As a landlord, security deposits are one of the most vital tools you have. While these deposits can only be used in specific instances, they ensure you don’t lose out on money if the tenancy doesn’t go as planned. Unfortunately, security deposits are the latest rental policy to come under fire. The affordable housing crisis, in combination with the pandemic, has many calling for security deposits to be banned entirely.
How Did This Proposal Start?
As housing prices have risen over the decades, there have been multiple calls to eliminate financial barriers in order to make housing more affordable. In 1990, Los Angeles City Councilman Zev Yaroslavsky stated “…perhaps the next solution will be to simply prohibit security deposits of any type… I think this will have a more deleterious effect on the landlord, but it might have a more positive effect on the creation of affordable housing.” At the time he made this statement, L.A. had just passed an ordinance requiring owners of rent-controlled apartments to pay tenants 5% interest on security deposits.
Currently, more than half the states have placed limits on the amount of money a landlord can collect for a security deposit, which is typically one to two months’ worth of rent. Many states also require landlords to return security deposits within 14 days after the tenant has moved out. Within the past year, we’ve seen progressive cities pass laws that limit security deposits even further.
Security Deposit Law Changes in 2020
In January 2020, the Cincinnati City Council amended Chapter 871 of the Cincinnati Municipal Code to require landlords with more than 25 units to provide alternatives to a security deposit. In lieu of a security deposit, tenants can opt for the following:
- Rental security insurance
- A reduced security deposit that’s half the total of one month’s rent
- A security deposit split into three payments over the course of six monthly installments
There are no clear penalties in place for landlords who refuse to offer security deposit alternatives; however, a tenant could potentially sue them if no alternatives are offered prior to the lease signing.
Cincinnati’s new legislation has prompted lawmakers across the country to consider making amendments to their security deposit regulations as well. The pandemic has only accelerated the issues surrounding the affordable housing crisis, with millions of unemployed renters being unable to afford to pay a security deposit.
One of the most notable bills on the table is California’s AB3260. This bill proposes all California landlords give tenants an alternative way to pay the full security deposit. This can be done through security deposit insurance or monthly installments. New York City is considering similar options.
How Can Landlords Prepare?
The pandemic has greatly increased the momentum for security deposit alternatives, so it’s likely other cities and states will propose similar bills.
As more areas adopt new laws or amend their current ones, you should be aware of what you can do to mitigate your risk with security deposits. Accepting security deposits in payments isn’t ideal because most tenant defaults take place within the first six months of the tenancy. If a tenant stops paying rent early on, there is little to nothing to fall back on. If you accept half of the first month’s rent, this likely won’t be sufficient to cover your losses.
An alternative to security deposits is working with a third-party that offers a lease guarantee. This is a separate contract that the third party guarantor agrees to meet the obligations of the tenant to the landlord. So if a tenant fails to pay rent, the landlord can recover the debt from the guarantor, generally before they seek damages from the tenant. Depending on the stipulations, the guarantor may also be financially responsible for damages to the property caused by the tenant. As of now, there are few areas that have taken steps to change security deposit laws, but it’s important to know that we may see further efforts to amend or eliminate security deposits in the future – especially as the pandemic continues. Now is a good time to start thinking about your security deposit policies and what would be an acceptable alternative to you should laws change in your area.
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