Small Security Deposits & The Pitfalls for Properties

At the onset of COVID, leasing markets became hyper competitive and forced many property managers to lower their security deposit requirements, particularly in the multifamily market. The reason was simple: to stimulate renter demand and fill vacancies.

Over the last few years however, we have seen a noticeable reversal of this trend from our property manager partners. Why are property managers abandoning the practice of taking small deposits? Let’s dig into the key reasons why deposit sizes are increasing.

Properties want to:

  Decrease Financial Risk

Property management companies face various financial risks, including property damage, unpaid rent, and unexpected maintenance costs. This is true in any market, but in today’s economic climate, where consumer card debt is at all-time high, property managers are even more cautious about protecting their financial interests.

A non-substantial deposit of $200-$300 may help close a new lease, but with residents that virtually have no “skin in the game” at move-out, operators are feeling the byproduct: bad debt and decreasing net operating income (NOI).

“I’ve seen firsthand how small security deposits fail to cover the move-out charges that renters can accrue,” said Andrea Taylor, Managing Member at Harmony MDU Solutions and former Director of Ancillary Services and Business Processes at several NMHC Top 50 Apartment Managers. “Operators often struggle with tying this bad debt data directly to small deposits, as the insufficiency of these deposits doesn’t reflect the true financial risk posed by delinquent residents.“

By increasing the size of security deposits, property managers aim to safeguard themselves against potential losses, considering the heightened risk of tenants struggling with debt repayment and potentially defaulting on rental obligations.

  Enhance Renter Quality

A higher deposit requirement can act as a screening tool. By requiring a higher security deposit, property managers can gauge a tenant’s financial stability. The ability to provide a larger sum upfront is often indicative of stable financial health, suggesting that the tenant will also be reliable in paying rent.

On the flip side, it might deter potential tenants who are not financially stable or serious about maintaining the property in good condition. This can lead to a tenant base that may be more likely to take good care of the rental unit, helping the property avoid maintenance costs and subsequent bad debt. 

  Keep Renters Accountable

Quite simply, a smaller deposit can lead to lower tenant accountability. Tenants may not feel as compelled to maintain the property or adhere strictly to the terms of the lease if they perceive that they have less financial stake in the security deposit. 

While the trend of increasing security deposit requirements in property management may pose challenges for renters, it is essential as a renter to familiarize yourself with local regulations (many states limit security deposit amounts to one month’s rent) and engage in open communication with your property manager to better understand how you can avoid charges at move out.

A Win-Win Solution: Increasing Protection & Competitive Advantage

To help properties maintain protection, reduce bad debt, maintain protection, and increase NOI,  while providing flexibility for residents, Obligo provides a transparent security deposit alternative in partnership with Wells Fargo.

With Obligo, property managers can easily increase their security deposit protection while providing residents with the same experience as a hotel check-in, skipping the nominal cash deposit, and instead pre-authorizing their existing payment method for any open balances at move-out.

At move-out, property managers charge open balances to the resident’s Obligo account and receive immediate payment. Obligo then works directly with the resident to recoup the charged amount, ultimately reducing your bad debt and minimizing any in-house collection efforts.

“As properties nationwide increase their deposit size requirements, we recognize that high deposits can be perceived as a market disadvantage,” said Taylor. “A deposit alternative like Obligo provides a win-win solution by protecting properties from bad debt while increasing their marketing advantage with a zero deposit offering.”

Interested in learning more? Get started today.