There is a reason that this is the #1 cause for landlords to be sued!
Most landlords do not have any type of policy or procedure that they follow and always think this is just something they will deal with when it happens…
First thing to clarify, it’s not only wise to keep separate bank accounts for each property’s security deposits, but in most states, it’s required by law.
What is a Deposit?
A landlord can require tenants to provide the money upfront, usually one or two months’ worth of rent. This money is then held by the landlord until the end of the lease, and returned if there are no damages to the property other than what is considered normal wear and tear.
Best way to avoid problems when the tenant vacates
Be very clear and upfront setting proper expectations with the tenant on what is expected of them in order to return the security deposit. For example, if you turn the property over to your tenant with professionally cleaned carpets you may require the tenant to return it to you in the same condition with a receipt from a professional company. We let our tenants know that we take 150 pictures of the home prior to the tenant moving in and then again after the tenant moves out. This gives us a clear “Before and After” view of the property to help determine the condition of the home before the tenant moved in and after they moved out.
Problems with Commingling Funds
Technically, the security deposit money does not belong to the landlord. It is “Security” that the landlord is holding to ensure the tenant abides with their end of the contract “The lease agreement”. The security deposit is held while the tenant lives in the rental property so that the landlord may then use it to repair damages to the property after the tenant vacates the home.
The landlord must keep it safe until it is time to either to offset damages or return it to the tenant, not use it to repay themselves for out of pocket expenses.
When a landlord keeps the deposit in the SAME account as his/her personal funds or other deposits, three common issues arise:
Problem #1: Lack of Tracking
The deposit becomes almost impossible to track and validate in a court of law. In many states, commingling of funds can forfeit a landlord’s right to claim any of the deposit.
Problem #2: Accidental Spending
The deposit might accidentally get spent on other properties or even worse personal items
Problem #3: Interest Accrual
Since the security deposit does not belong to the landlord, many states require that a landlord collect interest on behalf of the tenant. This becomes nearly impossible to calculate if the deposit is commingled with personal funds.
The Solution: Separate Accounts
Most independent landlords don’t realize the importance of this basic accounting technique. A quick and easy fix for this is to keep the funds for a security deposit in a separate operating account.
By keeping the security deposits in their own CHECKING account, you are able to issue deposit refunds directly from the appropriate account by writing a check – thereby keeping your books nice and clean.
I would not recommend keeping the deposits in savings accounts, because you would be forced to transfer money to and from a checking account in order to issue refunds via check. This defeats the purpose of keeping the money separate and the ease of tracking your accounting.
What Does the Law Say? Make sure you review what the law says about holding security deposits for your state.