lease and I will be holding the deposit for 1 year anyhow I may as well get a little interest on it.

Concerns are if they break the lease early..

but most cases I think of that is the case they will be forfeiting the deposit anyway..

Open to thoughts or opinions please

[Carolyn Fuller]

You should check the laws in your state. Some states (e.g., Massachusetts) require that all interest goes to the tenant.

[Ralph Poirier]

Don't forget that CD's are sold in $1K denominations.  Many have a cancellation penalty.  Is it really worth the extra work and issues if your tenant cancels for 20bps?  That works out to about $0.20 on a $1K.

[Kevin Sobilo]

@Brian Warren, I agree with @Carolyn Fuller.

In my state and I suspect many others, the deposit money is considered to be owned by the tenants even while you are holding it. So, any interest earned is owed back to the tenant. States may also require you to disclose on the lease where the money is being held.

[John Thedford]

Your info does not show what state you are in. Read your state landlord-tenant laws. They dictate how and where security deposits must be held. We have the option of putting the funds into an interest bearing account in FL but the interest must go to the tenants. It is not worth the time or hassle to put it into an interest bearing account in my instance. Pennies...for nothing.

[John Thedford]

Your info does not show what state you are in. Read your state landlord-tenant laws. They dictate how and where security deposits must be held. We have the option of putting the funds into an interest bearing account in FL but the interest must go to the tenants. It is not worth the time or hassle to put it into an interest bearing account in my instance. Pennies...for nothing.

[Nathan Gesner]

First, you need to check your laws. Some states require you to use an interest-bearing account and pay that interest to the Tenant. Some let you choose a non-interest-bearing account to avoid the hassle. Others allow you to keep the interest but you usually have to disclose that to the Tenant.

I think you may be allowed, technically, but at what cost? You need access to the funds and a penalty may be involved in you cash it early. And really, how much money are we talking here? A $1,000 deposit will earn you $21 in a year. You aren't going to get wealthy from bank interest.

[James Wise]

Originally posted by @Brian Warren:

I understand that I need to hold the tenants security deposit in a separate account... I was thinking of putting into a high yield savings account 1.9% or possibly putting into a 12 month certificate of deposit at about a 2.1% yield, Has anyone ever done this? Does anyone have a strategy that they feel strongly about? Or is this just not worth the hassle? My line of thinking is that they will be signing a 1 year lease and I will be holding the deposit for 1 year anyhow I may as well get a little interest on it.

Concerns are if they break the lease early..

but most cases I think of that is the case they will be forfeiting the deposit anyway..

Open to thoughts or opinions please

 As a licensed Property Manager in Ohio I am required by law to place all tenant security deposits in a non interest bearing account.

[Brian Warren]

@Brian Warren

I am pretty confident that that it checks all of the boxes legally. I am in Iowa, I do not believe that the interest is owed to the tenants. But I believe you may be right about “is it worth the hassle”

I am planning on scaling my business and over the next few years adding more doors to my portfolio. I thought that yes it may only be $21 but As I get more doors that may add up. I currently only have 8 doors but let’s say it’s 50 doors that would be an extra $1000 a year.

Not a huge amount but money still the same.

[Ron Rohrssen]

@Brian Warren you are correct that you need to keep this in a separate account and you do NOT need to give the interest to the tenant.

I have the same concerns as you with breaking a lease and facing penalty fees for withdrawing money from something like a CD prematurely. 

Because I have multiple properties (and multiple security deposits), I ladder these in separate accounts with maturity dates that match the tenant lease. I do that on all but one property's SD and treat that like a buffer in case someone were to break a lease. That separate SD is still in a separate interest bearing account, but not as high interest as the others.

[Brian Warren]

@Ron Rohrssen

Thank you Rob.

Yes, my exact thought was, it’s not like I won’t have a $1000 that I can pull from an account if needed and someone breaks the lease but I like the idea of keeping 1-2 deposits in a high yield account for a buffer, good idea. I read through your profile, I like how you think, it sounds like we are both on a similar journey. thanks for the input

[Michael Noto]

Look into this for your state but in my market that interest goes to the tenant so it wouldn't make much sense. 

[Adam B Henderson]

@Brian Warren discover has a 2 percent account that is savings so no need for cd

[Brian Warren]

@Adam B Henderson

Thank you.

Marcus (Goldman Sachs co) has an account that I use too.. that is 1.9% it was 2.3 when I first signed up.. they where running a special on 12 month CDs for 2.75%

I like the idea of the CDs also just to help me keep each deposit separate and I can label each cd with the street address of each apt.

[Michael Lettieri]

I would like to put my security deposit in a high-yield savings account as well. I live in New Jersey and will give the tenant the interest, I just want to do them a solid. However the state stipulates that I cannot co-mingle the money with my money. This is a problem because I'm not sure how to deposit the money into a high-yield saving account such as CIT Bank or Marcus without first depositing it into my personal checking account then transferring it.

[Joe Martella]

I have been pondering the same thing.  I have several rentals.  The landlord tenant accounts that I have earn limited interests.  In New Jersey you have to give the tenant the interest either on the anniversary of the lease or annually, by January 31. The tenant is responsible for the taxes on the interest earned. If you don't comply with NJ law the tenant can demand 7% interest on their money.  

On the other hand, a tenant would rather have a more meaningful cash amount received rather than a $2 or $3 interest payment.  

I know this thread is several years old, but I am curious to know if anyone has had any success.  I am starting to look at federal credit unions to see if they offer this type of product.

[Shawn Mcenteer]

interest goes to tenant in NJ, standard escrow account will suffice.