Calendar icon December 21, 2023

What is Security Deposit Insurance? Pros and Cons [+Best Providers]

Security deposits are an industry standard for property management. But new innovations are helping reduce some of the traditional pain points associated with security deposits.  

Here’s the thing; For property managers and investors, security deposits provide critical protection from financial fallout if the rental property is damaged. For renters, though, paying a security deposit upfront can pose a prohibitive cost, and an expensive security deposit can make it harder for the property manager to fill vacancies.  

Enter security deposit insurance – a modern solution that's reshaping rental agreements. 

We’re diving into everything you need to know about security deposit insurance: how it's different from the traditional security deposit, the pros and cons, and the scoop on the best providers out there. 

So, whether you're a seasoned property management business owner or just getting started, we’ve got you covered. (And that was an insurance pun.)

What is security deposit insurance?

Security Deposit Insurance is a coverage that residents purchase, which covers potential damages or unpaid rent during their lease period. Instead of paying a hefty upfront cash deposit, residents pay a fee for this insurance, which typically costs a fraction of the traditional deposit amount.

For example, imagine a tenant moving into a home where the usual security deposit is $1,000. With security deposit insurance, instead of paying this amount upfront, the tenant might pay an insurance fee of $50 each month for a 12-month lease. This fee provides coverage to the owner for the duration of the lease, similar to a standard deposit, but at a lower cost to the tenant.

This system not only eases the financial burden for tenants but also provides property managers and owners with coverage against potential lease violations, making it a potentially attractive option for both parties.

 

download rental inspection checklist template

 

What is the difference between a traditional deposit and security deposit insurance?

A traditional security deposit is a lump sum paid by the resident to the owner (or held by the property manager) at the beginning of the lease. It’s often the cost of one month’s rent or another negotiated amount. The security deposit acts as a safeguard for the property manager in case of any damage to the property by the end of the tenancy. 

If there is significant damage, the property manager and owner can withhold refunding the deposit, depending on local and state laws that govern the use of security deposits. 

Security deposit insurance, on the other hand, gives residents a way to avoid paying that large lump sum at the beginning of their lease. Instead, they can pay for insurance. Like any insurance policy, they pay a monthly premium for coverage. The premium will be considerably less than a one-time security deposit. 

When a resident has security deposit insurance, their property manager can file a claim to the insurance company over things like lost rent or damages. The resident doesn’t get any of their monthly payments back at move out. 

Let’s go over some of the pros and cons of security deposit insurance.

What are the benefits of security deposit insurance?

Security deposit insurance provides benefits to renters, property managers (or a landlord), and property owners. Here are a few of the top benefits.

1. Reduces the upfront cost of move-in and protects residents' ability to pay rent

We’ll just say it plainly: Moving is a huge, stressful life event that costs a LOT of money. One of the major costs of moving into a new rental home is the traditional security deposit. Renters may be paying two times or more the amount of monthly rent just to sign a lease.

Security deposit insurance solves that upfront-cost challenge by providing a service at a much lower monthly cost. 

From the property management perspective, that means residents can keep more of their money to ensure they pay rent on time, and they may be happier to cover other fees like pet deposit fees, a resident benefits package fee, etc.

2. Helps reduce vacancies

Because security deposit insurance removes one of the biggest financial barriers to signing a new lease, it can be a great way to reduce a property’s time on the market.

By advertising that you accept security deposit alternatives like insurance, you can differentiate your properties on listings and fill them more quickly.

3. Covers unpaid rent

This is one of the best benefits for property managers and owners. Traditional security deposits typically can’t be used until the end of a tenancy. But with security deposit insurance, property managers can file a claim over unpaid rent. The insurance typically will cover this.

Some states allow property managers to cover missed rent payments with a security deposit, but some do not. If you’re in one of the states that don’t, you may want to consider allowing security deposit insurance.

4. Claims can be made at any time during the lease

Like the coverage for unpaid rent, security deposit insurance can cover claims at any time throughout a resident’s lease. You don’t necessarily have to wait to be reimbursed for damage. 

 

Happier residents

 

What are the drawbacks of security deposit insurance?

Of course, there are a few risks to security deposit insurance and reasons you may not want to make it an option for your residents. 

Here are some of the cons of security deposit insurance.

1. Not all claims will be accepted

When you, as the property manager, submit a claim for coverage of unpaid rent or property damage, the insurance company may not decide to cover it. Each claim is evaluated at the time of loss to determine if coverage is applicable. 

Things like normal wear and tear are not covered. Plus, you’re not the one who gets to make the final decision.

