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Rental Security Deposits: The Risks Of Cash & Cash Alternatives

Do you know your landlord-tenant laws when it comes to rental security deposits?

One little mistake can put a big dent in your real estate profits. Yet, many investors simply don’t know the laws. They can also change frequently, forcing landlords to adapt.

Renter Security Deposit Rules

Handling renter security deposits is not something you can afford to get wrong as a real estate investor. There can be costly lawsuits and fines triggered by asking for too much, or simply mismanaging these funds and failing to return them on time.

Interestingly, despite how anti-investor California is infamous for being, the Golden State has some of the most favorable limits on security deposits for landlords.

According to FindLaw California landlords can actually charge up to:

  • 2x the monthly rent for unfurnished rental units
  • 3x the monthly rent for furnished rentals
  • Unlimited for commercial properties

This makes renting even more expensive for tenants. It’s common in California for it to cost more to move into an apartment than it would take to put a 10% down payment on a single family home elsewhere. In many places, you can buy a home for less than half the cost of renting a California apartment and still have plenty of cash left in your wallet.

Some jurisdictions across the country are challenging the industry by demanding landlords offer alternatives to cash security deposits. This may not be a bad thing for solo landlords in some ways. It could save them a lot of loss from lawsuits. There can also be serious downsides and unexpected consequences for all sides of the table.

In Cincinnati, OH, new laws require that landlords offer one of these alternatives to a hefty upfront cash security deposit.

  1. Insurance paid for by the renter
  2. Security deposits that do not exceed half a month’s rent
  3. Installment payments for the security deposits, spread over at least six months

With California’s reputation for being the most aggressive in tenant protections and regulation, don’t be surprised if similar rules show up on the west coast soon too.

The Risks & Responses To New Regulations

With all the legal liability of security deposits and the fact that some states don’t really let landlords keep the money under many circumstances, alternatives may be a wise choice.

Waiving security deposits, and increasing rents by the same amount actually gives landlords more profitability, while lowering barriers to renting, and reducing legal risks.

The problem facing California and New York landlords is when you can’t charge a security deposit, and rent controls prevent you from increasing the rent to offset your risk, you have little control over choosing your tenants and screening them.

Going out of state can often offer California based investors much better returns and lower risks. Just make sure you are working with an operator who:

  1. Knows the local landlord-tenant laws and specifically deposits.
  2. Knows how to balance these risks and rewards, and manage that money properly

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