The security deposit has long been the standard for how landlords are able to protect themselves from unreputable tenants. However, there’s a growing push to get rid of them altogether.
If you own apartments or housing that you rent out to the general public, it can seem pretty terrifying. However, there are alternatives that we’ll be getting into in a moment.
For now, it’s a good idea to examine how we got here. Where did this movement come from, and how should you operate within its building momentum?
Affordable Housing Crisis
According to the National Low Income Housing Coalition, there are 11 million low-income families in the United States with a shortage of 7 million homes. The fact that 7 million families find themselves in a situation where they can’t afford a roof over their heads is unacceptable.
Politicians seize on this fact because they fear the implication that there is a failure of leadership. As such, they will champion causes like the security deposit ban to try and get more of these families the homes they need and deserve.
Pandemic Fallout
Pouring fuel on the “apartment with no security deposit” fire is the fact that we’re now stuck in the middle of a pandemic with no discernible end in sight. In California alone, the economic catastrophe accompanying this public health crisis has placed more than 364,000 families in danger of eviction.
Recent stimulus packages from Washington have attempted to stop the financial bleeding of families like these. Moving forward, other reforms might seek to ban the requirement of a security deposit altogether so families will be able to devote more of their resources to moving, rent, and living expenses rather than providing a large security deposit.
Common Renter Vulnerabilities
Renters are largely a more vulnerable group than homeowners. This can be because of poor credit, bad financial luck, or the inability to invest in an asset that builds them equity.
People who rent tend to have a more difficult time finding steady and high-paying employment. This can exacerbate issues like cash flow, and lead to them being short on or unable to make rent.
These individuals feel like they don’t have a voice, so they seek it from their elected leaders. It’s only natural that housing barriers like the security deposit would come up on their radar as an “easy” fix to the affordability problem.
Landlord Positions of Power
Another thing contributing to the “no security deposit” movement is the perception that landlords are people in positions of power. Whatever power you feel you might be lacking as a landlord; the fact remains that you have the legal right to tell someone to move out of their living space.
That’s a power that will always ruffle feathers and make you an easy target for self-appointed crusaders. Requiring security deposits only pours more fuel on the fire.
How Do You Protect Yourself?
The concept of making apartments for rent without a security deposit can seem ill-formed, but there are alternatives. Some are only tenant-friendly while others protect both the tenant’s and the landlord’s interests. Let’s look at each one.
Charge Lower Deposit Amounts
Some states may limit the amount of the deposit you can charge. If you’re maximizing that already, and it isn’t enough, this may not seem like a very viable option.
Still, it’s important to realize something is better than nothing. Charging a lesser amount that your tenant is willing and able to pay can be seen as a good sign of financial viability. It can also give you some form of protection should they wash out on the lease.
Require a Co-Signer
You don’t see this one used by very many landlords, but it can be an effective alternative to goosing your tenant to the tune of hundreds of extra dollars before receiving that first month’s rent. Under this option, you would charge no security deposit, just the first month’s rent.
The protection for you is that a co-signer agrees to pay for the remainder of the lease term should the tenant prove unreliable on payments. Here, you are protected, and the tenant isn’t extra-strapped for cash.
Consider a Lease Guarantee
A lease guarantee is when you contract with a third-party guarantor to secure proper funding in lieu of a security deposit. Typically, the tenant agrees to pay an annual amount that can be worked into the payments. Under this structure, the tenant pays rent that’s a tad higher without breaking the bank, and you are protected.
Due to the dual-protection nature of lease guarantees, it is the option with the most momentum for replacing the security deposit. However, not all guarantors are created equal, so make sure the one you end up using has the following going for them:
- Reputation
Check with websites like the Better Business Bureau. Read online reviews. If you have friends who own and rent property, talk shop with them as well and ask for referrals.
You want to ensure that the lease guarantee is legally viable and enforceable. A company with a verifiable reputation will give you the peace of mind necessary to further explore this route.
- Affordable Rates
Rates will vary depending on the company, location, and market. Typically, you can expect it to be a small percentage of the annual rent. For example, charging $12,000 a year for rent (or $1,000 a month) on a 5 percent rate, your tenant would pay $600 a year or $50 per month for the policy.
- Options
Ideally, you want to make sure the policy amounts are affordable, so you may choose to go lower than the example in option two. Give your renter coverage options and a range of prices he or she can choose from. Common amounts are as follows.
- $1,000
- $5,000
- $10,000
- $15,000
- $25,000
Whatever they choose, they’re the ones paying. Furthermore, you’re protected for that amount should there be a claim.
Protection Beyond the Security Deposit is Still Possible
In other words, don’t mourn the death of the security deposit should it come. Explore your options, and make sure you’re protected.
Need help with property management in the Irvine area? Contact Genuine Property Management today to learn more and get a free quote.
