Alternatives to increased security deposit

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Alternatives to increased security deposit

Wesley W.
Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes

Well, us unfortunate folk who cater to C-class tenants in Upstate NY just got our heads handed to us.  The legislature does not want to own public housing; it just merely wants to CONTROL all the housing privately owned and managed by hard-working landlords "in the trenches" like myself.  By statute, we can no longer collect more than one month's security deposit or last month's rent.  These were tools I personally used to mitigate the risk on marginal tenants and/or those that would commonly give notice to vacate and then say "I'm using my security deposit as last month's rent."  With the speed and expense involved in an eviction (which just got MUCH longer), it would be a waste of money to begin such a proceeding.  I only offer MTM leases.

At this point the new laws have done the exact opposite of our governor's intentions (well, not really - this was done to garner votes).  I must now decline the applications of marginal tenants - and I am looking at having to raise rents in order to increase my capital reserves to cover my risk with the inevitable next eviction.

So, to avoid losing all my cash flow for the year on one bad tenant with no "skin in the game" - I'm looking for creative alternatives.  I'm aware of some products out there that act like "bad tenant insurance" where the company vets the tenant and a premium is paid that covers any delinquencies or damage expenses - anyone use any of those?

I'm also looking for other options, as the additional expense of a security premium would put me at a competitive disadvantage in my market until others begin using it.

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
7y

Rent Lock fee to guarantee no rent increase after first year.

Pet fee, pet rent.

First, last and next to last plus deposit.

Prepay rolling 30 days in advance of when rent is due.

Make rent due on 25th for next month and late on the 1st - gives you more time to react.

Require direct deposit, this is a stretch, if they don't have money there is nothing to take out of their account.

Prepaid cleaning fee for move out. They get it back if they clean themselves. I know sounds too much like a deposit.

Just brainstorming here.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    7y

    Rent Lock fee to guarantee no rent increase after first year.

    Pet fee, pet rent.

    First, last and next to last plus deposit.

    Prepay rolling 30 days in advance of when rent is due.

    Make rent due on 25th for next month and late on the 1st - gives you more time to react.

    Require direct deposit, this is a stretch, if they don't have money there is nothing to take out of their account.

    Prepaid cleaning fee for move out. They get it back if they clean themselves. I know sounds too much like a deposit.

    Just brainstorming here.

    4Reply
  • Wesley W.
    OP
    Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
    7y

    Originally posted by @John Underwood:

    Rent Lock fee to guarantee no rent increase after first year.

    Pet fee, pet rent.

    Anything labeled as a "fee" and then somehow refunded back has potential.

    First, last and next to last plus deposit.

    Prepay rolling 30 days in advance of when rent is due.

    We cannot collect anything beyond 1 month's security, including any "advances."

    Make rent due on 25th for next month and late on the 1st - gives you more time to react.

    By statute, now late fees cannot be applied until the 5th, and are limited to 5%.

    Require direct deposit, this is a stretch, if they don't have money there is nothing to take out of their account.

    In my neighborhoods, this would be impractical unfortunately.

    Prepaid cleaning fee for move out. They get it back if they clean themselves. I know sounds too much like a deposit.

    I think there is potential here.  I know some places have a "move in fee" in lieu of a security deposit.  The challenge is presenting this in a way that complies.  They use "secret shoppers" in my neck of the woods.

    Just brainstorming here.

    I really appreciate it, John.  I'm beside myself at this point.  Perhaps I can convince my wife to take a job in SC.  ;)

    0Reply
  • Jennifer T.Pro Member
    Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes
    7y

    I've never rented in NY.  But, back when I was a tenant, there were a couple places I rented that collected a non-refundable cleaning fee for when I moved out.

    Though...hmmm...come to think of it.  I don't think it was an extra fee.  I think it was just verbiage in the lease that $75 (or whatever) was non-refundable for cleaning and would be taken out of my security deposit, on move-out.

    Maybe an extra non-refundable cleaning fee on top of the security deposit?  But sounds like that might not work either under the new regulations.

