Waiving a security deposit

[Beth Lesage]

I am interviewing several PM companys for my first rental, its long distance. Half of the PM companies do not collect a security deposit. This makes me nervous. Am I overreacting? What is the benefit to a landlord of waiving the deposit, as I dont see any?

[Nathan Gesner]

The purpose of a security deposit is to ensure the tenant complies with the lease. It mitigates your risk by offering you some protection against a tenant that fails to pay their last month rent or leaves the home dirty or damaged.

If the Property Manager doesn't collect a deposit, how are they mitigating that risk or ensuring compliance?

More property managers are using deposit alternatives. For example, a company called Rhino offers "insurance" instead of a traditional deposit. The tenant applies with Rhino and determines the cost based on credit score and other factors. Instead of paying $1,000 for a deposit, the tenant can pay $10 a month to Rhino. If the tenant moves out and leaves $1,000 in cleaning and repairs, Rhino reimburses the Landlord or Property Manager and then goes after the renter to collect.

These deposit alternatives make it cheaper/easier for tenants to move in while providing the same level of protection to you as an investor. More and more cities/states are limiting what an owner can charge for a deposit, so this is a necessary change. I predict these alternatives will become more common than the traditional deposit within the next ten years.