[REN # 849] Property Management: New Law on Rental Security Deposits

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Property Management: New Law on Rental Security Deposits, Real Estate News for Investors Podcast Episode #849

New rules in Cincinnati will force landlords to provide security deposit “options” to tenants. It’s the first such ordinance in the nation to help tenants who can’t afford a large cash deposit. The new rules are not sitting well with some landlords who say all-cash deposits are necessary to help protect their properties.

So far, Cincinnati is the only place with this requirement, but the Wall Street Journal reports that several states are also considering security deposit options for tenants. Legislation has already been submitted in Virginia, and there are plans for similar bills in Connecticut, Alabama, and New Hampshire.

Unaffordable Move-In Costs

Lawmakers say lump-sum security deposits are making it difficult for many lower-income and younger people from finding a place to rent. They are often as much as two months worth of rent to pay for any damages caused by the tenant. That’s in addition to the first month’s rent, making the move-in cost unaffordable for some people.

As the Wall Street Journal reports, the typical middle-income household only has about $3,000 that’s easily accessible to them. Cincinnati City Councilman, P.G. Sittenfeld told the paper: “For a significant number of people living in Cincinnati, a security deposit for a two-bedroom would equal or exceed the totality of their savings.”

In Santa Cruz County, California, supervisor Ryan Coonerty is in favor of security deposit legislation. He says: “If you can get a couple thousand dollars in people’s pockets, that can make a big difference.”

Cincinnati Ordinance Options

The new security deposit ordinance in Cincinnati will allow the tenant to choose the standard cash option or request an alternative. As reported by the Cincinnati Enquirier, the landlord can then pick one of three different options.

  1. The first option is rental security insurance. It might cost the tenant $5 a month for the entire time they are renting the unit, but they don’t get any of that money back. In that scenario, they’d only be paying the first month’s rent, plus $5 when they move in.
  2. The second option is to make partial payments on the security deposit over a period of six months or longer.
  3. And the last option is a discounted security deposit. The Rental Housing Journal reports that as “no more than the equivalent of 50% of the first month’s rent.” That’s a big discount from a security deposit that’s equal to two months rent.

Pros & Cons of Security Deposit Insurance

Although security deposit insurance might not be a bad idea, some landlords don’t like it because it could result in a battle with insurance companies to get paid. They want cash in hand to pay for damages. COO for the National Real Estate Investors Association. Charles Tassell, says it puts the security deposit process in a “whole different realm.” He says: “I’ve got to deal with an insurance claim and get my attorneys involved. And they’ve got their high-priced attorneys in-house.”

The insurance option also eliminates a landlord’s responsibility to safeguard that money. Most states have laws saying security deposits need to be held separate bank accounts earning interest. Having an insurance guarantee might be easier. The Journal article mentions an insurance provider called Rhino. Co-founder, Ankur Jain, says that tenants pay about $5 a month for a $1,000 cash deposit. He says it gives “renters more options for how to save money and how to choose to manage their finances.” He also feels that the local economy will benefit because of money that isn’t locked up in security deposits.

If the insurance option seems like a good idea, landlords should make sure they are comfortable with the insurance provider. In Cincinnati, the new law requires that these providers are approved by the state, along with other rules, including coverage for the entire term of the lease.

Links:

(1) Wallstreet Journal Article

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