    I hear ya, though.  It's pretty landlord-friendly where I live (NOLA) and evictions are swift, when needed.  My rentals tend to be C-Class (safe neighborhoods, but lower middle class), plus I'm in a soft rental market.  It's great to have the leeway to occasionally accept someone who seems good overall, but is lacking in one area.  And I can offer them the place with a first, last, and security.

    But, if those policies changed.  Then, yep.  Politicians just made it that much harder for many people to move or find homes.  Seems like the opposite of what anyone would want.  But people often can't think past their initial first impression and won't go more than skin deep to the true ramifications of bad policies.

    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    7y
    Originally posted by @Wesley W.:

    Originally posted by @John Underwood:

    Rent Lock fee to guarantee no rent increase after first year.

    Pet fee, pet rent.

    Anything labeled as a "fee" and then somehow refunded back has potential.

    First, last and next to last plus deposit.

    Prepay rolling 30 days in advance of when rent is due.

    We cannot collect anything beyond 1 month's security, including any "advances."

    Make rent due on 25th for next month and late on the 1st - gives you more time to react.

    By statute, now late fees cannot be applied until the 5th, and are limited to 5%.

    Require direct deposit, this is a stretch, if they don't have money there is nothing to take out of their account.

    In my neighborhoods, this would be impractical unfortunately.

    Prepaid cleaning fee for move out. They get it back if they clean themselves. I know sounds too much like a deposit.

    I think there is potential here.  I know some places have a "move in fee" in lieu of a security deposit.  The challenge is presenting this in a way that complies.  They use "secret shoppers" in my neck of the woods.

    Just brainstorming here.

    I really appreciate it, John.  I'm beside myself at this point.  Perhaps I can convince my wife to take a job in SC.  ;)

    Maybe switch over to section 8. I have two of these and love them. The government is paying all or most of your rent so you don't have to worry much about getting paid.

    Section 8 pays 110% of market rents in my area.

    0Reply
  • Wesley W.
    OP
    Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
    7y

    @John Underwood in my area (which is undergoing gentrification) the local HA will not pay current market rents, and as I understand it, it is not allowed for landlords to ask the tenant to pay above HUD's "contract amount" for the unit.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    7y

    @Wesley W. right you can't ask tenant to pay more than HUD contract. However in my area the HUD contract is for up to 110% of market rents.

    So my HUD not only pays market rent they pay 10% more than market rents.

    0Reply
  • Allan Szlafrok
    Rental Property Investor · Long Island, NY · Member since 2015 · 490 posts · 301 votes
    7y

    @Wesley W. There are actually a few products that I’m checking out myself. One is called Steady insurance which is a policy you buy in the unit and they guarantee the rent if the tenant doesn’t pay. For security deposits there’s Obligo and Rhino which charge the tenant a small fee in lieu of giving a security deposit and they make you Whole on the deposit would have been if the tenant doesn’t pay. That being said I wouldn’t want to rent an apartment to someone who didn’t have enough money to cover a deposit so I’m offering that program to tenants who pay well for a year. Look into those they are all starting to do big business in NY because of the new laws.

    1Reply
  • Erik W.
    Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    Can you use a Trust / Escrow service?

    Example: Tenant pays a into an account at ABC Trustee Accounts, who holds the money for them "in Trust".  You have not collected anything.  Then the tenant pays you the monthly rent.  The Trust account is set up to be paid to you in event of default on the lease and successful judgment obtained in court, or at the end of tenancy if the tenant leaves owing no money then they receive the full balance back, less any fees for Trust account maintenance.

    If that doesn't work, how about co-signers?  My requirements:

    1) Income minimum of 6x the monthly rent.

    2) Owns real estate in the same state as the rental.

    3) Very good credit.

    I have the co-signer apply and sign the lease just as if they were a tenant, that way there is no additional action to obtain a judgment, and they are responsible for all conditions of the lease, not just the rent.

    Other than that, maybe you switch to lease-optioning so you can collect a couple thousand $$$ option fee, which they would obviously lose if they end up getting evicted and owing you money.

