New Security Deposit Laws Benefit Renters & Property Owners

It may be that “Location, location, location” are the three most important words in the real estate industry, but when it comes to rental properties, the three little words every renter dreads hearing are “first, last, and security deposit.”

For as long as most can remember, the traditional requirement that property owners ask renters to provide before moving into a new apartment, single-family rental home, or vacation property are first month, last month and a security deposit. It can add up to a lot of money, and renters often had to scrabble together everything they have, at times, more than they actually have in their bank account. 

To address these concerns and offer greater housing affordability, lawmakers throughout the United States are implementing new legislation that could dramatically overhaul the demands landlords currently have in place to protect themselves.

Not all property owners, managers, and landlords require the last month to be paid at the time of moving in, but many opt for the assurance that comes from a security deposit. This one-time sum, which is typically equivalent to one or two monthly rent payments, is refunded to the tenant after the keys are returned and the landlord is satisfied there has been no damage to the unit caused by the tenant. 

Each state has different limits regarding the amount you can charge as well as holding procedures for a security deposit. Smaller municipalities, including cities and counties, can enact new laws as well.. Whatever the regulations, it’s rare that a property owner doesn’t want to protect themselves from unforeseen extended vacancies, reasonable cleaning costs, unpaid bills, or damage to the unit beyond the normal wear and tear.

With a new Ohio security deposit law that was passed in Cincinnati, that might change. The city council recently enacted an ordinance that changes a landlord’s ability to demand a security deposit. Going into effect at the end of April 2020, this law, known as “Renter’s Choice,” means a renter can forego paying a security deposit in lieu of three new options to be chosen by the property owner or manager. 

With other states and cities considering similar regulations, the landscape of rental security deposits may be changing soon.

Lower Move-In Costs for Tenants

Lawmakers are hoping these new regulations will be a benefit for renters who have previously found themselves priced out of the rental market in their community.  

Recently, the Federal Reserve reported that 40 percent of Americans didn’t even have $400 to cover emergency expenses in their bank account. As rents continue to rise throughout the nation, that financial stress hits the low-income population the hardest. Apartment List reported last year that half of all renters in America are struggling to afford their monthly rent payment. For the first time since 2011, the median rental costs rose faster than median renter income.

40 percent of Americans didn’t even have $400 to cover emergency expenses in their bank account.

And it’s even worse in places where affordable rental homes aren’t available. The National Low-Income Housing Coalition reported in 2018 that the nation had a massive deficit of housing for families who fall below the national poverty line or below 30 percent of their local median income.  

The biggest benefit of the Cincinnati legislation is lower move-in costs for tenants. They still pay  their first month rent, but if they cannot afford to pay the security deposit, they can ask the landlord for another option, such as security deposit insurance. With this option, renters could pay just a few dollars every month, or even a one-time payment, as an insurance premium. The payment is not refunded at the end of the lease, but it would make moving in to a desired apartment a new reality to thousands.

Larger Market for Property Owners

There are substantial benefits to landlords, too. While lobbying groups on behalf of rental property owners initially balked at the limitations, the new options provide a level of control and protection for both sides of the lease. 

Not all markets currently have the demand for a full month’s security deposit. With the new regulation, security deposits can be increased to the state legal limits, with the understanding that rental security deposit insurance is made available to renters.

Landlords who own or manage  25 or fewer units are exempt from the Cincinnati law. 

Giving an option to renters to make an apartment or rental house more affordable will expand the number of people who are able to rent. Many people simply do not have the liquidity for an extra month’s security deposit, even though they have good jobs and can easily pay the rent. These are ideal tenants, able to uphold a lease agreement.

The law is also designed to help landlords feel more comfortable with the changes. It is the property owner, not the prospective tenant, who would be able to choose the different options in lieu of a standard cash security deposit. When they choose rental deposit insurance, for example, they’ll be able to deal with a professional company if there is a claim, rather than the tenants. 

Cincinnati Pioneering “Renter’s Choice”

The first of the Ohio rental security deposit laws for renters and landlords, was introduced by Cincinnati Councilman P.G. Sittenfeld, and passed 6-1 in January. In Cincinnati, nearly two-thirds of the population are renters, according to Rental Housing Journal.

 Sittenfeld was quoted in USAToday, “Today we are making a big, bold and exciting change. The impact of this legislation is removing a barrier to housing. People want to do the best they can for themselves and their families.”

One of the most convincing arguments for the new law was that the law would put more money back into the local economy and savings accounts of families. Currently, there are billions of dollars just sitting in low-interest escrow accounts for months and often years. 

Sittenfeld is part of the NewDEAL, a group of progressive leaders throughout the nation who are working on a variety of issues. That organization wants to spread this concept to other states and communities throughout America, suggesting that Cincinnati’s new law would be the beginning of a much bigger movement.

