Investing Deposits? Risk/Reward?

6 Replies

Hey BP Community, 

My rental portfolio is steadily growing (still pretty smalltime), I am up to about $20,000 in tenant deposits. Thus far the money just sits in an account, as its not my "free and clear" money.

What do you guys think about Investing deposit money into the stock market? 

I am not suggesting putting all the money on a roulette table, or a meme stock like AMC or GME.

However, the idea of investing the money in a stable dividend yielding stock is an interesting idea.

Where would you guys invest it? Would you Invest it? 

You need to learn the law. Security deposits are not YOUR money to spend. The funds belong to the Tenant until the lease is terminated and then the funds can be applied towards unpaid rent, utilities, cleaning and repairs, or whatever else your law/lease allows.

The same goes for prepaid rent. If a tenant pays you an entire year of rent, do not spend it. The only money that belongs to you is the money applied to the current month's charges.

Some states don't even allow you to keep the interest earned on security deposits because it is not your money.

@Nathan G.

Good insight. I haven’t looked into it much as I just assumed it would be best to keep it safety tucked away. I have one tenant in particular who has made his intentions pretty clear that he’s not going anywhere. Seemed like a waste having them money sit idle

Depends on how you define tenant deposits and your love of risk.  If by tenant deposits you mean rent money that you have set aside yes, you can do anything you want with it.  If you mean prepaid rent, security deposits or other type of deposits then no, that is not your money today and it needs to stay where it is.

If it is rent money you can buy anything you want, including stocks. The question is how much do you need to have on hand for emergencies.  Need a new furnace, roof, whatever it is, you need to have funds set aside to cover those unknown costs, even an unexpected tenant turn.  If you love risk and the idea of being cash poor gambling on the fact you won't need the money you can spend it all.  If you hate risk then leave it be.  

Cash is king!

You will only compound your problems if the market crashes, you will have 50-80% less cash to reimburse all those tenant's  deposits that may have to move because of said crash's trickle down impact on them.

Also, it may be illegal to do(maybe this should have been first)

Tenant security deposit is not your money.  It belongs to the tenant and generally there are strict laws about where they can be parked and how you must report on them.  What Ido is have a separate bank account (non interest bearing) where all my security deposit funds go.....  when a tenant moves in I put the deposits there - when they move out i take the funds from there and return to tenant. the balance of that account should always equal the total security deposits you have on record.  

Suggest you join the  (local to your rental)  rental owners or multi family owners group and start taking the classes they will provide. You must understand the rules of the game you are playing if you want to win. 

Most states are pretty tenant favored, and as stated from the posts above the security deposit is the tenant's money. Touching that money will just result in a headache at a future time. 

Definitely check out the CA laws to see what you can/cannot do with the money. I'm a proponent of investing in stable dividend yielding stocks but I wouldn't do it with someone else's money...