Landlords have $45 billion of our personal savings held hostage. Here’s how we get it all back.
It’s a process all too familiar. You finally find an affordable apartment to rent, and then right before you move in, the landlord demands that you cough up a security deposit, forcing you to find another full month’s rent in cash that will be held hostage for the duration of the lease. Even if you’re lucky enough to get it all back when you move out, you’ll likely be forced to hand it over to your next landlord — keeping these savings locked away indefinitely. Thanks to this frustrating cycle, more than 110 million Americans now have roughly $45 billion worth savings trapped in security deposits.
The impact of this lost capital cannot be overstated. With rising student debt, higher rent costs, and growing credit card debt, more than 40% of Americans can no longer afford a $400 emergency expense. And given a median national rent of just under $1,000/month, a one-month security deposit can be a huge financial strain. The problem is even worse in cities like New York and San Francisco where rent is higher and the average security deposits are therefore 3–4x more.
But it doesn’t have to be this way.
Security deposits were originally created to help protect landlords from bad tenants. Landlords would hold onto extra capital to cover losses if the tenant damaged the unit or missed rent. But as rents have increased over the decades, security deposits have become an even greater portion of a person’s total life savings. The increased financial barrier has gotten to the point where many everyday people are now being priced out of renting or are being forced to take out loans, often predatory, just to cover the entry cost. Because of the fear of a few bad actors, we’re penalizing countless Americans from being able to access the most important rental market in the country: housing.
Imagine, for a moment, if other industries worked the way housing does. How would you respond if when renting a car for a day, they asked you to put down a $5,000 cash deposit in case of damages? No one would do it. You would probably just find an alternative way to get around. Unfortunately, when it comes to housing, there are no other options.
With services like car rentals, the problem was solved by offering renters the option to provide insurance instead. Rather than giving up your life savings to use the vehicle, you have the choice to pay a small fee that insures the owner against any damages. You save money and the owner is still protected. It’s a win-win.
By simply requiring that landlords offer alternatives to security deposits, we can return billions back to our communities and make the housing market more accessible. Our elected officials can end this outdated process by passing simple regulation that gives every home renter the choice between traditional deposits or insurance. Overnight, it would bring the entry costs of housing down by as much as 50% (‘first month’s rent + security deposit’ now just becomes ‘first month’s rent’). It would unlock $45 billion in capital that every day Americans could then reinvest into the local economy, use to pay off debt, or save for unexpected emergencies.
Of course, for this to ever pass legislation, landlords will have to benefit as much as tenants do from offering security deposit alternatives. Already, some of the largest property owners in the country are finding this to be the case and have voluntarily made insurance options the default alternative to traditional deposits. Removing the burden of upfront costs and listing units as “Deposit-Free” is helping them fill vacancies and close lease renewals at a faster rate. And because they are now paid out directly by insurance for any claims, property owners no longer need to worry about tenant disputes or going to court over a deposit. The key to any regulation being a win-win will be making sure insurance policies are required to pay property owners for any claims reliably within 48 hours so that landlords aren’t worried about footing the bill for damages.
New York City is about to be the first city to introduce legislation that can tackle this crisis. And hopefully that will lead to sweeping national change. Nobody is benefitting from the antiquated system of security deposits. It’s time we free this capital and give it back to the people who need it most.