2. Not all insurance providers or products are reliable

This is true particularly because the industry itself is a newer innovation. Residents may pay monthly premiums but then find the coverage is not all that great. All of us have probably had some kind of experience like this with other types of insurance, too. Some claims aren’t covered, and some insurance companies promise a lot and deliver very little.

3. Residents are on the hook for monthly payments

Generally, security deposit insurance is cheaper than a cash security deposit. But if the lease is long-term, the monthly payments may end up being more expensive than just paying a lump sum at the beginning of the lease. 

For property managers, you want to consider if it’s ideal for your residents to have an additional monthly fee they’re responsible for on top of rent.

4. It can be a hassle

Nobody likes submitting or following up on insurance claims. It’s a hassle! The process is often clunky and slow and requires a lot of management. It may take weeks or months to get paid for a claim. 

Property managers may also need to put time and energy into educating residents or clients about how the security deposit insurance works and the differences in their options. (Or you could show them this article!)

Best security deposit insurance providers

Security deposit insurance is fairly new to the SFR property management world. Here are three of the best security deposit insurance products on the market right now.

1. LeaseLock

LeaseLock is the category leader in this particular security deposit alternative space. In October 2023, the company surpassed $9 billion in insured leases. 

LeaseLock offers a modern solution in security deposit insurance, replacing traditional cash deposits with a unique insurance model. Their insurance coverage provides property managers with protection while easing the upfront financial burden for residents. 

The monthly cost to the resident is generally around $30, with $5,000 in coverage for unpaid rent and damage.

2. Obligo

Obligo was launched in New York and helps property managers reduce their risks while making security deposits more affordable for renters. Residents pay a small monthly fee for the service while Obligo sets up secure billing authorization between property managers and the resident. The property manager is then authorized to charge the resident for damages up to a pre-set maximum. 

It’s essentially the same as the type of pre-authorization hold that a hotel might place on a guest’s credit card. Residents won’t be charged unless they cause damage or miss rent, and they will only be charged up to a certain amount. 

Some residents will not qualify for Obligo’s services, depending on credit rating, etc. The company has a high trust rating on Trustpilot.

3. Rhino

Rhino offers a slightly less straightforward insurance model but is a leading solution in security deposit alternatives. Through a surety bond model, their service provides robust protection for property owners while significantly reducing move-in costs for residents.

Rhino is sued in over two million homes in the U.S. and claims to save renters over 90% on moving costs. Some former customers complain about unreliable costs and being on the hook for claims.

Final thoughts

Security deposit insurance is reshaping the rental landscape, offering benefits for both residents and property managers. Providers like LeaseLock, Rhino, and Obligo are at the forefront of this change, providing innovative solutions that ease financial burdens and streamline rental transactions. As the industry evolves, these services may become a new standard in property management.

The goal is to make life easier for renters, owners, and property managers. At Second Nature, our goal is the same. We help property managers provide the best residential services and solutions, all while building opportunities for ancillary revenue

We provide a package with solutions like renters insurance, credit reporting, and resident rewards, all built to help protect a resident’s financial stability and reduce risk to your property management company.  Plus, it’s completely handled for you, so your team can focus on what they do best: manage your properties.

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How to Optimize Operational Frequency with Processes and Software

