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Security deposits are a must for rental property investors. Not only do they ensure you're choosing a tenant with the financial capabilities to pay the rent and maintain the property, but they also give you a safeguard in case of damage.
Unfortunately, in today's hard economic climate, the traditional security deposit is often hard to come by for many renters -- especially when coupled with first month's rent, moving costs, pet fees, utility deposits, and more.
As a result, security deposit alternatives are gaining steam. These come in several forms. Some are more like insurance policies while others are offered by way of surety bonds or credit pre-authorization services.
Whatever shape they take, though, they're a critical piece of the rental investing puzzle these days, especially as many municipalities take legislative action against traditional cash deposits.
Here's what you need to know.
Alternative security deposit options
Security deposit alternatives run the gamut. One of the most popular is the installment approach, which allows the renter to pay a small monthly fee instead of a single, large upfront one. Rhino, Jetty, and LeaseLock are examples of companies offering options like this.
In some cases, these services even offer added property protection, similar to an insurance policy. (LeaseLock, for example, insures up to $5,000 per property.)
There are also surety bonds. These work sort of like cosigners, going in on the risk with the tenant. Examples of this approach include DepositIQ and SureDeposit.
Finally, there are credit authorization services, like RoostEasy and Obligo. These pre-authorize a tenant's bank account and withdraw funds should any property damage occur. They basically force the renter to put their money where their mouth is and take care of the property -- or pay up.
Security deposit legislation
Various states and municipalities are making moves against the traditional security deposit, passing so-called "renter's choice" measures that aim to reduce the financial burden tenants face at move-in.
In Atlanta, for example, the city council recently passed an ordinance requiring landlords to offer alternatives to cash deposits -- either security insurance or installment payments.
According to council members, the move will better serve both renters and landlords. As the bill puts it, "Requiring that tenants have the choice of providing rental security insurance and installment payments as an alternative to traditional security deposits in residential rental agreements will provide upfront cost relief to individuals and families entering into said rental agreements while ensuring landlords are reasonably protected against damages and unpaid rent."
Other places to pass similar measures include Cincinnati, Baltimore, Connecticut, New York, and New Jersey.
The bottom line
For a rental property investor, security deposit alternatives can be a smart move. Not only does it lower the barrier for renters (making those vacancies easier to fill), but it can also better protect your property and ensure compliance with local laws and regulations.
If you want extra protection from tenants, you can also look to rent guarantee insurance. These policies cover lost rent (up to a certain point) if a tenant fails to pay up. While they don't replace the security deposit per se, they can offer an added safeguard from financial loss.
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