Deposits are usually essential for landlords to protect their property in the event of damage. But paying the first month’s rent, pet fees, security deposits, and moving expenses can make it difficult for renters to provide a security deposit.
In contrast to traditional, expensive cash deposits, deposit alternatives are cost-effective options. In addition, some states are now requiring landlords to accept alternatives to security deposits.
All landlords know the value of the deposits. You can use the money to pay for repairs, equipment replacements, unpaid rents, or other expenses attributable to a renter’s actions. Security deposits are also a way to motivate tenants to take care of the property.
However, it is difficult for many responsible renters to get the cash required for the advance deposit. Even before the pandemic, a study found that the vast majority of Americans lived from paycheck to paycheck, which meant they were unable to put savings aside.
This can make it impossible for tenants to find suitable accommodation. A 2017 Federal Reserve study found that 40% of people would find it difficult to cover unexpected expenses of $ 400 – let alone deposit more than $ 1,000.
For landlords, high deposits can mean a longer time to fill vacancies. However, it is risky to rent to someone who is struggling to make ends meet without putting up a security deposit. Deposit alternatives can help here.
What is a deposit alternative?
A deposit alternative protects the landlord financially in the event of damage by the tenant, but also makes the rent cheaper for tenants. Popular alternatives to bail are guarantees, pay-per-damage agreements, credit authorization services, and lease insurance.
What is Renter’s Choice Act?
Although alternatives to traditional deposits have been around for a number of years, some states require landlords to accept alternatives. For example, Renter’s Choice laws require landlords to offer alternative options.
Depending on the state, here are some examples of what some city councils require landlords to add to the traditional deposit:
- Pay the deposit in at least three monthly installments
- Take out rental deposit insurance
- The flat-rate deposit is limited to a maximum of half a month’s rent
More on BiggerPockets deposits
The pitfalls of traditional bail
The main problem with the traditional security deposit is its cost – usually between one and three months’ rent. Many tenants do not have this extra money. The money will be refunded to the tenant if there are no rental violations, but the money is in a bank account. So there are hundreds of millions of dollars of tenants idling in cash deposits.
The advantages of deposit alternatives
In most cases, deposit alternatives are win-win solutions for landlords and tenants. Landlords get the same, if not more, protection that a security deposit offers. Tenants do not have the financial burden associated with renting a new apartment.
Filling vacancies faster
Since deposit alternatives aim to lower the deposit, it’s easier to find tenants. The initial rental costs are lower, so you can attract more tenants. In addition, you stand out from the competition because your options are more attractive to potential tenants.
It’s also easier to accept tenants with a lower credit rating. For example, deposit replacement systems allow people with low credit ratings to use their service. This means that you can take on tenants who are in excellent financial standing but have poor credit ratings.
Protect your property better
In many cases, protecting your property by replacing the traditional security deposit with an alternative is a smart move. For example, a deposit insurance can cover damage to your property for more than a traditional security deposit. Some standard insurance policies cover damage up to $ 5,000 – far more than you could ask for a deposit.
Insurance premiums can also be based on the renter’s history, pets, credit history, and other factors.
A popular alternative deposit is a surety. This is a fraction of the cost of a typical security deposit. The renter pays a fee which can be less than 18% of the usual cash amount. Or there may be a small monthly fee while the renter is in the unit. In the event of damage, the guarantee issuer then bears the costs. This means that you don’t have to solve any problems with the tenant.
Give tenants a choice that suits their circumstances
If you give tenants a choice of cash deposit alternatives, you are a better landlord. Affordability upfront for tenants is beneficial for many tenants. They also give tenants more control over their money.
Some renters may choose to pay the traditional security deposit. However, many will choose from the various alternative deposit options available. In a changing economic environment, offering tenants options can make your rental property financially more attractive.
Beginner Bootcamp | August 24th – November 9th
Take the first step towards financial freedom by signing up for the 12 week Real Estate Rookie Bootcamp designed to help you close your first deal. We cover topics ranging from finding and financing deals to real estate investment strategies. Plus, you’ll be supported by real estate investing experts, your bootcamp cohort, and the rest of the BiggerPockets community.
What are the downsides?
For most landlords, deposit alternatives are a way of attracting more tenants and minimizing vacancies. These alternatives make rental apartments more affordable for tenants. Tenants can move into a new apartment for a small sum or a monthly fee, and the landlord is fully covered.
But are there any disadvantages to consider?
For renters, the fact that they don’t get their deposit fee back is a sticking point. Unlike a deposit, they won’t get their money back even if they leave the place spotless. In addition, they must reimburse the liability insurance in the event of damage or if the rent has not been paid. In the long run, a guarantee can become more expensive for tenants.
Another problem tenants have with surety is that they think they have bought deposit insurance. This can cause a shock for the tenant if you claim damages and the surety company charges them for this.
You must inform each tenant about the type of deposit alternative offered and its effects in the event of damage to be replaced.
Should you accept alternatives to the deposit?
The rental industry is slowly moving towards accepting alternatives to traditional security deposits. Deposit alternatives make moving in less expensive for tenants. As a landlord, you are also protected against loss of rent and damage to your property.
For most landlords, sureties, bond insurances or rental deposit insurances are excellent alternatives to protect themselves against financial damage to the tenant.