Property management software is currently helping property managers establish efficient and reliable processes at a higher rate than ever before in the PM industry. With that development in the proptech industry has come the development of tech for self-managers that has changed the capacity of the accidental landlord. Thus, the demand for efficiency at scale has risen in order to separate the professional from the amateur, and the establishment of processes that allow such a thing has become a critical topic for professional property managers. Optimizing property management processes Carter Fleck of Triton Property Management, a growth-oriented firm out of northern Virginia that is approaching 300 units with larger goals for 2024, joins us to share his expertise on process definition. Fleck is the General Manager responsible for operations and strategic growth, and he has been developing effective processes to ensure efficiency at Scale at Triton, and in the process, he has garnered an understanding of how to do so. “A lot of failing,” says Fleck. “In the early days, we were getting a lot of good and bad feedback, but typically the bad feedback is what you adjust off of.” Fleck believes that assumptions are the enemy when it comes to defining procedures and sourcing software for your PMC. “The image that we use is if you're going to build a sidewalk before people even start walking on a field, it's kind of dumb. You have to see where people will walk first, and then you'll build a gravel path. So number one, you see where they walk, see where their intentions are in the grass, then you build a gravel path. And then eventually, once that walkway is established, that's where you build your processes and procedures.” The analogy is a visualization of the concept that you have to see how people operate before you can establish processes to make how they operate more efficient. Fleck encourages the negative experiences of process breakdown and cites them as the only way to really nail down what your processes should look like. “Over time, between the tenants giving feedback and owners giving feedback, we adjusted our processes. It's a mix between figuring out where the owners walk and where the tenants walk, and then building paths that align.” Fleck details an example of how Triton adjusted its process after an assumption it made got challenged: "We had an assumption that payment plans were helpful for residents," says Fleck. "And so the way we handled delinquency is we would reach out to them and would be like, ‘you need to pay this. Do you have a payment plan option?’ And they would always say yes. Our process was we'll put you on a payment plan, we'll invite you to a payment plan, you'll accept the payment plan, and then we'll monitor the payment plan. That in itself was a lot of work, but we thought it was doing well. But some of the owners that we had managed for mentioned that another property manager doesn't allow any payment plans. And if you're not fully paid up by the end of the month, then the eviction process starts if you’re over $500 due. So we're like 'alright, well, we'll serve you in that we'll change our processes.' And we did, and our delinquency percentage shrunk significantly. So, consistently, by the end of every month, we're around 5% APR. Whereas with payment plans we're like 5 to 10%.” Fleck obviously credits seeing the assumptions in motion as what prompted the need for process iteration, and he firmly believes that making too many of these assumptions is one of the biggest mistakes growing property management companies make. Like any business experiencing growth, process definition is critical to achieve efficiency at larger volumes. What Fleck is essentially advocating for is processes based on what you know, not what you think, and there is a big distinction. Managing property management software Fleck has installed both general and tech-based processes, and cites that understanding of how people interact with processes as the key in both areas. "They don't focus on user experience. That's really important. Number one, how the tenants like the tech, but specifically how the people who are using the tech are gonna adopt it. So when we were choosing a rent inspection software, we had so many people recommend one, software and I, we almost pulled the trigger on it. But then I was like, let's do a trial run on both these two. And we chose the other one because it was way better user experience for property managers. So user experience, both for us and for residents." Tech is a tool that is ultimately as good as its users, and if it's not used correctly or at all, its potential is wasted. An over-reliance on technology can actually go hand-in-hand with an under-reliance, as both often spring up from a lack of understanding of how to choose, implement, and manage it. In this vein, Fleck can't recall many property managers who operate with too much tech. As long as you're not purchasing redundant software and you've done and continue to do your due diligence, tech-based process can make your business more efficient. "I more often find myself having that conversation," says Fleck. "When I'm talking to property managers in my sub-market, who aren't connected with like a NARPM, who aren't connected with like a Crane group, or who aren't connected with a Second Nature, aren't connected to the tune of what the property management industry is doing and the cutting edge of it, I'm just like, 'you could save so much of your time and you could scale this so much more if you only even if you just had tenant Turner, or if you had LeadSimple.'" No matter what your story is a property manager, if growth is in the cards, so is process and technology refinement. Hopefully, Fleck's experience in these areas can help you stay efficient and organized as door counts grow.

Calendar icon April 19, 2024

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Why offer a tenant benefits package?

