Now state and local officials are giving more attention to innovative solutions for one of the most significant challenges in rental market affordability — the security deposit.
New York State Controller Scott M. Stringer is pushing for changes that would make it easier for renters to meet landlords’ security deposit requirements. Among the solutions Stringer’s plan encourages is the use of security deposit replacement products as an alternative to one large cash payment. Paying a comparatively modest premium to insure against damages rather than a single initial payment represents “a significant reduction in the upfront costs of moving [in],” Stringer’s office notes.
Stringer’s office estimates that $507 million were being held in security deposit in 2016 in New York, while the total amount of residential security deposits held by landlords in the U.S. exceeds $50 billion.
Wider use of solutions such as deposit replacement products could free up a significant share of that amount, in effect, increasing renters’ disposable income. That could have a positive “multiplier” impact on local economies. “Freeing up this money for other uses would be transformative,” Stringer asserts.
The report issued by Stringer’s office estimates the median advertised monthly rent of a New York City apartment at $2,695.50. Assuming a security deposit equal to first month’s rent, the typical family of four would have to pay 6% of their annual income to cover the upfront costs of moving in, the report figures. To put things in perspective, in order to make a move to a new apartment, the typical US worker would have to set aside, or borrow, nearly 70 percent of their average monthly income of $3,895, just to cover the security deposit.
Citing security deposit replacement insurance as alternative solution, Stringer describes a situation in which a tenant would pay a modest premium to cover potential damages, versus paying $1,800 up front. While tenants would not be refunded the premium paid after leaving an apartment, the report acknowledges that insurance “can be a desirable trade-off” in terms of reducing tenants’ out-of-pocket expenses.
Stringer’s initiative is part of a trend by local governments in major urban areas to tighten regulations around security deposits, initiatives often couched as an effort to improve affordability. Seattle officials recently released an overhaul of regulations relating to deposits. The Seattle proposal has centered around allowing tenants to pay security deposits in six installments, an alternative also considered in Stringer’s proposals.
The problem with the installment approach is clear: It falls short of delivering the efficiencies and savings that are available to both tenant and landlord with the use of security deposit replacement products. Tenants don’t achieve the savings possible with insurance, and landlords face a higher administrative costs and inadequate protection against damage.
As local rules around the holding and distributing of cash deposits grow more complex, landlords see insurance as an attractive alternative that reduces the administrative burden and costs of protecting against property damage, as well as making rentals more affordable for tenants. Notes HousingWire:“Property managers are turning to security deposit alternatives as a way to mitigate bad debt, get ahead of regulatory trends and increase efficiency.”
TheGuarantors, an insurtech company based in New York City, is providing leading property owners and landlords the convenience and cost-savings of security deposit replacement insurance to tenants through the integration of its software with their own rental management systems.
Lump-sum security deposits no longer represent the best, or most efficient way for landlords to protect their properties. Nor are they in the best interests of society at large. If policy makers are serious about improving the rental market’s affordability, it’s time they focused on security deposit replacement programs, delivered with fintech efficiency, as the alternative that offers the most benefit to tenants as well as landlords.