Real estate investors will spend a large sum of money in order to purchase rental properties. This holds true whether you purchase the property for all cash or if you get a loan after putting down a percentage of the purchase price. Landlords purchase rental properties so that they can collect rents from tenants in hopes that the rents will cover the cost of the mortgage payment each month. If the rental income exceeds the mortgage payment, then the landlord will have positive cash flow. The quickest way to derail your plans as a landlord is to run afoul of the laws covering security deposit.
Escrow Account
The first step is to determine whether or not you are required to put security deposits into a separate escrow account. The answer to this question will be determined by your state?s law. In my state there are different rules on whether or not you are required to have a separate escrow account. If you are managing your own property and you have less than 10 rental units, you are not required to have a separate escrow account. Once you exceed 10 rental units that you manage yourself, you are required to have your own escrow account. Anyone that manages properties for somebody else regardless of the number of properties they manager is required to have a separate escrow account.
Escrow Account Notification
If the state law requires you to have a separate escrow account, you are required by law to give the account number to your tenants. The easiest way to provide this account information is to include a paragraph in your standard lease agreement that gives the bank name and the account number.
If you manage your own properties and you buy your 10th property, you are required to notify all your existing tenants that you now have an escrow account. Since this occurs in the middle of their existing lease you do not have the information in their current lease. You will need to send all your tenants a letter detailing the bank name, the account number and that you have now established an escrow account due to the law requirements. I would recommend sending this letter certified mail with return receipt request. You do this so that you can prove that you notified the existing tenants if you need to at a later date.
State law is very clear on the requirements for security deposits. If you violate the law you could be held responsible for treble the amount of the security deposit.
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