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Security deposit alternatives: why properties should outsource traditional security deposits, not replace them
Security deposit alternatives had the right idea—improve move-in affordability for residents while maintaining asset protection for properties. But some security deposits alternative products have come under fire for creating resident confusion and additional workflows for properties. If you’re looking to reduce the hassle and lift of security deposits, consider automating and outsourcing—not replacing—your deposit management. Here’s why.
1. Security deposits protect your asset and residents’ money
Refundable deposits are well-understood, fair, and protect your asset. They also give residents the power to preserve their deposit money and repurpose it for their next move. (Security deposit alternatives claim to reduce move-in expenses but overall costs for residents typically increase.)
Cash deposit automation gives residents the power to get their full refund back. And if they need help at move-in, they can pay their deposit over three months or more.
2. Security deposit alternatives don’t motivate the right behavior
According to researchers, the pain of losing is psychologically about twice as powerful as the pleasure of gaining. Properties that require security deposits are tapping into a fundamental human operating principle, and residents are motivated to take care of their units to avoid losing their cash deposits.
In contrast, residents using security deposit alternatives, often paying a non-refundable monthly fee don’t feel the same level of urgency. They may also feel that they’ve been making payments throughout their lease and will be surprised to receive an additional bill for any damages at move-out.
3. Refundable deposits are less expensive than security deposit alternatives
Residents who use a security deposit bond replacement often end up frustrated and confused and pay more out of pocket. Not only are residents on the line for a non-refundable fee, but they’re also responsible for paying the surety bond company for any property claims.
|Non-refundable fee (12 months @ $25/mo)
|Cost to resident
Some residents have gone so far as to challenge the legality of security deposit alternatives. The Maryland attorney general, for example, claimed that one alternative provider violated Security Deposit Law, stating that the company’s program “effectively had tenants paying their security deposits monthly, but, at the end of the lease, tenants got nothing back.”
4. Deposit money can double as a financial safety net
For many Americans, the amount of money set aside in their security and other refundable deposits represents one of their greatest assets. Having this money set aside can seed future savings for a down payment on a home, but it can also act as an instant emergency fund throughout a resident’s lease.
When operators outsource their deposit management, it gives residents the option to “unlock” some of their deposit money to cover an unexpected bill. Using their own money helps residents avoid expensive, predatory alternatives, including high-cost credit and overdraft or late fees.
5. Security deposits are familiar and don’t require extra explanation
Sometimes, there’s a good reason to get rid of a requirement. But security deposits are tried and true and fair to both parties. As long as renters know what’s required and how to get their money back, they generally understand and accept the requirement.
Security deposit alternative products can also confuse residents (Is it insurance? Can they get their money back or not?) and take additional team time to explain, sell and respond to questions or complaints. Keeping things simple also helps prevent negative reviews and complaints that can lead to scrutiny by state or regulatory officials.
6. Outsourcing cash deposit management reduces compliance risk
Security deposit laws are constantly changing, and non-compliance comes with heavy fines that can wipe out NOI for an entire unit. Just like with outsourced payroll, outsourced deposit management ensures compliance. Limits, notices, holding, inspection, interest, returning, documentation….each requirement can be easily adjusted as jurisdiction regulations change.
As the requirements become more stringent and expand across states, having a flexible, repeatable way to ensure compliance will reduce risk and training time for onsite teams.
7. Modern, flexible payment options are built-in
The future of payments is highly influenced by tech-savvy Gen Z and Millenials, and operators should work to maintain relevance with this growing renter population.
Many Millennials do not own a credit card and lean on buy-now-pay-later options to fund purchases if they don’t have the cash available. They’re also used to paying just their share of a purchase by moving money via Venmo, Paypal, or Zelle.
Outsourcing deposit management means your property doesn’t have to implement the most current payment trends – the platform does it for you.
8. Automation reduces the load on managers & accounting
Managing payments and refunds requires several steps and can take an unnecessary amount of time. Inspection, getting quotes for repairs, compiling labor estimates (if your property is in Portland, Ore., you’re also compiling proof of market rates for that labor), pulling together a final account statement, sending that statement to accounting, making sure the check is issued on time…And it doesn’t stop there.
Some properties report that as many as 80% of residents don’t leave a forwarding address. That means operators have to send a check to the last address on file, typically the resident’s old unit. Then former residents call wondering where their check is. If too much time has passed or the check cannot be tracked down, properties must reissue the check (hello again accounting) or issue a stop payment (hello bank fee!).
Deposit automation manages the process for you, ensuring that residents receive the proper documentation and that refunds are delivered directly into residents’ checking accounts shortly after the FAS is closed out.
Outsourcing and automation can simplify traditional cash deposits
You don’t need security deposit alternatives to simplify cash security deposits. Cash deposit automation streamlines your existing security deposit management process and reduces your compliance risk. You maintain full asset protection and reduce hassle for onsite teams while giving residents control and visibility into their money.
Roost is a mission-driven tech company focused on improving property NOI and renter financial health. Roost’s free platform helps large multifamily automate the deposit intake and refund process, reduce compliance risk, and minimize disputes. It also helps renters avoid late fees and build credit history by providing renting guidance, financial tips, and savings deals, and a simple way to turn their refundable deposits into an instant emergency fund.