Guide to security and damage deposits for short-term rental hosts

Security/damage deposits can offer short-term rental (STR) hosts peace of mind in the unlikely event that guests cause real damage beyond normal wear and tear to their vacation properties. While most STR guests are used to paying security deposits, having the right processes in place can make them less of a burden for your guests and easier to deal with for you. Here are 10 tips.

1. Make sure you’re charging the right amount.

When determining how much to collect for a security deposit, you’ll want to charge enough to a) provide guests incentive to avoid damaging your home and to b) cover the cost of damages that might occur — without making the amount so high that it will deter renters from choosing your property.

Many hosts use $250 or $500 as standard security deposit amounts, although another option is to charge 10% of the rental price, particularly if the rental cost is on the higher end. It can help to take a look at similar properties to see what they’re charging for security deposits so you can stay competitive.

2. Know the law in your area.

Local laws on security deposits may specify renters’ rights, how security deposits can be used, how long they may be held, or even where they must be held (i.e., in a separate bank account). Be sure to familiarize yourself with the local laws that apply to your property.

3. Find a collection/refund system that will work for you.

There are a few options for collecting and refunding short-term rental security deposits, with varying pros and cons for you and your guests. While requiring a security deposit via check may be more common for long-term renters, for short-term rentals, it’s usually more convenient to either charge the full amount of the deposit via the same method used for booking the rental (typically a credit card or bank account debit) or to preauthorize the amount of the deposit on a credit card. Specialized software can help you collect, process, and refund security and damage deposits.

It’s helpful to list the security deposit as a separate line item in the rental bill so guests know exactly how much they’re being charged. If the security deposit amount is actually charged at the time of booking, it will be refunded if there are no damages. If preauthorization is used, the amount will only be charged if damage occurs; otherwise, the hold will be released.

Keep in mind that Airbnb requires hosts to process security deposits via its booking system; collecting security deposits from guests outside of Airbnb is a violation of its terms of service. Within the Airbnb system, guests are not charged for the security deposit unless the host makes a claim for damages.

At Vrbo, hosts have three options for damage deposits: using a card on file, charging an upfront refundable damage deposit, or requiring guests to purchase property damage protection to cover potential damage and/or incidentals at the property.

4. Be clear about when the deposit is due and process it quickly.

If you don’t manage security deposits through your marketplace booking system, make a clear request to your guest for payment of the security deposit and give a deadline to complete the payment. Once the guest’s part is complete, process the payment quickly to avoid any problems such as returned checks.

5. Make house rules and damage policies clear.

Always let your guest know what is and what is not acceptable behavior on your property, and what will be grounds for keeping a security deposit. Normal “wear and tear,” such as breaking a glass or other minor accidents, isn’t grounds for dipping into the security deposit. Be specific about what sorts of damage will result in your guests losing part or all of the security deposit. This gives you more solid legal ground and warns guests about the consequences of certain kinds of damage.

6. Refund your deposit quickly.

Your property should be inspected for damage as soon as your guests leave. If you’re not on-site, your cleaning staff should be trained in what to look for in terms of major damage. If there’s no damage, return the security deposit as soon as possible. Many states require that you return the deposit within a specified period of time, ranging from 14 to 45 days. Returning it quickly also goes a long way toward cultivating goodwill with your guest and encouraging positive reviews and repeat visits. Keeping the deposit longer than necessary, on the other hand, is a sure way to sour a good relationship.

7. If you must keep the deposit, keep careful records.

If major damage has occurred, it’s crucial for you to document it in case there’s any dispute. Take photos of the damage and keep receipts for costs you incur to fix it. Generally, you’re only allowed to keep the amount of money it costs to make repairs or buy replacements, so if the amount to fix the problem is less than the security deposit, the guest would get some of the deposit back.

8. Be aware of the tax ramifications of security deposits.

Typically, any short-term rental charges that are mandatory, including the room rate and required cleaning fees, are subject to lodging tax. On the other hand, refundable fees, such as security deposits, most often are not subject to lodging taxes. But it all depends on the specific regulations in your area, so get to know your local lodging tax rules.

9. Don’t skip short-term rental insurance.

While charging a security deposit can offer you an extra layer of protection, you still need to have property insurance. Check that your policy specifically covers short-term rental properties — or you may find that claims on damage caused by guests won’t be covered.

10. Give and take.

A security/damage deposit can offer some assurance when you’re letting strangers stay in your home. But it’s key to handle security deposits in the spirit of hospitality. The security deposit process should be simple and fair so it can protect you without detracting from the experience of your guests.