“We are proud of the leadership of Councilmember Sittenfeld as the first legislator in the nation to introduce a renters choice bill, as well as the efforts by nearly a dozen other NewDEALers who are already looking to spread his work to their communities,” NewDEAL CEO Debbie Cox Bultan said. “Housing affordability is one of the most significant obstacles to economic security, and it is exciting to play a role in a policy idea that gives renters lower-cost alternatives to cash security deposits and puts that money back in their pockets.”

Other States Considering Legislation

Indeed, other states are considering similar legislation to the Ohio tenant laws concerning security deposit requirements. These initiatives are spearheaded by leaders in Alabama, California, Connecticut, Maryland, New Hampshire, North Carolina, Pennsylvania, and Virginia.

In January, The Hill reported that Virginia Delegate Mark Keam introduced a bill that requires landlords to allow tenants to provide damage insurance coverage instead of a security deposit in cash. Also in the proposal are limits to the total amount of required coverage, including rental insurance coverage, to twice the amount of the monthly rent.

New Hampshire state Sen. Jon Morgan and North Carolina state Rep. Ashton Clemmons are also advocating for a similar proposal. Greensboro, North Carolina, the city that Clemmons represents, has one of the highest eviction rates in the state, according to Eviction Lab.

Meanwhile, the New York City Council has also supported similar laws.

Insurance Best of New Options for Tenants

As a result of this proposal, the interest in rental security deposit insurance has increased in New York as well as elsewhere across the country, according to Brick Underground, a New York City real estate blog. New regulations that limit the amount of time that landlords have to legally return the security deposit—now just 14 days—have made property owners concerned over scheduling property reviews, quotes for damages, and get the escrow released from the bank in time. It’s even more difficult for large management companies. 

The Cincinnati law actually provides three options that landlords can offer to potential tenants who wish to bypass the traditional cash security deposit. They are:

  • Apartment security deposit insurance, which may range from $3 to $20 a month paid during the duration of the rental, depending on the monthly rent.
  • Installment plans, which would be paid over no fewer than six months.
  • Payment of a smaller security deposit, which must be less than 50% of the first month’s rent.

One large benefit that property owners would have by choosing the rental security deposit insurance is in marketing.

In a nationwide survey, it was the high up-front costs that stopped renters from moving into the homes they dreamed of. Nearly half of respondents said they were unable to afford a cash security deposit equal to an additional month’s rent, at the time of the survey. However, 70% of those renters said they could afford the monthly premium payments toward rental security deposit insurance.

How Surety Bonds Differ

While rental security deposit insurance is gaining acceptance in communities throughout the nation, some landlords confuse the concept with a surety bond. The two are very different.  

Insurance is a form of risk management. With a policy as a written contract between the insurance company and the property owner, it offers a guaranteed promise that the owner will be covered in case of damage or loss as a result of the rental. The rates are determined based on many factors, including the risk associated with the rental. Most importantly, the insurance company does not expect repayment when a claim is paid. 

A surety bond, however, is a contract between at least three parties. The bond is issued to one party on behalf of another, and the contract guarantees that the second party will pay whatever is due to the first party. If they do not, the third party can recover its losses from that bond. With this kind of bond, the premium paid is for the guarantee that the second party fulfills any obligation. They’re only offered to qualified individuals or businesses, as losses are not expected. Worst of all, bonds can run out of funds.

In short, surety bonds, also known as security bonds, are confusing. Residents don’t understand the process. Bonds require a co-signer, which can be difficult and problematic for many tenants. They can also lead to negative reviews for management companies who are simply looking to protect themselves, while offering flexibility for future tenants.

Surety bonds sometimes take 30 days for the bond company to reimburse the company when damages occur. This wait can cause unwanted delays in fixing properties and getting the unit re-rented, especially in a hot market when new tenants are ready and waiting to sign new leases.

Learn More About Rental Security Deposit Insurance

RentSense offers Deposit Plus+, which replaces traditional security deposits supports property owners AND fulfills the new and proposed legislation. Deposit Plus+ is written through an Admitted A Rated insurance carrier, backed by States Guaranty Associations. There are no deductibles, and no cost to property owners to sign up. It’s all tenant-paid.

With Deposit Plus, property owners receive 50% more protection than traditional security deposits. Its streamlined process makes it efficient for managers to complete sign-up applications, file claims, and receive payments. As a result, Deposit Plus+ dramatically decreases the time spent on unwanted administrative tasks related to security deposit accounts, as well as the resources and energy spent maintaining the accounts.

Deposit Plus+ is added protection for apartment communities, single-family rental homes, student housing, senior communities, and vacation rentals. To learn more, talk to a RentSense representative trained to answer your questions and walk you through the sign-up process today. Call us at 833-500-5959.

RentSense. Taking the Deposit Out of Security.