In the residential real estate sector, like everywhere else, residents and property investors alike are getting younger – and with this generational shift comes expectations for a certain level of convenience and support. To put it bluntly, today’s residents want their needs proactively anticipated. It’s something they're willing to pay (and stay) for. That’s where a tenant benefits package comes in. In this article, we’ll explore what a tenant benefit package is, how it improves the experience for both property managers and tenants, and crucial mistakes to avoid. Before we get into the details, we want to give a shoutout to our very own “Resident Benefits Package” – which is how we refer to the benefits comprised in the “tenant benefits package.” “Tenant” is not yet a legacy term, but we here at Second Nature are trying to evolve it. That’s because, in our experience, property managers work hard to make renters feel like they’re not just parties to a contract – they’re residents. On one hand, this is just humans being humans, but on the other hand, it also encourages them to invest in care for their new home and add value to the property. Ready to get started now? Build your Resident Benefits Package today. What is a tenant benefits package? A tenant benefits package is typically a bundle of services, conveniences, and provisions offered by a property manager on top of the basic lease agreement. They represent a triple-win situation for property managers, residents, and property owners, as they enhance the overall rental experience, generate additional income, and protect the real estate investment. It might include conveniences such as online monthly rent payment options, or portals for submitting maintenance requests and tracking their status. It could also include various financial perks, such as credit rating improvements that are contingent on on-time rental payments, or discounts on nearby services such as fitness centers. It might also include amenities ranging from move-in concierge or utility set-up services, to identity protection services, to HVAC filter delivery. The cost for resident benefits packages is typically included in the lease and added as a monthly fee, with the fee being dependent on the specific benefits. Indeed, the benefits contained in a tenant benefits package will vary depending on the property manager and the type of rental property. The overall goal is to provide tenants with an enhanced quality of life while simplifying the experience of renting. At Second Nature, we pioneered the only fully managed resident benefits package, in response to PMs who wanted to make their business stand out. Our RBP includes an array of services and supports for residents, from filter delivery to credit building to maintenance. Why should property managers offer a tenant benefits package? Beyond the triple-win considerations mentioned just above, there are compelling and concrete reasons why property managers should offer tenant benefit packages. We'll turn to these now. Ancillary revenue Some tenant benefit packages include optional services or add-ons that can generate additional revenue streams for the property manager. This might include things like renter insurance or HVAC filter delivery. Resident experience Tenant benefit packages deliver numerous savings and value to tenants, beyond the value they would get if they were obtaining the same benefits "à la carte." Additionally, by offering additional services and conveniences, benefit packages can make tenants feel valued and more satisfied with their living experience. For instance, maintenance hotline requests, tenant portals, and air filter replacements all make life easier. Add-on services like identity theft protection can offer a sense of security. And discounted renters insurance coverage, utility concierge services, or other perks can save tenants money. Decrease tenant turnover and vacancy rates In a competitive rental market, tenant benefit packages can be a major differentiator toward boosting retention rates and reducing vacancy rates. Properties that offer these packages can also attract a wider pool of qualified tenants, and potentially command higher rents. Note that certain benefits in the package, like online rent payments and maintenance requests, can automate tasks and free up the property manager's time. This allows them to focus on more value-added initiatives. How does the tenant benefits package improve the tenant experience? Tenant benefit packages can significantly improve tenant satisfaction in several ways, by making life easier, more convenient, and potentially more affordable. For instance, if an online portal (a baseline feature for most property management software) is included for rent payments and maintenance issues and requests, this eliminates the hassle of writing checks or waiting on hold to speak with someone about a clogged drain. In other words, tenants have the peace of mind of knowing they can manage their tenancy 24/7 from the comfort of their own devices. Some packages might include features like filter delivery services or regularly scheduled HVAC maintenance. This frees tenants from having to remember these tasks – and ensures their apartment is well-maintained. Certain packages might also offer "verified vendor" services – in other words, a vetted vendor network that can help provide a more secure feeling to residents when service providers are on-site. 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This provides tenants with additional spaces to relax, socialize, or stay healthy. Packages can include security deposit alternatives that serve to provide a means for residents to be financially liable for damages without having to pay a significant lump sum upfront, such as pure insurance, surety bonds, and ACH authorization programs. Ultimately, tenant benefit packages create a more professional and responsive image for the property management company, which helps tenants feel valued and allows them to experience a smoother, more stress-free rental experience. What are the mistakes to avoid when offering tenant benefits packages? Property management companies should take care to avoid certain pitfalls when implementing tenant benefit packages to ensure they are providing true value to tenants as well as delivering profitability to the PM company itself. For instance, it's important to ensure that the services you're offering are actually relevant to your target renters. For example, young professionals might appreciate discounts on gym memberships, while families might prefer pet-sitting services. You should also take care to clearly communicate what's included and not included in the package to new residents. Don't oversell the benefits – focus on how they genuinely improve the living experience. It's also very important to set realistic expectations for response times on standard maintenance requests, emergency maintenance requests, or virtual concierge services. Likewise, be clear on all available payment methods, as well as rent due dates, late fee structures, and any associated payment processing fees. If your package includes services from third-party vendors, ensure that these vendors are reputable and reliable. Research their customer service record and responsiveness to ensure a smooth partnership and a positive experience for tenants. Above all, regularly monitor the usage of different benefits within your benefits package. This can help you refine your offerings and ensure you're not spending where spending is not required. Looking for a Resident Benefits Package? If you’re looking for a “plug and play” resident benefits package, Second Nature’s RBP is the way to go. Designed to be easy to implement and simple to use, all the services it includes are managed by Second Nature – which means there’s no day-to-day upkeep required from the property manager: Second Nature keeps it running. It’s a simple way to grow your business and create great experiences that residents will pay and stay for. Learn more about our fully-managed Resident Benefits Package.

Calendar icon April 2, 2024

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