How To Guarantee A Rental Deposit (Even If Your Tenant Can’t Afford It)
There’s no bigger headache in property investing.
Finding the right tenant can sometimes feel like a nightmare!
And there are so many moving parts that can affect that too.
The wrong people coming through and showing an interest…
Worse yet, no people coming through at all…
Or what about that perfect tenant that Um’s and Ah’s and hesitates because of your substantial deposit?
Well you’re in luck, because I’ve found a tool that takes the hassle out of securing a dream tenant!
With this tool you can guarantee your deposit, even if your tenant can’t afford to pay it.
In fact, better yet, with the tool I’m about to reveal you can secure your dream tenant without them ever having to actually pay a deposit, all while you still get one!
How on earth does this work?
Let me show you…
How to Always Get Paid As A Landlord
First things first – Why is a deposit so important in buy-to-let investing?
Naturally, finding a reliable and trustworthy tenant is crucial when you’re renting your property out.
Once you’ve found the perfect candidate, the very next step and one of the most important aspects is securing a deposit.
A deposit forms a vital part of a tenancy agreement.
It covers you, as the landlord, for a number of things, including:
- Damage a tenant may make to your property whilst in residence
- A tenant missing rent payments
- And missing items from your property once a tenant moves out
Ultimately, the amount you decide to ask for in terms of a deposit is up to you.
Yet, a deposit generally amounts to anything from one month to two or three months’ rent.
Renting out a property without asking for a deposit is risky.
So, what if you find the perfect tenant, but they just don’t have the deposit you’re looking for?
You may think you’ll have to start searching for a new tenant again, but consider this viable option first…
Introducing Deposit Guarantee Insurance
This form of insurance is a practical alternative to asking a prospective tenant to pay over a deposit in a lump sum.
Instead of doing this, your tenant can opt to pay a small monthly premium to an insurance company.
This way, it doesn’t matter if your tenant has the cash to pay for a deposit upfront or not.
So what exactly is deposit guarantee insurance?
This form of insurance covers the landlord for up to three months’ rent as a deposit.
How many months’ rent the deposit equates to is dependent on the insurer.
It also covers damage a tenant may cause, and cover outstanding utility bills.
The tenant pays the insurer your premium for the insurance.
How This Nifty Profit Tool Actually Works
Let’s say the insurer covers you for three months’ rent for your deposit.
Some insurer’s charge more for the first month’s premium, equating to 35% of a month’s rent. Thereafter the premium drops to a little 1% of a month’s rent.
The insurer may also charge administration fees so ensure that you state that is payable by the tenant in your tenancy agreement.
This makes sure that you’re not out of pocket with such an arrangement.
The Pros Of Deposit Guarantee Insurance
There are a number of benefits to both you and the tenant with this arrangement over a traditional deposit…
For The Landlord
The insurance covers you for damage to your property, rent arrears, outstanding utility bills and legal costs.
You may also find a policy covers eviction costs.
The tenant pays the premium, so you’re not out of pocket.
The insurance company deals with any claims.
You widen the pool of prospective tenants for your property.
It also means that you have less admin on your side. Taking a deposit from tenants has legal obligations on your side.
You have to have a separate interest bearing savings account to deposit it into.
Plus, a tenant is well within their rights to ask you for a statement of this account.
This form of insurance removes this extra work for you.
You have the peace of mind that you’re covered with little work once you decide on which insurance company to go with.
For The Tenant
They have the protection of a third party being involved in the agreement.
For example, it would avoid a difficult landlord holding onto a deposit unnecessarily once they’d moved out of the property.
They don’t have to fork out a large amount of money to cover the deposit.
The deposit is secure.
It makes it easier to move into another property in the future.
Plus, the insurance company may pay back a portion of the premiums, if there are no claims made, to the tenant. So it rewards them for being a good tenant.
The Cons of Deposit Guarantee Insurance
But there are some drawbacks to consider before going this route…
There could be a strict limit on arrears.
For instance, you may find that the insurer will only cover you for one month’s rent, but if you shop around you should find insurers covering up to three months.
Secondly, you have to be able to prove implicitly any damage, arrears, etc.
In the event of a claim, you may have laborious dealings with the insurer to prove your case.
One neat trick I've found that works wonders is to take a few pictures of the empty unit before the tenant moves in (that way you now have physical proof of the state the unit was in before the tenant arrived).
How To Include This In Your Tenant Agreement
If you’re considering deposit guarantee insurance, of course, you will have to include it in your tenancy agreement.
It’s a good idea to offer both options, a traditional deposit and deposit guarantee insurance, to prospective tenants.
Depending on which option they go with, you must include this in the tenancy agreement.
If a tenant opts for deposit guarantee insurance, you can use the insurance contract as part of your tenancy agreement.
If you’re unsure, make sure you get a lawyer to look over your contract before you get a tenant to sign.
Who Offers This Tool?
In South Africa, there are a few companies offering deposit guarantee insurance.
Two you can check out are:
The important thing here is to ensure that the insurer you go with is an authorised financial services provider.
How To Guarantee Your Deposit, And Peace of Mind As A Buy-To-Let Investor
As you can see, the benefits of this insurance definitely outweigh the disadvantages.
So how can you find the best cover for you?
Look at all the different options and find the one offering the best benefits for you.
It’s important that you’re happy before you commit to such an agreement.
Ensure the insurance company you opt for has a good reputation and excellent customer service.
Unfortunately, it’s only when you need to make a claim that you’ll find this out for yourself.
Look at how long an insurance company is likely to take to pay out a claim.
If you have friends or family who also let out property they own, have a chat with them. If they use this form of insurance, they may have a recommendation for you.
And, if you have several properties you let out, this will save you a lot of time and worry.
Until then, here’s to profitable property investing.
The Money Lab