Reader question on Security Deposit Interest in Chicago

A reader wrote:

Thanks for your article "Series: Getting started with Chicago Investment Property. Part 3." Very good info there. I am new to the rental market; I have a condo unit in Chicago to rent; I wonder where should I put the security deposit? The city requires 1.26% for the year of 2008. I checked into several banks but the trust account only pays O.5% interest. Which bank has a better offer? Or is there a better way to deal with this money? I only have one unit. Can I be exempt from the rule that I must hold this money separately? I looked into a CD that requires a certain amount, that means I must put some of my money into it in order to meet the requirement, however that must be under my name. The rate is much better. Is it legal to do it? Please advise!

Hi Jean,

The short answer is that, if you are subject to it, there is no way to get out of complying with the Chicago Landlord Tenant Ordinance. And if you own a condo, it sounds like you're not living in an owner occupied two, three or four unit.

However, the Ordinance only states that you must keep the security deposit funds in an interest bearing, Federally insured institution that is located in Illinois. It does NOT require you to keep it in a "trust account." To comply with the law, you merely need to open a savings account. You can even open a CD. Savings accounts seem to be paying around 3% and CD's appear to be paying around 5% . Open a savings account and have your bank (Federally insured) name the account "Your Name – Security Deposits."

You should then only use this account for Security deposits – NOT FOR ANY OTHER PURPOSE. Any personal money that you have or rent money, etc, should never go into or out of this account.

All banks vary what interest they pay on basic savings accounts so, check with the bank you like to work with. If you have more than one account with a bank they may give a more favorable rate. Keep in mind however that on a $1,500.00 security deposit, the difference from what you earn and what you pay is not that huge. In your example you said you could get 0.5%. If the required interest you pay is 1.28% then 0.78% is what you have to come up with out of your own pocket. On that $1,500.00 security deposit, that amounts to a $19.20 interest payment of which you made $7.50 in interest. That means your total annual out of pocket is $11.20. That's not too bad.

Check with your accountant as well, because you should be able to write off any excess interest that you pay to the tenants.

Guide to articles

Part 1: Identifying potential property
Part 2: Marketing
Part 3: Taking an application and lease
Part 4: Move in day