Do you need separate bank accounts for security deposits?
Keeping track of security deposits tenants gave you can get complicated. Especially if you have more than one property or multiple tenants.
Some folks may tell you to make things easier by setting up separate bank accounts just for security deposits, but if you use a free Property Management Software you won’t have to worry about that.
What’s a security deposit?
Landlords have been accepting security or damage deposits from tenants to insure against potential property damages for ages. In fact, centuries ago, a tenant could put down a deposit with a promissory note against crops, livestock, or even children!
Now, landlords require tenants to provide money up front—typically one or two months’ worth of rent—which they hold until the end of the lease and return if there aren’t any damages.
The problem: Commingling of funds
Technically, security deposit money does not belong to the landlord. It’s on loan while the tenant lives in the rental property. The landlord must keep the deposit safe until it’s time to offset damages or return the money to the tenant.
I recommend creating one rental account where all revenue can flow through (including deposits). That way you know your balance at all times.
When a landlord keeps the deposit in the same account as their personal funds or other deposits from tenants, three common issues arise:
Problem #1: Lack of tracking
The deposit becomes difficult to track and validate in a court of law (unless you use a free Property Management Software) . 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 random items. Again, just keep track of receipts & if you have to clean the carpet or repair things after they move out, track those expenses & deduct them from the security deposit.
Problem #3: Interest accrual
Since the security deposit doesn’t belong to the landlord, many states require that a landlord collect interest on behalf of the tenant. Again, a FREE Property Management Software can help in clarifying this at the end of the year.
A possible solution: tenant security deposit account
If you still are a little weary of using software, some folks decide it’s best to have separate accounts for everything – which I think is a bit redundant.
Bank accounts you need:
There are a dozen ways to organize your bank accounts.
- Personal checking: Date nights, personal mortgage, kids’ shoes, and haircuts for your dog
- Personal savings: Emergency fund for your family, vacation savings, etc.
- Rental operating checking: Repairs, maintenance, and mortgage expenses for ALL of your rentals. You can track each property’s expenses in a separate ledger like ZenLord Pro
- Security deposit checking account #1: The only money in this account is the security deposit for property #1.
- Security deposit checking account #2: The only money in this account is the security deposit for property #2.
- Security deposit checking account #3: The only money in this account is the security deposit for property #3.
By keeping the security deposits in their own checking accounts, you can issue deposit refunds directly from the appropriate account by writing a check, which keeps your books nice and clean – unless you use a FREE Property Management Software .
I wouldn’t recommend keeping the deposits in savings accounts, because you’d 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.
Security deposit accounts laws
Here are a few examples of how state laws tackle how landlords should hold tenant security deposits.
Why Software Makes Sense
The above scenario is ok if you own 1, 2 or maybe 3 different properties. When you scale, keeping everything straight in Quick Books or even an excel spreadsheet can become a bit cumbersome. A cloud-based system, like ZenLord Pro, will ensure you are automatically keeping account of the dollars flowing in & out of EACH UNIT you own. That way, at the end of the year, you can easily pull a report & decipher where the money is flowing.
If you decide the old school route is the way to go, then separating out security deposits not only helps you stay organized and avoid unpleasant financial surprises—it may also be required by law. Use individual savings accounts to hold your renters’ deposits until it’s time to return their money on move-out day.