I'm Rick Kahler, thanks for joining me.
If lawmakers in several states and cities
have their way, the traditional security deposit
for housing rentals may become a relic of the past.
If you've ever rented a house or an apartment,
you've almost certainly paid a security deposit.
They're pretty ubiquitous.
Most deposits equal one or two months rent
and they're paid at the time that the tenant
signs the lease. Security deposits function are to
help minimize damages to the property and
offset costs in the event a tenant breaks their lease
or break something in the property
that causes some type of damage.
They are also a small indication of the tenant's
solvency and ability to pay the rent.
While the tenant is legally responsible
to cover all the damages or the rent
under a broken lease and can be sued
for damages if they refuse to pay,
collecting is a different story.
It can take time and be expensive.
Often tenants just don't have the wherewithal
to pay a judgment brought against them.
Typically, if a tenant struggles to come up with a
security deposit, that's a warning that
they may also struggle paying the rent.
This makes collecting deposits even more important,
even though they are often insufficient
to cover damages or the balance due on the lease.
Well there's a growing trend among lawmakers
to make it illegal for landlords to require tenants
to pay a cash security deposit prior to
moving into the unit, without other options.
The reason, according to an article in
The Wall Street Journal entitled,
"Security Deposits Are The Bane of Many Renters"
which was ran on January 2020,
written by Will Parker,
is to make renting more accessible to
tenants who have not saved enough
for a security deposit. Parker suggests that
many lower to middle income renters
find paying a security deposit so expensive
that it prevents them from renting.
For decades renters have had to produce
cash security deposits. Why is it a problem now?
Well I'm guessing because so many
people fail to set aside a portion of every paycheck
to create a cash cushion.
Given that around 75% of Americans would
need to borrow or sell something to come
up with $1,000, it's understandable that
coming up with a security deposit is hard for most.
One solution enacted by Cincinnati, forces landlords
to accept an insurance policy or installment payments
instead of an upfront deposit.
Connecticut, New Hampshire, and Alabama
are also looking into enacting similar laws .
Inevitably, such restrictions will have unintended
consequences, most do, and I think most likely result
in landlords finding other means to offset
the increased risk of not getting
sufficient upfront deposits.
These could include raising rents, increasing
security deposits, requiring more restrictive
background checks, and decreasing amenities.
For example, a landlord requiring one month's rent as a
deposit might increase the deposit to
three months payable in six installments.
That would give the landlord the normal
one-month security deposit within two months.
Likewise, the landlord might increase the rent
for the first few months to build a non-refundable
reserve and then lower it for the balance of the lease.
Landlords could also exclude amenities
that are most vulnerable to damage such as
appliances, carpeting, expensive light fixtures,
wallpaper, and wood flooring.
Of course, some lawmakers will try to anticipate this by
introducing rent controls and limiting security deposits
to one or two months.
That will bring about even worse
long-term consequences in the form of
housing shortages, as investors become
unwilling to accept increased risk and
lower return on their investment.
I wonder what would happen if lawmakers
went a different direction.
Perhaps, they could encourage renters to
save enough for a security deposit by
creating tax deductible rental savings accounts
or allowing penalty-free withdrawals from
an IRA for security deposits.
Rather than penalizing landlords,
it might be more helpful to reward tenants
for strengthening their own financial circumstances.
Thanks for joining me.