Deposit protection is one of those double-edged swords in the property rental business.
For the tenant, it represents a significant upfront cost in addition to paying rent, typically a month in advance, they usually pay a deposit of typically four-eight weeks rent. Thus, a payment equivalent of up to three month’s rent could be required. Therefore, it is a hefty up-front outlay for sure.
For the landlord, it is intended to protect against damage to the property, cleaning, unpaid bills and even unpaid rent...so it is a form of insurance if you like. Given how long it can take to evict a tenant, a deposit can be quickly eroded when rent goes unpaid and should this situation arise then damage and a dirty property often go in tandem.
This feature highlights some research by the National Landlords Association (NLA) that some 28% of landlords had their property damaged by tenants in the past 12 months and so this supports the need to seek some sort of protection for damage alone, ignoring unpaid rent.
Looking after a tenant's deposit is also a legal requirement with strict compliance standards. The deposit must be protected by a Government approved scheme, of which there are three and Prescribed Information relating to the deposit has to be issued in a certain format within 30 days, otherwise some serious consequences can arise - such as a fine of up to 3 times the deposit...ouch!
Removing the deposit also removes the deposit compliance requirement but equally increases the risk to the landlord. However, by doing so, it also potentially attracts the wrong type of tenant as well.
Is there another alternative? Perhaps yes there is...some kind of substitute cover, a deposit warranty for example like this one: http://www.thewarrantyhub.com/index.html This is a warranty or insurance cover and so costs less than the equivalent deposit it replaces. I don’t have personal experience with this option at the time of writing.
Another option would be to self-insure, which should only be considered by experienced, larger landlords that can effectively spread the risk around, which is equivalent to what an insurer would do anyway. This latter option may also mean having a fund set aside to cover rent arrears and damage at the end of a tenancy for one or two tenancies at any given time, depending on how many properties owned. The NLA research would imply protection equivalent to around one week for every four properties at least. In such a case, it is strongly advisable (as always) to undertake adequate reference checks on prospective tenants, as there will not be any financial support available to protect the landlord here. Personally, I would suggest that an admin fee is collected from each new tenant to help build up such a fund. If we normally collect the equivalent of four weeks rent as a deposit, then a fee equivalent to one week per tenancy for every four properties owned would eventually replace this (minus any deductions of course).
There we have it – sadly, property damage does happen and quite regularly, it seems. Deposits are an established mechanism to deal with protecting landlords against this but equally add to the costs for the tenant. A warranty is one deposit replacement option; or a properly funded, self-insurance scheme could work as an effective alternative for multi-property landlords too.