California will become the latest state to impose limits on security deposits—a proposition that has rental housing operators seeking alternative protections and revenue sources in a market that already features widespread rent control.
Assembly Bill 12, recently signed by Gov. Gavin Newsom, becomes law July 1, 2024, making California the latest state to limit security deposits to one month’s rent. The bill will change the existing law, which allows operators to charge two months’ rent as a security deposit for unfurnished homes and three months’ rent for furnished properties. Instead, the new law limits operators to a maximum of one month's deposit, regardless of whether the property is furnished.
The bill gained support in the face of rising housing costs. Housing accessibility advocates touted it as an opportunity to level the playing field for renters who have a steady income but lack the available funds for a sizable deposit. Opponents of the bill pointed to the restrictions it imposes on owners trying to protect their assets against physical damage and unpaid rent. Housing management companies contend the bill unintentionally escalates rental costs because owners will need to find a new way to mitigate the financial risk.
“One month's rent at some properties is a drop in the bucket in terms of the expenses that can be incurred when a resident moves out,” says Kevin Hott, vice president of information systems and technology for E&S Ring Management. “When you look at the length of time it takes the local governments to process evictions—between filing with an attorney, the court process, and scheduling a lockout with the sheriff’s department—it’s easily 60 to 90 days. That's a minimum of three months’ lost rent. The owner is already out $10,000 in rent, plus whatever damage was done to the unit.”
Hott says the result of the legislation could be a reduction in amenities at rental properties, higher rents, or what he calls an overall “cheapening of the product” in the multifamily industry to offset the impact of reduced deposit requirements. He says the legislation has already slowed housing development in California and spurred multifamily companies to look out of state for potential acquisitions.
Companies like E&S Ring, however, have turned to deposit replacements like lease insurance to help bolster asset protections and prevent net operating income loss. Lease insurance replaces traditional security deposits with a monthly policy fee paid by the resident and is customizable by property.
“We’re up to about 50% of our leases on lease insurance, and we’re working to increase that figure,” explains Hott. “We’re offering it on new leases, and also offering to refund security deposits upon lease renewal so existing residents can sign up for lease insurance. It’s better protection on our end and less of a financial burden for residents.”
Deposit replacements like lease insurance don’t require upfront deposits whatsoever. The reframed model expands housing options for many renters—beyond the impact of the new legislation—as well as applicant pools for operators, by eliminating a longstanding financial barrier.
“Accessibility has become a real issue for renters, and a lot of it stems from the security deposit requirement,” says Theresa Eastwood Davis, president of Richman Property Services, which operates both affordable and market-rate communities. “Deposits are designed to protect property owners but often can pose an obstacle for renters, create tension between residents and property teams, and generally fail to provide adequate risk mitigation. Setting deposit limits may help renters to a degree, but deposit replacements and alternatives go further and offer greater benefits and flexibility to renters and owners alike. If we’re serious about making housing more attainable, we need to look outside the box.”
Flexibility is the focus for industry insiders looking to reform the security deposit model. Rather than tweaking an outdated system through legislation, introducing options at the point of leasing may change the equation.
“Security deposits have been a part of rental housing for generations, but they have outlived their efficacy,” says LeaseLock president Ed Wolff. “They no longer meet the needs and lifestyles of today’s renter. Modern renters want options, they want convenience, and they are comfortable with the subscription- or fee-based structure of deposit alternatives. There may be some renters who prefer traditional deposits, but building legislation around security deposits only perpetuates the problem for everyone involved. There is power in choice and flexibility, and we should be focused on meeting renters’ needs without unnecessarily exposing owner/operators.”
Hott says forcing the hand of rental housing operators isn’t the answer, and neither is forcing renters into security deposits.
“We need to have options available, at lease signing and renewal, that function in the interests of both renters and operators,” Hott says. “Security deposits, in any form, don’t serve anyone. The rental housing industry needs to look at deposit replacements, look at the structure of rental contracts, and find ways to make renting a home both affordable and manageable.”