Interest in Landlording

Landlords are required to follow rules while handling the money of their tenants. One of them relates to the security deposits that they collect when someone first moves in. Tenants are supposed to earn interest on their deposits at a rate defined by the state.

Not for Sale - But a Nice Looking Multi-FamilyFor many years (since 2002) the state held the required security deposit interest rate at 1.5%. This page on the CT Department of Banking site shows the historical interest rates for a wide variety of deposits held in the state of Connecticut. As most everyone knows, it’s been really tough to find a 1.5% interest rate for deposits over the past few years. So landlords have been out of pocket each year to make up the difference. It’s not like it’s a huge amount, the entire 1.5% on a $3,000 security deposit would be $45, but still.

The state reduced the rate dramatically in 2012 to 0.16%. This is more in line with the current interest rate environment, so in that sense it’s long overdue. That same $3,000 security deposit will now only earn $4.80 per year.

But the bigger question is whether or not your landlord is actually paying interest. We would hope that the larger, professional organizations know about the law and comply with it. But the mom-and-pop landlords may not actually know what they’re supposed to be doing. We’re frequently surprised at how fast and loose some landlords seem to run their businesses.

Keeping up with the various rules regarding landlording was one of the main reasons we exited the business after only two years. It really is a commitment to do it right, and for us to be renting a single unit just didn’t make sense. We could see how it would be different if we made that our full-time job, or hired out the management to professionals, but neither of those options were right for us.

It’s actually a good time to be a multi-family property buyer right now. Prices are down overall, and in the more urban towns there are plenty of opportunities for distressed buildings. Many need a cash investment to bring them up to rentable condition, but that’s part of the reason they’re so cheap. People with cash to invest (and who want to earn more than the 0.1% the banks offer) may want to consider real estate. But keep in mind that it’s a tough business that will require time and attention.

5 thoughts on “Interest in Landlording”

  1. We set-up a security deposit escrow account for our upstairs tenants when they arrived in January 2009. I’m happy to say that our bank has been paying them interest at a rate of 1.5% per annum ever since. In fact, I was joking with Val that we should set up a tenant escrow account for ouselves since one can’t earn that rate in a CD right now, let alone a savings account! I haven’t seen a 2012 statement yet, so I don’t know whether they’ve lowered the rate consistent with the legislative change, but I can say that we haven’t been out-of-pocket a dime.

  2. Huh, I thought they were just splitting the types of accounts into two buckets with two different rates. That’s not how you read it, Josh? Perhaps it will need to be settled by the courts then…

  3. Kyle, I think you’re right. I almost couldn’t believe that the state would be that daft (well, stress the “almost”). I just pulled the statute and it looks like the rate on rental security deposits is the new .16 rate. Thanks for pointing this out, I would have kept subsidizing the bank rate.

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