5 Reasons You Should Stop Handling Cash Security Deposits

Posted by: TheGuarantors on January 12, 2022

There are several items to check off your list when completing a rent agreement with a prospective tenant. One such item is the cash security deposit. A very necessary item when you look at it critically but a cumbersome one to manage too.

There are suggestions that the traditional cash deposit may not be the best way to go. This is because, the renter and not the property owner, is in the best position to decide how to pay it. It’s also the renter who knows what works best for their budget, guaranteeing that your properties get the needed coverage and protection.

Before we get ahead of ourselves, let's look at exactly what we mean when we refer to a cash security deposit.

What is a cash security deposit?

cash security deposit

A cash security deposit is the amount of money paid by a renter when renting a property that can be used to cover damages incurred during the lease period. Thus, if your tenant damages your property - beyond normal wear and tear - you can use the cash security deposit money for repairs.

The security deposit also comes in handy if your tenant leaves without paying rent. However, if there is no damage, and your tenant owes no rent, you have to return the deposit within a time frame specified by your state.

Do security deposits get cashed?

Yes, you can cash the security deposit. Security deposits are different from placing payment in an escrow account. You’re expected to place the security deposit in a designated account where it can accrue interest. After you cash it, you must make sure that you can give it back within the specified time frame upon request by the renter.

Forget about cash security deposits

Cash Deposit Limits

Paying the traditional cash deposits as well as the first month's rent is often problematic for many renters. As such, many property owners are beginning to jettison the model for the following reasons:

Reason #1: Cash deposit limits

Even though you’re the property owner, you do not have the right to decide on your own how much you want to charge as the security deposit. Many states have a maximum limit on security deposits. For example, under California property manager-tenant laws, a property manager can charge a maximum of two months' rent as a security deposit for an unfurnished apartment, and three months' rent for a furnished apartment. This limits how much coverage you can get for your property or apartment in case of damage. Contrarily, some other alternatives do not have limits at all.

Reason #2: Holding cash deposits isn't easy

Laws regarding the holding and storage of security deposits vary from state to state. More than twenty states require property owners to hold cash security deposits in separate deposit-specific bank accounts or in escrow accounts. Some like Florida and Idaho even require you to store deposits in an interest-bearing account. For something you will be returning, the effort may not be worth it.

Reason #3: Security deposit laws are cumbersome for property owners

The security deposit law prescribes specific actions and timelines. For example, a cash deposit must be held in an interest-yielding account and must be returned within 30 days of the lease expiration. Unfortunately, keeping track of the laws isn’t as easy as it sounds. To avoid a tenant lawsuit for failure to comply with the law, many are refusing to accept a security deposit altogether. For example, in Chicago and California, if as a property owner you fail to adhere to the law, you'll have to pay back double the security deposit.

Reason #4: Security deposits are burdensome for tenants

For some, forking out the first month’s rent is a hassle, especially in high brow areas. Now imagine adding a security deposit to that. It means many potential renters may not be able to afford to pay up. This would mean your apartment or property gets to stay on the market for longer than necessary.

What can I take in place of a security deposit?

alternatives to security deposits

There are other options available to you if you don’t want to take a security deposit. Here are some of them:

Security deposit insurance

Security deposit insurance follows the surety bond model. A security deposit insurance provider protects the property owner who enters into a contract with renters. The renter is not obliged to enter into any such deal. Should excessive damages be incurred or the renter absconds with the rent, the insurance company clears the deficit.

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Lease insurance

Lease insurance insures your property against damage and also prevents you from losing any part of your loss. The tenant will be required to pay a monthly fee along with the rent. When you choose this security deposit alternative, you do not even need a guarantor. The ease makes it a popular alternative among property managers.

Surety bonds

Surety bonds are popular among property owners. An amount is paid by the tenant to a middle man who stands as surety in the event of damage. In case of such damage, the bond company pays and then asks the tenant for reimbursement.

Move-in fee

You can also collect a move-in fee instead of a security deposit. It isn’t subject to as many regulations as a security deposit since it doesn’t need to be returned to the tenant at move out. However, it’s usually lesser and may not cover your deficits in case of excessive damages.

So which option should I choose?

What you need is a security deposit option that protects your property and helps you get more Net Operating Income (NOI). That's what TheGuarantors guarantees with our security deposit replacement. Let’s help you achieve your goals.