The city of Cincinnati, Ohio has recently taken a substantial step toward improving rental affordability by passing legislation requiring landlords and property managers to offer renters options besides the traditional cash security deposit.
And though it’s the first U.S. city to mandate that properties accept alternatives to cash deposits, legislators in Virginia, Connecticut, Alabama and New Hampshire have already shared plans to introduce similar bills.
If these bills pass, properties across the country will be required to choose a deposit alternative to offer their renters. And even for properties that aren’t subject to this next round of deposit legislation, it may be just a matter of time before going beyond the traditional security deposit becomes standard practice in the multifamily space.
This legislation is great news for renters.
Securing a rental home isn’t cheap, and in many cases, the expenses involved are cost-prohibitive for those looking to move.
We see evidence of this all the time. According to our 2019 “Renter Sentiment Report,” high upfront costs have prevented 60% of renters from moving into the rental homes or apartments they wanted. The bulk of these upfront costs is the cash security deposit, often equal to one month’s rent.
With the Cincinnati bill, properties will be required to offer one of three alternatives that make paying for property coverage more affordable. So while the exact option a renter is given depends on the property, the end result is, invariably, a less expensive move.
Properties managers will need to make a decision.
Cincinnati’s security deposit legislation is the first of its kind. And though other jurisdictions may create slightly different requirements, properties in the city must choose between three alternatives to offer residents:
• A reduced security deposit that is no more than the equivalent of 50% of the first month’s rent.
• An installment plan, in which the renter still pays the standard deposit amount, but over the course of six or more months.
• An insurance-based deposit alternative, where the renter pays a third-party provider approved by the state, which then insures the property against damage. (Full disclosure: My company is this type of provider.)
With the Cincinnati legislation, properties will have 90 days to decide which of these options to offer renters.
Each option reduces upfront costs for renters, but they offer varying levels of protection and can mean more work for property managers. Cutting deposits in half puts properties at increased risk, while collecting payments in installments creates a ton of extra work for property managers. It’s my view that by using deposit alternative products, landlords and property owners can navigate both of these issues, protecting their properties against damage and missed rent while simplifying management processes at the same time.
Will deposit alternatives soon be standard practice?
Cincinnati’s legislation is the first of its kind, but it could serve as a model for legislation across the country. Similar bills are already being discussed in at least four U.S. states.
While properties outside of Cincinnati may not feel quite the same sense of urgency to choose an alternative to cash deposits, owners and operators across the country are already seeing the benefits of offering them to residents. We’ve seen how deposit alternatives can help lower move-in costs, reduce operational costs and add protection against damage and missed rent. And for properties that begin offering an alternative that’s been admitted by their state’s Department of Insurance sooner rather than later, there will be no need to worry if and when legislation mandating these products is introduced in their area.
That said, it’s important that any property considering offering a deposit alternative is familiar with the terms of the provider they choose and prepare their management teams to communicate those terms to residents.
For example, when a resident purchases a deposit alternative, they’re paying a non-refundable fee. If this isn’t communicated clearly, they could be unhappy with the property at the end of the lease when they realize that they aren’t getting those funds back.
It’s also essential to keep in mind that even after a property begins offering a deposit alternative, residents still have the choice to pay a cash deposit and some may choose to do so. After all, the goal of this legislation is to help make rental housing more affordable — and to give renters more control over how they spend their money.