A New Sought-After Amenity
Originally Published on REI-INK.
Everyone remembers their first time renting an apartment and having to put up a security deposit. I certainly remember. After finishing college, I moved to New York City and, after an exhausting search, found my dream studio apartment in Greenwich Village. Only when reviewing the lease terms did it become clear to me that the security deposit would wipe out all the savings I had earned during the past four summers of college.
Security deposits have been used for generations to limit the amount of risk that a landlord takes when renting out an asset. In most jurisdictions, landlords are required to follow strict rules and regulations governing how much they can demand, how to hold security deposits, and to what they can be applied against. The process of administering, accounting for, and returning security deposits represent a cost center for landlords across the country, costing $35-$60 per door to manage.
As rents have steadily risen over the past decade, so too has the average size of cash security deposits. Prospective residents need to come up with a substantial amount of cash to move into a new home. In a city like Boston or New York, where it is customary to put up a one-month security deposit, move-in costs can easily exceed $5,000.
It should be clear to all by now that cash deposits are a poor form of self-insurance for the landlord and an inefficient use of capital for all parties. When they are applied in the case of a default, they rarely cover the total losses incurred.
An Alternative to Security Deposits
Pandemic-driven headwinds, pro-tenant legislation and innovative new products are quickly changing the landscape for security deposits. Today, cash deposits are being replaced by smarter alternatives—soft capital solutions to replace hard cash deposits. These new security deposit alternatives free up critical tenant liquidity which is important in today’s declining credit environment. For example, let us say that a landlord’s average security deposit is $1,000. With security-deposit replacement insurance, the renter would instead pay about $10 a month, and the landlord would receive the same $1,000 in rent and damage protection.
In July 2019, the State of New York passed sweeping rent reform law. In part, the bill limited the amount that landlords can require as a security deposit to one month. Soon after, several states followed suit. In recent months, certain cities have passed legislation that goes even further. For example, the city of Atlanta began requiring landlords to provide tenants with installment plans for security deposits or to offer security deposit replacement insurance. Today, there are a dozen states in varying stages of considering legislation that, if passed, will require landlords to offer similar alternatives to traditional security deposits.
The next generation of renter is the “subscription model generation”. Generation Z are used to paying monthly fees (think Netflix, Spotify) and using new financing tools (Affirm, Klarna) in lieu of putting cash up front. Generation Z moves frequently and demands flexibility. Market data shows that when a security deposit alternative is offered, roughly 90% of Gen Z choose to keep their cash and go with the alternative. In the near future, this new apartment generation will consider a small monthly payment for security deposit replacement insurance as an amenity. Those who do not offer a choice to tenants will find themselves at a competitive disadvantage.
To learn more about Leap Deposit Replacement, please visit www.leapeasy.com.