    1Reply
  • Jeff Willis
    CA & NV · Member since 2019 · 215 posts · 378 votes
    7y

    In CA, the rental laws are crap, but we do have a few advantages/techniques, that you might consider.  In CA, we can collect advance rent (see last paragraph below). I ask for a security deposit and advance rent. In your case, look at the NY law on advance rents. If there is no law to prohibit, then ask for it. When they give notice, then they are using the advance rent and you still have the security deposit.

    CA Civil Code 1950.5

    (c) A landlord may not demand or receive security, however denominated, in an amount or value in excess of an amount equal to two months’ rent, in the case of unfurnished residential property, and an amount equal to three months’ rent, in the case of furnished residential property, in addition to any rent for the first month paid on or before initial occupancy.

    This subdivision does not prohibit an advance payment of not less than six months’ rent if the term of the lease is six months or longer.

    0Reply
  • Wesley W.
    OP
    Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
    7y

    @Jeff Willis

    Alas, as I mentioned above - advances are prohibited beyond the one month's security deposit.

    0Reply
  • Jeff Willis
    CA & NV · Member since 2019 · 215 posts · 378 votes
    7y

    @Wesley W.

    I apologize, I read that to mean that you can not collect more that one month's rent as a security deposit or in lieu, the last month's rent. 

    0Reply
  • Marc Winter
    Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    @Wesley W., unfortunately, you are correct:  the rent control, landlord/tenant, and housing registration laws have unintended consequences.  They end up actually raising the prices of existing non-regulated apartments and properties, and have a very chilling effect on investor activity in the subject area.

    Of course, there are cases where some regulation is required for those nasty slum-lord types to prevent kicking out someone in the middle of winter into the deep, freshly-fallen snow, or if they won't fix the hot water for weeks at a time.

    But, IMO, the more government gets their sticky fingers involved in a legitimate business, the worse they make the situation; it is almost never improved.  

    There are three options I can see (forgetting about all the slick workarounds others have mentioned):  1. bite the bullet and submit to the regulations; 2. get involved in the political process to change the laws, OR 3. sell and get out of Dodge.

    That's one of the reasons I no longer own any property in NY.  Oh well. 

    2Reply
  • Anthony Rosa
    Rental Property Investor · New York City · Member since 2019 · 703 posts · 538 votes
    7y

    @Wesley W., considering you are in a C class neighborhood and your hands are tied with regulations why not go section 8.  The risk is already in place and you'd probably get higher rents.

    0Reply
  • Kris L.
    San Antonio, TX · Member since 2019 · 930 posts · 836 votes
    7y

    @Wesley W.

    Hmmm, what if you charged higher rents but gave a significant refund each month for early payment? You could then have a higher deposit? I donno, just trying to be creative

    3Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    7y

    @Wesley W. This is a tough one for sure. Maybe requiring a co-signer for tenants on the fringe of qualifyng?

    0Reply
  • Account Closed
    Rental Property Investor · MN · Member since 2015 · 186 posts · 149 votes
    7y

    Minneapolis is pushing for the same ordinance. In addition to limiting pet deposit, and forcing landlords to accept credit scores as low as 500.

    0Reply
  • Account Closed
    Rental Property Investor · Albany, NY · Member since 2015 · 51 posts · 18 votes
    7y

    @Wesley W. I'm an agent and investor in the Capital Region - lets connect - I sent you a request.

    You could definitely charge a cleaning fee - the way I do it is that security deposit will be returned minus xxx. The xxx is the cleaning fee. Secondly, I don't think it's ever NOT possible to do direct deposit - my rentals are all on electronic payments, it doesn't have to be direct deposit but you can easily convert your tenants into electronic payments. If my tenants need me to collect the rent in cash or check - there is a fee for travel charged to them in addition to administration fee for depositing the check/cash into a bank account. Once the tenants see these fee's - they'll understand and switch over. That being said, you can't just implement this immediately - you'd need it written into your lease and consult a RE Lawyer as well. 

    Lets connect and we can share some more idea.

