Security Deposits vs. Damage Protection: What’s Right for Your Rental?

One of the biggest fears and concerns of new vacation rental businesses is that guests will trash their place, and they’ll end up with their very own Airbnb horror story.

Luckily, there are different ways owners can protect their properties and avoid this kind of situation.

For some vacation rental owners, charging a security damage deposit is the best option. By collecting a refundable payment up front in this way, owners have a pot they can dip into and deduct funds from, should any damage be caused at the property.

Other hosts prefer to charge guests for damage protection insurance. This is usually a smaller, non-refundable fee that adds another level of protection to the property. In case of rental damage, the owner would have to go through the insurance company to receive suitable compensation.

There are plenty of things to bear in mind when deciding whether security deposits or damage protection insurance are right for your business. We’ve done the hard work for you, and come up with these lists of pros and cons:

Pros of security deposits

Helps guests feel responsible for the property

There’s something about handing over an extra sum of their hard-earned money that suddenly gives guests a greater sense of responsibility for the property. While you’ll have probably screened your incoming guests already, security deposits tend to deter any unsuitable renters who are likely to cause damage.

When totaling up the cost of their vacation, plus the refundable deposit, the amount guests are subject to losing suddenly becomes very real. For responsible renters, this won’t be an issue because they know they’ll hand back the keys to a perfect property, left exactly as they found it. However, a large security deposit can also act as a reminder to guests to behave correctly if they don’t want to lose out when it comes to check-out.

Hosts can set the deposit amount

The fact that owners and managers can choose the amount they charge for the security deposit is one of the biggest advantages from a business point of view. In some circumstances, you will want to charge extra as your property might be more vulnerable to damage (i.e. in the case that it’s pet-friendly). This flexibility makes collecting security deposits a real benefit for worried owners.

Hosts collect payment upfront

The nature of collecting security deposit payments means that hosts will have a backup plan in place – in case something does go wrong. Taking this payment upfront allows hosts to deduct from it if any repairs, replacements or extensive cleaning have to be carried out.

Cons of security deposits

Guests are hesitant to pay

One of the biggest disadvantages of demanding large security deposits is that it can actually deter some guests from choosing your home. It can be a scary thought – having to hand over so much extra money to the host – without any real benefit for themselves.

Can create more work for owners

As some countries and even cities have very specific rules and legislations regarding short-term rentals, it could be that imposing a security deposit will create even more work for owners and hosts in the long-term. For example, there may be specific timelines that owners have to adhere to (e.g. when it comes to claiming against the damage deposit) or specific entities where the amount must be deposited and so on.

Owners and guests may disagree on deductions

Anyone who has rented a property – whether long or short-term – and had something deducted from the deposit will understand: it’s often the owner’s word against the guest’s. This can lead to big disputes and disagreements regarding what’s fair to deduct from the security deposit amount, making the experience bitter for the guest and possibly causing them to leave a negative review.

Pros of damage protection

Less hassle for more coverage

Besides the short-term rental approved home insurance you’ll already have in place, offering extra damage protection to guests is a great and simple way to cover your property in case of accidents. It’s hassle-free as there are no refunds involved – guests just pay a small non-refundable extra fee on top of their rental amount.

75% of guests prefer it

According to research by home-sharing platform, HomeAway, more than three quarters of guests prefer to pay the small additional fee, instead of a large refundable deposit. This could be due to some of the cons mentioned in the deposit section. For example, they’re simply scared to hand over so much extra money, or they are worried about disputes upon check-out.

Plenty of services to choose from

With the growth of the sharing economy in recent years, we’ve also seen a huge growth of different service providers who can facilitate services such as damage protection insurance for vacation rentals. This means it’s becoming increasingly easier to offer this to your guests, instead of the traditional security deposit option.

Cons of damage protection

Not everything is covered

One of the biggest downsides to damage protection insurance is that often, it doesn’t include absolutely everything you might need it to. For example, extra guests, smoking inside the property, pets, loss of rental during repairs, or excessive cleaning fees. Additionally, while some plans may cover replacement costs to any damaged rooms, furniture or electronics, they may not include labor costs for these reparations.

Difference in guest attitudes

Compared with security deposits and having to leave a large sum and assume the responsibility of the property, damage protection can sometimes encourage a different type of guest attitude. As they know they have insurance in place which will “cover any damages” and they won’t come out of their pocket, guests may be more reckless when it comes to caring for the property.

Can be time-consuming in the long run

In case damage occurs, having to go down the insurance company route can add a whole lot of extra time onto the process. Not only do you have to file the complaint and wait to hear back, you’ll then need to schedule the maintenance and repairs teams, replace any damaged furniture and so on – which could leave your property unfit for renting for weeks on end.

Each vacation rental business will have their own preferred method of protecting their property from damage. What would you recommend new owners to implement – security deposits or damage protection? Why?

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Show Comments (3)
  1. Great article. One CON for Deposit that you missed is that unless deposit is cash [difficult to deal with] rather than easier PayPal /creditcard, is that guest can always dispute what you withheld with credit card company. Even if you have solid evidence [like Paypal agreeing] the credit card company will usually side with guest. So you are out the damage cost – I speak from painful experience.

    1. Ralph, you are absolutely correct! We have had two guests do that to us after they trashed our home, and damaged high-end finishes with unauthorized animals that they brought with them. What we have learned is that if you refund part of the deposit (even $1.00 out of $1,500), it is much more difficult for the person to argue to credit card company that they did not authorize that charge! So, always refund a small amount of the deposit because you will have a higher chance of retaining the rest. Good luck with your future rentals!

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