The Hidden Costs of Security Deposits for Property Managers

It’s no secret that renters aren’t fans of the security deposit — it’s an upfront payment that gets their money tied up for the duration of the lease. For them, the cost of security deposits is straightforward: a fixed amount of usually one to three months of rent. 

The cost/benefit analysis of security deposits gets a little more complicated for property managers. On one hand, you are getting financial protection for yourself and the owner in case of damages or unpaid rent. On the other hand, there are many hidden costs associated with security deposits that you need to take into account. If not careful, you could see your bottom line take a hit. 

3 Hidden Costs of Security Deposits

1. Admin Costs

One hidden cost of security deposits is the time and effort required to collect, process and refund them. This includes tasks such as signing a security deposit agreement, collecting the deposit from renters physically, depositing it into a separate account, and mailing out refund checks by state-mandated deadlines.

It’s always been done that way, so property managers might have internalized the cost and not calculated its true financial impact. All these tasks are labor-intensive, meaning your team is tied up during peak rental season handling paperwork around security deposits. This is valuable time they can’t spend on touring and attracting new renters — the opportunity cost of handling deposits the traditional way. 

Real Property Management® Express, a property management company with over 2500 units in their portfolio, finds refunding deposits a major operational burden. More than 20% of their accounting team’s time was spent on handling deposits. The accounting manager, Heather Dube, was spending six hours a week just processing deposit refunds before using Obligo. 

“You’re printing tons and tons of checks, waiting for a check signer to come in, making sure they get out in the mail. And then the checks don’t get to where they’re supposed to be, and sometimes they come back…” Heather said. “It was miserable.”

When you consider that the average employee overhead is 1.4 times their yearly salary, the amount of time your staff spends on non revenue-generating, security deposit-related tasks becomes even heftier of a cost. 

2. Deposit Refund-Related Costs

When mailing back deposits, it’s often inevitable that some checks would get returned or lost due to incorrect forwarding addresses. When this happens, property managers need to issue a stop payment and reissue the checks, at a cost of $20 per check.

In a two-week period, Heather had to cancel and reissue five to six checks. Over the course of a year, that added up to $2,880 in stop payment costs – not a small number. 

With deposit refunds, there is also the risk of legal disputes. If a renter disputes your decision to keep part of or all of their security deposit, you may need to spend time and money on legal fees to defend your decision. Even if you ultimately win the dispute, the legal process can be time-consuming and costly.

If you didn’t mail out the refund checks in time, depending on your state deadline, you could also be sued in court and held responsible for paying twice or even thrice the amount of security deposit for the renter. 

The easiest way to avoid these issues is to stop accepting security deposits and stay protected with Obligo’s deposit-free solution. It streamlines your operations so your staff no longer need to grapple with physical checks, and your renters won’t need to wait for their refund via snail mail. It’s a win-win. 

3. Loss of Prospective Renters

Requiring security deposits can also cost you prospective renters, resulting in lost rental income, if your competitors are offering alternative solutions. 

Some renters might not have the funds immediately available to pay the security deposit upfront, which delays or derails the leasing process. Others might prefer to use those funds for other expenses, such as moving costs, buying furniture, or paying off debt.

In the past, renters didn’t have much choice when it came to security deposits. But as deposit-free renting becomes a sought-after amenity today, you could lose your competitive advantage if you’re slow to adapt to this trend. 

Don’t Let Security Deposits Cost You

Security deposits have been essential to protecting the financial interests of landlords and property managers. However, it’s important to weigh the costs and benefits of requiring a security deposit, and not let the hidden costs affect your bottom line unnecessarily. 

Obligo’s deposit-free solution will streamline your property management operations and save you valuable time from manual tasks. Now you can use that time to focus on attracting new renters, providing great customer service and fostering a positive resident experience.

Don’t let security deposits cost your business. Get in touch with Obligo and learn how you can avoid the hidden costs and boost your bottom line with deposit-free living!