    0Reply
  • Patti RobertsonBusiness Member
    Property Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes
    7y

    Can you change the rent due date so that Jan rent is due on Dec 1, Feb rent is due Jan 1, etc?  You wouldn’t be collecting rent up front, because your contract would identify a due date. Just thinking this will allow you to always be 30 days ahead of a problem, which gives you the same protection as a double deposit.

    757-472-2547
    1Reply
  • Wesley W.
    OP
    Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
    7y

    @Patti Robertson  I like your creativity!  I'm not optimistic, but I'll ask my attorney.

    Unfortunately, the process for an eviction has been lengthened substantially, so another month won't be a total solution, but again....I like the thought.  Thanks!

    0Reply
  • Josh R.
    Rental Property Investor · Wake Forest, NC · Member since 2016 · 106 posts · 148 votes
    7y

    @Wesley W.

    I too use a Rate lock fee for first 2 years. This is non refundable. Make it 100$ less than first months rent. It will cover 1 month of vacancy so you can find another tenant quickly. Make sure this is in your lease as well and make sure the tenant knows they are not getting it back. This avoids the whole mess around security deposits and the legal aspects of it.

    I do this on all of mine and it has worked fantastic and tenants love it.

    Also use only month to month leases on C to C+ properties. Easier to evict. Less headache in the long run as well as time and money. Offer cash for keys first before you ever try to evict anyways especially on these types of properties.

    Hope that helps! :)

    0Reply
  • Patti RobertsonBusiness Member
    Property Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes
    7y

    @Wesley W. - One month was just an example.  If the strategy works, why couldn't you say March rent is due January 1, April rent is due Feb 1, etc.  Were you able to run it by your attorney yet?  Just wondering if this would work.

    757-472-2547
    0Reply
  • Wesley W.
    OP
    Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
    7y
    Originally posted by @Patti Robertson:

    @Wesley W. - One month was just an example.  If the strategy works, why couldn't you say March rent is due January 1, April rent is due Feb 1, etc.  Were you able to run it by your attorney yet?  Just wondering if this would work.

     I did ask my attorney and this would be considered an advanced  and any form of an advance is now disallowed under the new law.

    0Reply
  • Account Closed
    Rental Property Investor · Central, FL · Member since 2016 · 950 posts · 821 votes
    7y

    I would do a discount for early rent, say 100 dollars if paid before the 1st and then add your late fees as allowed by law. 

    So You normally could rent it for 1,000, you actually charge them 1,100, with a 100 dollar discount if paid before the 1st, then on the 5th you can charge the late fee.  

    That would allow for a actual late fee of 55 dollars plus the “discount” of 100, so if they pay late they have a bigger amount owed to offset for when they try the well my security deposit is my last months rent. 

    So you’d be able to charge 1,100 in a security deposit since that is what 1 months rent is.  I know it’s only 100 extra dollars but it’s something.   

    I’d also charge pet rent monthly, nonrefundable pet fees, service call fees, and any other thing to offset the fact you can’t collect a first, last, and  security deposit up front. 

    1Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    So the housing authority won't pay market value for rent, won't let the tenant pay the difference between what they (HA) will pay and market rent and won't let you collect last month's rent in advance...what is their rationale for anyone wanting to rent to their clients????  At a minimum, they need to pay market value for the rent.  If you advertize at market value, then you won't ever be renting to any of their clients as you can state the rental price is firm.

    0Reply
  • Wesley W.
    OP
    Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
    7y
    Originally posted by @Bella Walsh:

    If you're not already, make sure you're running a comprehensive credit and background check. I use https://www.myrental.com/ to run all of my checks and I take advantage of their Tenant Score system to see how landlords in my area have handled people with similar credit/backgrounds. It's a not a surefire solution given that you want to focus on "C-Class" renters, but it helps me weed out a lot of the bad apples right from the start.

    Other than that, like other people are saying, there are things you can do to raise your capital reserves, like pet fee/pet rent and requiring direct deposit. 

     It is now against the law in NY to run an eviction background check on an applicant and use it to decline their application.

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