A rental security deposit is a pre-determined sum of money paid by a renter before moving in. The deposit is typically held by the property owner until the tenant moves out and covers damages to the rental unit beyond normal wear and tear and unpaid bills, which are taken out of the deposit before the remainder is returned to the tenant.

These deposits can be financially burdensome for many people, often in addition to other fees due at move-in, including first-month’s rent. High upfront moving costs can be a significant barrier for low- to middle-income renters who are trying to secure affordable housing, leaving them with few to no options. Multifamily operators may also struggle with the management of security deposits, which can involve a staffing commitment to handle them appropriately.

While traditional security deposits serve their purpose, we’re seeing several firms in the industry offer alternative options such as:

  • Surety: The renter promises to pay the property for any damages, up to a pre-approved amount. If the renter fails to pay, a company (the surety) will cover the property owner’s damage claim and then bill the renter for reimbursement.
  • Insurance: The renter obtains and pays a monthly premium for insurance, covering the property for damages caused by the renter, up to a coverage limit.
  • Installments: The renter pays the security deposit in regular (e.g., monthly) installments instead of paying the entire security deposit upfront.
  • Loans: The lender can front the amount of the security deposit and the renter repays the lender over time.

Though these services and practices can benefit both landlords and renters, it’s important also to consider the costs and potential pitfalls for renters. Multifamily operators interested in offering these services should carefully review the fee structures associated with any service that offers alternatives to security deposits and ensure that renters are made fully aware of these costs and key terms.

Operators should consider how a renters’ liability for damages is affected by an alternative option to a traditional security deposit. For example, when opting for security deposit insurance, renters may find they are still liable to the insurance company for any claims that it paid out to a property owner. So, landlords should ensure their tenants understand if and how these services affect their ability to have their security deposits or payments returned at move-out and renters should take steps to carefully understand their obligations under each option.

These alternatives to traditional security deposits provide extra flexibility that may reduce the financial barriers many renters face and help make housing more affordable for renters across the country.

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