Security Deposit Insurance Getting New Attention

With renter budgets tightening, the traditional security deposit is beginning to give way to deposit insurance.

Deposit insurance is a new breed of security deposit, which traditionally has protected apartments from damage by encouraging residents to practice good housekeeping. The indemnity paid in monthly installments has become an alternative to up-front deposits that have been the bane of renters and landlords.

Traditional deposits due in full at lease signing are sticking points that, sometimes, put residents and landlords at odds when a lease is broken, or the apartment vacated. A property manager justifiably citing damage to the apartment or lost rent may keep the deposit to offset all or some of the cost. A resident may balk at the $300-$500 deposit and walk away, costing the property much-needed revenue.

Deposit insurance, which is a low-cost insurance policy, strikes a happy medium and keeps billions of dollars circulating in the economy rather than being tied up for years, proponents say.

Recent legislation is discouraging property managers from taking up-front deposits and holding the money until the end of the lease in favor of low-cost options for renters.

In January, the Cincinnati City Council passed a law that requires landlords managing 25 units or more to offer residents an alternative security deposit versus a cash payment. Along with a reduced security deposit tied to the monthly rental rate, the options included deposit insurance.

New York has joined 10 other states and Washington, D.C., with a law that limits security deposits to no more than one month’s rent. And Virginia is proposing a measure that ensures renters will have multiple options to pay deposits.

Other states are considering similar legislation.

In light of COVID-19, more light has been cast upon the estimated $45 billion that is locked up in residential security deposits. Lawmakers argue that the tidy sum is money that could be spent to fuel the economy and help struggling residents who have suffered from reduced wages or job loss due to the pandemic. At least one state has issued an executive order mandating that landlords allow renters to use their deposit money to help pay their rents.

Deposit insurance transfers resident risk, protects property

RealPage Deposit Insurance, which transfers the resident risk to an insurance carrier, is gaining momentum because it provides protection for the property and low-cost option for the resident. Depending on the policy, residents pay a small monthly non-refundable premium (about $10) and the property can recoup damages, loss of rent and fees, up to the policy limit from the insurance carrier in the event of a loss.

“It’s a win-win,” says RealPage Vice President and General Manager Deposit Insurance Tom Schickel, who helped author the company’s solution. “A deposit insurance solution will allow a property to have equal or greater deposit protection and offer reduced move-in costs to future residents.” 

RealPage rolled out its solution late last year to round out the company’s insurance platform, which includes DepositIQ, an alternative security deposit solution, and Renters Insurance.

RealPage Deposit Insurance is a deposit replacement solution that is a true risk transfer, greatly reducing resident-caused losses from rent and damage. Among the benefits for properties are guaranteed deposit replacement, greater property protection and a stream of ancillary income of up to $48 per active policy per year.

Deposit Insurance adds protection for properties at a time when rent reductions and concessions are threatening the current cycle. In past downturns, landlords have drastically cut security deposits – or waived them – to remain competitive while risking absorbing increased losses from rent and damage. Properties are now being forced to consider raising traditional security deposits to offset increasing risk.

While rent collections far exceeded expectations in April for the U.S. apartment industry, many are on edge about collections for May and June as the country’s job loss numbers continue to rise. Interest in less risky deposit alternatives has grown in recent weeks as properties brace for possible lost revenue, Schickel said.

“Deposit insurance is what a lot of these companies are looking at now to be proactive,” he said. “On average across the country, we see refundable deposits of $250-$300. Properties are now anticipating there is going to be a higher level of lost rent.”

A marketing advantage with greater protection

Through deposit insurance, property managers can bolster marketing efforts with advertised lower move-in costs because the security deposit is paid monthly. The resident still has to fulfill their lease agreement and be a good steward of the apartment, but reaps the benefits because of a much lower cost at lease signing.

RealPage Deposit Insurance reduces resident move-in cost by as much as 300 percent the first lease year. A typical policy that provides $1,000 coverage to the property may cost the resident only $240.

Schickel said the solution is likely to be the new norm as properties continue to see ways to attract and retain renters and get even greater protection.

“In a time when renters are trying to maintain the status quo and hope they get their paychecks, the industry is moving very quickly on this,” he said. “Property managers are also trying to figure out how they can protect assets, so Deposit Insurance is a solution people are looking at differently.”