Property Management: How to Handle Security Deposits

The way we're going to talk about it is more general, because every state handles security deposits differently. I'm familiar with Pennsylvania rules and regulations, and I'm going to talk about Pennsylvania. Most likely your state is somewhat similar. I certainly can't guarantee it's exactly the same way. You would again have to do that research I asked you to do last week and make sure that you understand how to handle security deposits.

The important concept about security deposits, and a lot of landlords don't understand this, is that the money is not your money. It's the tenant's money and you're just holding it on their behalf.
Escrow Account

You can hold it in a legal escrow account and that's the preferred method, but understand that it's the tenant's money. It is not to be used to pay your bills. It's not to be put in your general operating fund. It's not to be used if somebody one month is short. It is the tenant's money and you are holding it on their behalf. That's the important concept to understand about security deposits.

A lot of people don't understand that. A lot of landlords don't escrow the money in a side account or a side way. They hold it. They just roll it into their general fund and then they say they will pay the money when they leave. That's technically not the right way to handle it. The money should be isolated in a separate account.
The way Pennsylvania works is you are to put it into a separate interest bearing escrow account. In Pennsylvania, you can hold as much security as you want in here the first year, the first 12 months, but after the first 12 months of a lease you can only hold 30 days worth of security.

If you took two months of security up front, at the end of one year you would have to return one of those. You can keep the other. If you kept more than one security initially, you have to return one.
After one year, you can only hold one month's security. That's an important element. I would imagine most states have a very similar rules and regulations. I'm not sure.

Again, it must be in an interest bearing account. The way Pennsylvania works is the first year the landlord gets all the interest, and then after the one year, all the interest must remain in the account and become the tenant's money, less 1%. The landlord can keep 1% and that essentially covers expenses. So that's the way securities work in Pennsylvania.

Once the tenant moves out, let's say they move out after one year, you would then have 30 days to return that security deposit to the tenant.

I invite you to learn more about Property Management and get a free 60 minute audio titled "Learn the 10 Success Secrets of Property Management Every Real Estate Investor Must Know to Maximum Profit and Avoiding Tenant Headaches" by going to http://www.realestatewealthtoday.com/PMS.html. Mike Lautensack is the owner of Del Val Property Management LLC, a FULL service residential property management company located in Philadelphia, PA.
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