Let’s Kill the Security Deposit
It’s time for rental deposits to go the way of the dodo.
In theory, security deposits were meant to bring alignment between renters and landlords. The renter puts some money down when they rent a new place, and they therefore have something to lose if they trash the place or otherwise behave badly. Makes sense, right?
But, and here’s the rub: as a concept, security deposits are a complete failure. They’re a huge burden for renters, they create conflict between renters and landlords, they are an expensive bureaucratic hassle for landlords and they don’t even work as protection against damage to the rental.
There’s a new breed of security deposit alternatives, typically an insurance plan, that covers more risk at a lower cost.
Not convinced to switch yet? Here’s the details.
Deposits are burdensome
From the renter perspective, security deposits are expensive. In a country where almost 40% struggle to come up with $400 in an emergency (Federal Reserve), coming up with a full months’ rent — more than $1,000 — is a serious challenge.
Not only that, but if you’re moving, you generally need to put a new deposit down before you get your existing one back, so you really need to have enough liquid cash on hand to have two deposits.
That’s more $2,000 for a typical American renter, an amount that’s out of reach for many who are living month-to-month.
Deposits cause conflict
The security deposit introduces an unwelcome new risk into the renter’s life and creates conflict between renter and landlord.
With money on the line, it’s tempting for landlords to see repairs as caused by the renter (therefore the renter’s responsibility) and for the renter to see repairs as normal wear and tear (therefore the landlord’s responsibility).
For example, how many renter-installed picture hanging hooks constitutes excessive wear and tear that justifies a $500 paint job when a renter moves out when the wall hasn’t been painted in a few years and could use a fresh coat? When do the latest batch of stains in 5 year old carpet constitute renter damage and not just carpet that is old and at the end of its expected life?
Having the security deposit creates the temptation for the landlord to charge for those items, since they know they won’t have to chase the renter for the money and justify the expense in a new charge to the renter following the move out inspection. Neither the renter nor the landlord is an expert, so each thinks it should go their way and conflict results.
I can’t tell you the number of renters I’ve known who’ve gotten along just fine with their landlord until it came time to move out and they struggle to get their deposit back. In fact, it’s likely the #1 source of lousy Yelp and Google reviews for landlords.
Deposits are a bureaucratic nightmare
Long, long ago, one of the reasons landlords liked security deposits was because it was extra cash that they could use to help them manage their business.
Fast forward a few decades, and deposits have changed. For the landlord today, they’re a logistical and bureaucratic nightmare. Many cities and states have rules about segregating renter deposits, paying interest, etc. Break the rules, and you could owe the renter three times the deposit!
So, security deposits are no longer useful to the landlord — now they’re a management headache that actually costs them money to manage and adds risk to their business.
Deposits don’t stop damage
In the years before co-founding Dwellsy, I was responsible for 60,000 apartments in over 50 different towns and cities up and down the U.S. West Coast and each had its own rules and culture around deposits that guided our security deposit policies. In some communities, we had deposits that were a full months’ rent (sometimes $2,000 or more) and in others, we would regularly run $99 or $199 deposit specials, so the deposit was negligible.
I saw over 100,000 people move out of those properties in the years I was in that job and having looked at the data, I can tell you there was no meaningful relationship between how the apartment was cared for and how big or small the deposit was.
Simply put, most of us are going to treat our rentals with respect and appreciation because those rentals are our homes and we want our homes to be in good condition. Some of us will damage our rentals, but having a larger or smaller deposit makes no difference between the two in my experience across a large portfolio with hundreds of thousands of renters.
There is a better option
Without the deposit, what happens if the renter does damage the place?
Enter insurance in lieu of security deposits.
In recent years, new and existing companies have been established that provide insurance that covers what the security deposit was supposed to cover.
For the renter, this means that instead of paying $1,000 up front as a deposit, you can often pay just $5 or $6 per month to satisfy a security deposit requirement. Renters don’t get the money back, but over the course of the year, they spend just $60 or $70 instead of having $1,000 locked away. Also, they don’t have money sitting there, tempting the landlord to use it to repair something without having to justify it to the renter.
Also, the landlord typically gets more protection than a normal security deposit. Coverage is often up to $5,000, which is far more than most security deposits.
Beyond reducing costs for renters without cost for landlords (love that — it’s a true win-win situation!), my favorite part of insurance as a security deposit alternative is that it reduces the chances of conflict between the renter and their landlord.
In most cases, the rental apartment or home is undamaged; most of us do a great job of taking care of our homes. But, when something does happen, the landlord has to seek repayment from the insurance company NOT from the renter. Instead of negotiating with a busy renter who has little expertise in repairs and maintenance, they’re talking to true experts who understand things like the expected life of different apartment features.
Imagine the carpet needs to be replaced and it’s only a year old, the landlord gets their claim paid without friction. Or when the room hasn’t been painted for five years, the insurance company knows that it needs a new paint job anyway, so they’re not going to pay. Both renters and landlords have less experience and more personal risk and struggle to know what they are and are not responsible for.
Renters are accountable for any truly bad behavior to the insurance company. So, in theory, the old alignment that security deposits were supposed to bring is still in place.
And the result with one of these policies in place? At the end of the lease, the renter moves out, and any issues are taken up with the insurance company, not the landlord. The renter maintains their good relationship with the landlord, and the landlord with the renter.
It’s time. Let’s kill security deposits for good.
To truly kill the security deposit, landlords need to be willing to accept insurance in lieu of the deposit, so the easiest path is for landlords to take the lead here.
We have started to see Renter’s Choice laws pass, giving renters the choice to pay a security deposit or use insurance in lieu, so that’s a broader path. And, there is a movement afoot to ban security deposits, so if that’s successful, that will cause some serious change here. Kudos to Kairos for pushing this as a move that will unlock $45B in renter assets at a time when so many need those assets.
In the meantime, as a renter, you can bring one of the companies below to your landlord to help them understand the program. If they like the idea of reducing their risk, lowering their hassle factor and making their customers happy, they’ll probably be open to it.
If you’re a landlord, then you should rush to adopt these programs. They’re great and they should be the standard.
Together, we can kill the security deposit.
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Companies offering security deposit alternatives
Neither I, nor Dwellsy has any relationship with these companies. If your company offers a security deposit alternative and would like it added to this list, please let me know.
