Government agencies and tech entrepreneurs are trying to come up with alternatives for traditional rental deposits.

How might these choices hurt or help the property market, investors, and tenants?

Rents are high in many areas. Add to that a variety of other new tenant costs, cleaning fees, pet deposits, association applications, and it can be very expensive to move-in somewhere today. Often, even more, than is needed to put down to buy a home.

The Alternatives to Big Renter Deposits

In response, more and more jurisdictions seem to be taking things into their own hands. Many are limiting the amount of deposit landlords can demand to move-in.

Cincinnati, OH has gone as far as to change the law to require landlords to offer alternatives to a large upfront cash security deposit.

Other options can include:

  1. Security deposits which are less than half a month’s rent
  2. Ability to pay the security deposit in installments over six months
  3. Additional monthly insurance premiums paid by the renter

Of course, this is probably more of a win for the insurance companies selling these products than anyone else. While some landlords may still be sabotaging themselves with deposits that are too large, illegal in nature, or poorly managing the money, there are impacts to this type of regulation. It may not be as damaging as rent control or dictating whom you have to lease too, as in some states. But it pays to understand the pros and cons.

Access & Affordability

On the surface, it seems these new changes may make renting more accessible and affordable to many individuals and families. It might, in some cases.

Mobility means not being stuck captive to steep rent hikes, just because you can’t afford to move into a new place. It can mean you have less on the line to lose if you are dealing with an unscrupulous landlord who will find any excuses to keep the deposit.

However, some opponents pose that these new changes are predatory in nature. Paying monthly insurance premiums instead of a security deposit means more lost money, and higher renting costs. It is money thrown away, as there is no hope of getting it back as you might with a security deposit. It’s effectively a rent hike. Only the rent is going to someone other than the landlord. Some have likened this to a payday loan scheme.

The Need To Offset Risk For Landlords

These caps and regulations put landlords at more risk. That means they need to find their own alternatives to offset this risk. There is a huge risk that the insurance will never payout. Tenants also won’t have any perceived motivation to take care of the place if they think the insurance is going to cover it.

The easiest and most obvious solution is to just increase the rent. Instead of charging a $1,000 security deposit on a $1,000 monthly rental, you can charge an extra $100 per month. In the first year, you’ve already actually increased your gross income by $200 per unit. Every year they stay, you are making an additional $1,200 per unit.

What some fear is that landlords will take the other path of simply tightening up standards. They may become far more demanding of the criteria and people they allow in their rentals. They may find it better to hold them vacant than lease them. That will artificially increase rents for everyone, and block more from housing.

What do you think?

ABOUT THE AUTHOR

Bill Zahller is the Managing Partner of Park Capital Partners, LLC and resides in Asheville, NC. As a Multifamily Real Estate Investor and Syndicator, he founded Park Capital Partners, LLC in 2016 after 14 years involvement in real estate investment. He works with accredited investors and professionals who are interested in real estate investment, diversification, and financial freedom.

Bill has been flying since high school. His father was a Naval Aviator and Captain for TWA. Bill has been flying professionally for over 25 years, 23 of those at his current company. He has accumulated over 12,000 hours and 7 Jet type ratings. He has also held Instructor, IOE Instructor and NRFO pilot positions with a large fractional flight company. He is currently flying the Global 6000 in a long range mission capacity. This keeps it interesting – one week its Beijing or Sydney; the next Rio or Rome.

Bill is also the founder of the Asheville Multifamily Investor Club. Visit www.ParkCapitalPartnersLLC.com for more information.

 

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