Alexandra Alvarado
Director of Marketing and Education, American Apartment Owners Association
It is painfully clear America is facing an affordable housing crisis unlike ever before. A recent study from the National Low Income Housing Coalition found full-time minimum wage employees could not afford a two-bedroom rental in 95 percent of U.S. counties. Tenant rights advocates point to security deposits as one major barrier to affordable housing. In response, many cities and states have limited how much of a security deposit a landlord can collect, but a new movement proposes eliminating security deposits altogether.
New landlord requirement
Cincinnati, Ohio led the way earlier this year with the passage of legislation that requires landlords to provide renters with three security deposit options: 1) A security deposit installment plan of 6 months or more; 2) A reduced security deposit of 50 percent of one month’s rent; or 3) low-cost security deposit insurance.
California, New York, Virginia, Alabama, Connecticut, New Hampshire, and Pennsylvania have similar bills in the works and with a pandemic only worsening the affordable housing crisis, many of these bills are likely to pass.
The hope is that renters with less money tied up in a security deposit will be more likely to succeed financially and access more housing. However, reducing or creating installment plans for security deposits are problematic for landlords who are left with little protection in case of rental losses, especially as more renters affected by the pandemic are falling behind on rent.
A creative solution
The answer to help both renters and landlords may lie in using a low-cost security deposit alternative, which can still provide landlords with thousands of dollars of protection, yet the cost to renters is minimal.
Unlike a security deposit, the fee is non-refundable, but it frees up cash for tenants. According to the Federal Reserve’s 2019 Report on the Economic Well-Being of U.S. Households, 37 percent of Americans have less than $400 in emergency cash. In today’s world of uncertainty, tenants may prefer to bolster their savings to overcome unexpected financial hardships, rather than have thousands of dollars locked away in a security deposit.
Tenants may also see their credit scores decline due to financial hardship from the outbreak, making them less qualified for housing. However, rental owners may be more inclined to accept tenants even if they do not meet their standard qualifications when the tenant’s rent is backed by a security deposit alternative.
Interestingly, security deposit alternatives are trending in the rental industry even in places where progressive security deposit laws haven’t been passed. Many rental owners, brokers, and landlords are using a security deposit alternative as a lease signing incentive to fill vacancies faster, without increasing their risk. This is especially true in urban areas with luxury rentals that may be experiencing higher vacancy rates as more people migrate away from big cities and work from home.
It’s important to note that in states where legislation has been passed tenants may still choose to provide a standard cash security deposit. The intent is to give tenants more options. That being said, the benefits and rising popularity of security deposit alternatives seem to indicate, this new leasing tool is here to stay as part of the “new normal.”