Traditionally, there’s a lot of money required upfront to sign a lease. Having to give first and last month’s rent and a security deposit can be a struggle, even if you can afford the monthly rent.
According to the 2019 Renter Sentiment Report from Jetty, “Almost 60 percent of renters have been prevented from moving into the rental homes or apartments they wanted because the up-front expenses were too high.”
The issue is often the added cost of a security deposit. It pushes renters over the edge of what they can afford upfront to rent an apartment. As a result, security deposit alternatives have begun to gain traction.
The pitfalls of traditional security deposits
A typical security deposit is equal to one month’s rent, but many renters don’t have that amount of extra cash in their bank accounts. Especially when you factor in paying the first-and-last-month deposit when you sign a lease, money can get tight. The 2019 Renter Sentiment Report shares that it’s almost an even split between renters who can and can’t afford a security deposit when looking to sign a new lease.
Source: Jetty
Even if you’re splitting a security deposit with a roommate, the extra, upfront expense can make renting cost-prohibitive. It’s also frustrating to think of paying all that money upfront when you’ll most likely get it back at the end of your lease term.
Security deposit alternatives
Security deposit alternatives, though still new, can help close the gap for renters and make more apartments attainable. They can give renters more options and help property owners decrease the time apartments are vacant.
For potential tenants struggling with collecting enough upfront money to rent, “Employing a security deposit alternative does two main things: eliminates bad debt and lowers move-in costs,” says Jeremiah Jensen from HousingWire.
There are a few popular security deposit alternatives making waves in rental communities.
1. Surety Bonds
The most popular alternative right now, surety bonds cost you only a small percentage of a traditional security deposit. “While surety bonds were relatively rare a decade ago, economic realities prompted landowners to look for ways to make it easier for struggling families (millions of whom had just been foreclosed on after job losses and were now looking to rent) to deal with move-in costs,” says Jason Van Steenwyk from Buildium.
With a surety bond, you put down as little as 17.5 percent of what you’d normally have to pay. For example, if the average one-bedroom rents at the $1,362 per month, with a surety bond, your security deposit would only be $285.60.
The cost of a surety bond buys you the backing of a third party. They serve as the go-between for you and your property manager if any damages occur. They also cover the costs of any damages to your apartment that are your responsibility. You still end up paying for the repairs, but rather than pay your property manager, you reimburse the third-party company after the fact. The benefit of this situation is not having to come up with a large sum of money upfront. A few popular bond providers include:
Jetty and SureDeposit require a one-time downpayment that’s 17.5 percent of the traditional security deposit. Rhino does things a little differently, adding a minimal, monthly fee to your rent to cover the bond. It’s about $13 per month for a $3,000 apartment.
The drawback to surety bonds is you don’t get your deposit back. It’s the fee the bond company will take regardless of whether there’s any damage to your apartment when you move out. If you’re someone who doesn’t do any damage to places you live in, a surety bond could end up costing you more than a security deposit. If you’d paid the full deposit, you’d get it all back when your lease was up.
2. Pay per damage
This unique arrangement allows property managers to bill a tenant for damages, up to the total amount of the traditional security deposit. A special bank account with secure, but limited access, managed by a third-party facilitates this process. If there’s a claim, the third-party company ensures property managers don’t take more than the cost of the repairs. You can dispute unreasonable claims, and make payments in installments.
Again, this security deposit alternative requires no large sum upfront. In fact, with companies like Obligo, there’s only a monthly fee for each active billing authorization. The fee is dependent on the size of the damage claim and can be charged to the property owner, tenant or both based on how the service is set up. Assuming you do no damage to your apartment, this could cost you no money at all.
3. Lease insurance
While the other two security deposit alternatives are ones you, as a tenant, can pursue, lease insurance is often opted into by the property manager. It’s a service that greatly benefits tenants since it eliminates all deposits, bonds and cosigner guarantees. You only end up paying a small fee each month.
LeaseLock, for example, charges $19. Your property manager may cover the fee since this alternative is so beneficial for them, as well. It can help make it easier to manage properties since they spend less time collecting, managing and refunding deposits. Because it saves you from having to pay a security deposit, though, it’s worthwhile to ask property managers if they use this type of service.
Another benefit to losing the security deposit
Another perk to an alternative security deposit beside the upfront savings is not having to deal with getting the money back once you move out. Among the most common issues tenants face as renters is dealing with the return of a security deposit. A property manager may attempt to withhold some of your deposit to pay for what’s considered normal wear and tear to your apartment. They may also try to keep more money than the cost of a repair. In both cases, you can take legal action to get the money back, but that takes time and can mean more expenses for you.
You may also have to deal with the frustration of not getting your security deposit back fast enough. Then, you’re stuck doing the legwork in tracking down the money. Each state has a time limit for property managers to either refund your deposit or send you a letter itemizing why they’re keeping all or some of it. If you don’t receive a letter or your money within about two months, you can most likely take action. It then becomes more of your time to get something back that already belongs to you.
Both of these situations can cause unnecessary stress and aggravation, not to mention the cost of any legal action. With a security deposit alternative, you can avoid all of this drama.
Save a little money when signing a lease
With all the benefits to security deposit alternatives, it doesn’t hurt to be on the lookout for apartments that use these services. Property managers partnering with a company that offers a security deposit alternative means you won’t have to pay a traditional security deposit upfront. Knowing you’ll save that money right from the start can make it easier to find an apartment you know you can afford.
