Should You Offer Security Deposit Alternatives?

Learn how you can differentiate your properties in a competitive market with security deposit substitutes.

Property management (PM) companies and landlords have traditionally relied upon security deposits as safeguards against potential damages by tenants or unpaid rents. But this method has not been without its drawbacks. Not only can the lump sum amount of a security deposit deter potentially great tenants, but the administrative hassle and stack of laws and regulations regarding its handling can be a burden for PMs. 

In response to these challenges, several alternatives to traditional security deposits have emerged over the past few years. These alternatives can provide comparable protection for PMs while also being more tenant-friendly. Let’s take a look at all of the available options, both outsourced and in-house, including the pros and cons for both PMs and tenants.

Security Deposit Alternatives

Alternatives to rental security deposits can offer both pros and cons. Picking one depends on your company’s risk tolerance and tenant demographics. Let’s explore the options:

1. Surety Bonds

A surety bond acts as a third-party guarantee and is the oldest form of security deposit alternative available. Many large multifamily companies have used surety bonds for years, even decades.

With a surety bond, instead of a tenant paying a full security deposit, they pay a non-refundable premium to a surety company. In the event of tenant-caused damages or unpaid rents, a PM can claim compensation from the surety company. The tenant remains liable for the damages, and the surety company may seek repayment from the tenant.

Pros:

• • Lower upfront cost: Tenants only pay a fraction of the traditional deposit amount.

• • Enhanced coverage: Some bonds might offer protection beyond the standard deposit amount.

Cons: 

• Potential liability: If damages exceed the bond coverage, tenants are still on the hook and you have to chase them down for the money.

• • Non-refundable: Unlike security deposits, tenants won’t get the premium back, so they may balk at this option.

• Potential liability: If damages exceed the bond coverage, tenants are still on the hook and you have to chase them down for the money.