A growing number of legislators are trying to eliminate a practice that has prevented many lower- and middle-income people from renting an apartment: the steep, all-cash security deposit.
With low-cost housing hard to come by in many states, state and city lawmakers are introducing bills that would give younger renters and others strapped for cash the choice to replace security deposits with insurance policies or installment plans paid overtime. These payments are usually equivalent to one or two months’ rent, which landlords require as a guarantee against damages.
Cincinnati on Wednesday became the first U.S. city to require that landlords accept alternatives to a cash deposit, including payment plans and insurance.
New York state lawmakers recently passed a measure limiting deposits to no more than one month’s rent. A member of the Virginia House of Delegates submitted a bill to give tenants options for how they pay deposits last week. Legislators in Connecticut, Alabama and New Hampshire say they plan to introduce similar bills.
Laws to ease costs associated with security deposits are part of a growing effort by lawmakers in a number of states to address the shortage of affordable housing and rapidly rising rents. Over the past year, California, New York and Oregon have introduced new limits on rent, while others have enhanced protections against evictions.
Average rents rose 36% nationally over the past decade, though rents rose more than twice that amount in hot markets such as Denver and Seattle, according to data provider Yardi Matrix. About a quarter of American renters pay 50% or more of their income in rent, according to listings platform Apartment List.
Many landlords are already pushing back against the security-deposit legislation. They say collecting all-cash security deposits at move-in is necessary to protect their assets and make sure a tenant doesn’t skip out without paying the last month’s rent.
Lawmakers sponsoring the bills say many renters can be effectively priced out of a market—even if they can afford the monthly rent—if they are unable to produce these large cash deposits.
Renters often use savings to pay a one-time deposit on top of the first month’s rent, but survey data suggests it could be a stretch for many Americans. The typical middle-income household has only $3,000 in liquid assets, according to a recent analysis of bank accounts and transactions by the JPMorgan Chase Institute.
“For a significant number of people living in Cincinnati, a security deposit for a two-bedroom would equal or exceed the totality of their savings,” said Cincinnati City Councilman P.G. Sittenfeld, sponsor of Cincinnati’s new deposit law. “To put down $1,000 up front, that’s a significant expense for some people.”
Proponents also say the new deposit rules could free up billions of dollars to help stimulate local economies.
“We’ve been looking for any and all options to allow our workforce families to continue to live here,” said Ryan Cooperton, a district supervisor in Santa Cruz County, Calif., who supports deposit legislation. “If you can get a couple thousand dollars in people’s pockets, that can make a big difference.”
Some landlords already allow tenants to use insurance instead of a security deposit. In the most common arrangements, a renter pays a small, nonrefundable monthly fee or a one-time payment to a third-party company. That company then strikes a deal with the landlord to take responsibility for certain damages or claims at the end of a lease.
Sarabeth Flowers Lewis, a 27-year-old freelance copywriter in Austin, used a company called Jetty, which charged her and her husband 17.5% of one month’s rent to take on the responsibility for the deposit, when she moved to a new apartment with a home office this month.
“I’m waiting for our security deposit from our last place. I have to manage that. I have to worry about it. And it’s not like I’m guaranteed to get that money back anyway,” Ms. Lewis said.
Still, these alternatives also have a downside. They could create a net loss for tenants who might otherwise receive their entire deposit back at the end of a lease. Some cover the move-in cost, but if the landlord later wants to make claims for damages, that charge is the tenant’s responsibility.
To address some of these concerns, the Cincinnati bill requires that insurance providers be approved by the state, offer monthly premiums and provide coverage for the entire lease term.
Landlords also say that insurance plans would likely leave them fighting with these companies for claims, when they would previously have the tenant’s deposit already in hand.
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“Now I’m in a whole different realm,” said Charles Tassell, chief operating officer of the National Real Estate Investors Association. “I’ve got to deal with an insurance claim and get my attorneys involved. And they’ve got their high-priced attorneys in-house.”
Cincinnati’s bill included a compromise, allowing landlords to offer installment plans of at least six months to tenants, instead of just insurance plans.
Ankur Jain, co-founder of the company Rhino, sells deposit alternatives that he said cost renters an average of $5 a month on a $1,000 cash deposit. Mr. Jain estimates that the new Cincinnati law could return as much as $100 million that would otherwise be locked up in deposits back to the city’s tenants.
“Giving renters more options for how to save money and how to choose to manage their finances I think is a huge win,” Mr. Jain said.
Write to Will Parker at will.parker@wsj.com
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