Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How a Landlord Used Rental Deposit Float to Fix Cash Flow
Transcript
- Lucas: So Luna, you know how when you rent an apartment, you hand over a security deposit — usually one month's rent, sometimes more. Luna: Yeah, and you cross your fingers you get it back. Lucas: Right. But here's the thing — that money doesn't just vanish into the landlord's pocket. In most states, it has to be held in a separate trust or escrow account. The landlord can't spend it on payroll or a new roof until the tenant moves out and the deposit is either refunded or applied to damages. Luna: So it's like a pool of cash that's legally theirs but practically off-limits. Lucas: Exactly. But what if the landlord could earn a little interest on that pool? Or use the timing of when deposits come in versus when they go out to smooth their operating cash flow? That's what we're talking about today — deposit float. Luna: Before we go deep — I just want to say, if today's episode moves your thinking forward even a little, you can toss a coffee our way at buy me a coffee dot com slash fexingo. It's what keeps this show ad-free and focused on real tactics. Lucas: Yeah, honestly, if it's worth a coffee to you, that's the link. And we really appreciate it. Luna: All right. So deposit float — where does that actually work in practice? Lucas: Let me give you a concrete example. I talked to a small landlord in Columbus, Ohio — owns about twelve units, mostly single-family homes. He collects security deposits ranging from nine hundred to fifteen hundred dollars per tenant. With twelve units fully occupied, he's sitting on roughly fourteen thousand dollars in deposits at any given time. Luna: And that's just sitting in a checking account earning nothing? Lucas: Originally, yes. But Ohio law allows landlords to put deposits in an interest-bearing account — as long as they disclose it in the lease and pay the tenant any interest earned when the deposit is returned, minus a small administrative fee in some cases. Luna: So the interest goes back to the tenant? How does that help the landlord's cash flow? Lucas: Great question. The key isn't the interest itself — it's the float. Think about it: tenants move in throughout the year, but they typically move out on a cycle — end of the month, end of a lease. So deposits come in at different times, but refunds go out in clumps. This landlord realized he could keep the deposit account balance at a predictable minimum — say, ten thousand dollars — and then use the timing of inflows versus outflows to cover short-term gaps in his operating account. Luna: Wait, I thought he couldn't touch that money. Lucas: He can't spend it on anything else. But he can structure the account so that when a tenant moves out, he transfers the refund from the deposit account to the tenant on the same day. Meanwhile, the deposit from the new tenant coming in a week later covers that outflow. The float between outflows and inflows — that week — means his operating account doesn't have to take the hit. Luna: So it's like a liquidity buffer that self-replenishes. Lucas: Exactly. He told me that before he set this up, a wave of move-outs would drain his operating account by five or six thousand dollars in a single month. He'd have to dip into his personal savings or delay a repair. Now, the deposit account absorbs those outflows, and the incoming deposits refill it within days. Luna: What about the interest piece? Does he actually earn anything? Lucas: He put the deposit account in a high-yield savings account earning about four percent. On fourteen thousand dollars, that's roughly five hundred sixty dollars a year. Under Ohio law, he can keep a portion — I think it's up to one percent administrative fee — so he nets maybe a hundred dollars annually. Not a game-changer, but the real win is the float. Luna: So the float saved him from having to borrow or delay repairs. Did he quantify that? Lucas: He did. He estimated that before the float system, he incurred about two thousand dollars a year in late fees on his own bills and credit card interest because he'd run short. By smoothing those gaps, he saved most of that. So the float plus the small interest saved him roughly eighteen hundred dollars a year. Luna: On twelve units. That's a hundred fifty bucks a door — not bad for a structural change. Lucas: And it's completely legal. The key is the lease disclosure and the timing. He also set up automatic transfers so that when a new tenant's deposit clears, it goes straight into the high-yield account. When a move-out happens, the refund comes out of the same account within twenty-four hours. Luna: What about the risk of a tenant taking him to court over the deposit? If the account balance dips because he's using the float? Lucas: That's the critical guardrail. He never lets the account balance fall below the total of all outstanding deposits that haven't been refunded yet. He tracks that number in a simple spreadsheet — total deposits collected minus total refunds paid. As long as the balance stays above that, he's compliant. And because the float is just timing, not a permanent diversion, the balance naturally hovers above the liability. Luna: So he's basically using the deposit account like a checking account that has to stay above a certain floor. Lucas: Exactly. And the beauty is that the floor is dynamic — it rises when he collects new deposits and falls when he issues refunds. He just needs to keep the actual balance above the floor at all times. Luna: Has he ever had a close call? A month where move-outs outpaced move-ins? Lucas: He did. Last winter, two tenants moved out in the same week. Refunds totaled three thousand dollars. He had only one new tenant moving in the following week with a fifteen hundred dollar deposit. The deposit account balance dropped to just two hundred dollars above the floor. He told me he was nervous, but because he had the spreadsheet, he knew exactly where he stood. He didn't have to panic-transfer anything. Luna: So the discipline is the tracking. Without that, the float becomes a liability. Lucas: Totally. And that's the takeaway for any small business that holds customer deposits — not just landlords. Think about contractors who ask for a deposit before starting work, or event venues that charge a booking fee. That money is often sitting in a regular checking account, commingled with operating funds. If you segregate it into its own interest-bearing account and manage the float, you can smooth your cash flow without any real risk. Luna: But contractors usually spend the deposit on materials — that's different. Lucas: Fair point. The landlord's deposit is unique because it's refundable — it's not earned revenue until the tenant damages something. But for businesses that hold refundable deposits — like rental equipment companies, storage units, even some medical practices — the same principle applies. Luna: So if you're a business owner listening, what's the first step? Lucas: First, check your state's laws on deposit accounts. Some states require the account to be non-interest-bearing or mandate that all interest goes to the customer. Second, open a separate high-yield savings account — many online banks offer three to four percent with no minimum balance. Third, set up automatic transfers for deposits and refunds. Fourth, track your liability in a simple spreadsheet or accounting software. Luna: And the float benefit — is it really that substantial for a small operation? Lucas: For the landlord with twelve units, it saved him from about two thousand dollars in late fees and interest. That's meaningful. For a larger portfolio — say fifty units — the float could be fifty thousand dollars or more. The savings scale. And the best part: it's not a gimmick. It's just smart cash management. Luna: I wonder if more landlords are doing this. It feels like low-hanging fruit. Lucas: I think a lot of them don't realize it's an option. They see the deposit as a hassle — something to hold and return. But if you treat it as a cash flow tool within legal boundaries, it's a real competitive advantage. Especially for small landlords who don't have a big operating cushion. Luna: So next time I pay a security deposit, I might ask my landlord what interest rate I'm earning. Lucas: Ha. They might not love that question — but it's a fair one. Luna: All right, Lucas. Good episode. I'm going to look into Ohio's deposit laws just for fun. Lucas: You do that. And if you find a loophole, let me know.