Security deposits have been standard practice in multifamily for as long as I can remember. They offer operators some financial protection if a resident damages their apartment home or skips on their rent.
But the tide is turning.
To start with, affordability has become an even greater concern for apartment renters.
Many prospective renters live paycheck to paycheck—according to one report, the number is nearly 80 percent—leaving them ill-equipped to afford the large, one-time expense of a deposit.
On the operator side, the management of deposits and the calculation of refunds can require a considerable amount of time and hassle. More and more operators are growing especially frustrated with the fact that deposits usually provide inadequate protection against unpaid rent and apartment damage. This is because property managers often are forced to keep deposits low enough to be competitive, but that can leave them exposed to potential bad debt.
The concern about security deposits has spread to local and state legislators. Over the years, numerous jurisdictions—like Seattle and New York—have passed laws limiting deposit amounts.
Now, with rising concerns about the economic plight of renters, a new kind of deposit-focused legislation has begun to emerge. These recent bills and laws require apartment communities that charge upfront deposits to also offer residents other ways to move into a new home.
What’s happening in Cincinnati, Atlanta and Pennsylvania
Cincinnati’s renter’s choice law is one example of this new wave of legislation. The law, which took effect in April 2020, says communities requiring a security deposit must also offer residents an alternative to a full, upfront deposit. Among the alternatives: a surety bond, an installment plan to pay the full deposit, or a smaller upfront deposit that cannot exceed 50 percent of the first month’s rent.
Also, in April, Pennsylvania legislators introduced House Bill 2427, which is similar to the Cincinnati law in that it would mandate that apartment operators that charge security deposits offer residents an alternative, such as a surety bond or an installment plan. However, the bill goes the extra step of giving apartment operators the choice to replace security deposits and surety bonds entirely through lease insurance.
In October 2020, the Atlanta City Council unanimously approved a new city bill that allows renters to buy rental security insurance instead of paying a traditional deposit. Under the new ordinance and upon a renter’s request, operators with more than 10 rental units who require a security deposit over 60 percent of the monthly rent must accept either rental security insurance or payment of the deposit in at least three monthly installments in lieu of an upfront deposit.
Generally speaking, the industry should applaud the move away from security deposits, and operators looking to do so will have to determine for themselves what different method of financial protection is best for their particular circumstances.
Weighing the options
Operators need to know that some alternatives—such as surety bonds—can present their own headaches. Surety bonds can make the move-in experience much more affordable for residents because to purchase a surety bond, a renter pays only a portion—typically 17.5 percent—of the total security deposit amount at move-in as a nonrefundable fee.
However, surety bonds also require a separate, time-consuming application process. Furthermore, surety bond pools can provide inadequate protection for communities. As for residents, many think they’re purchasing security deposit coverage when they’re not. If the apartment community makes a claim against the resident, the surety bond company will pay the property up to the total deposit amount. The bonding company will then run collections on the renter; frequently, the resident is not expecting this expense and can become angry and frustrated.
Likewise, installment plans can make it more affordable for residents to move in, but collecting and tracking the payments can be a significant administrative hassle for operators.
On the other hand, more operators are finding that lease insurance provides benefits without many drawbacks. With lease insurance, renters pay a small monthly, nonrefundable fee that waives the deposit requirement and generates coverage on every lease that significantly exceeds what the typical deposit or deposit alternative provides. The right lease insurance provider also requires no separate registration, application or billing process for residents or operators. Still, replacing security deposits entirely is a big shift, and some operators may be skeptical of lease insurance in the same way they were once hesitant about requiring residents to purchase renter’s insurance.
A new era
Looking ahead, it’s clear there is serious momentum for moving away from traditional security deposits. Residents and operators are frustrated with them, and state and local governments are taking action.
But these new laws may steer operators towards solutions that carry their own set of significant problems. Apartment managers need to make sure that the implementation of any new method for protecting themselves against unpaid rent and property damage creates a true win-win for themselves and their residents.
Marcie Williams is the president of RKW RESIDENTIAL and is the overall leader of all aspects of multifamily property management operations, new business development and strategy. Prior to joining RKW RESIDENTIAL she served as senior director of real estate at Greystar, where she was responsible for the operations and new business development in North and South Carolina and select assignments across the Southeast. Her portfolio included over 20,000 units from lease-ups to renovations and repositions. She has over 20 years of multifamily experience from companies such as Summit Properties and Camden Property Trust.