For property managers, the vacation rental security deposit can be both a savior and a dealbreaker.
When collecting a security deposit, you have to find the balance between asking for the right amount to cover the guest damage and not deterring them from making a reservation.
It’s a fine line. Not collecting a vacation rental deposit at all leaves you open to huge amounts of risk and is something we would advise against. At the same time, you should ask for a vacation rental reservation deposit carefully, explaining your intentions to renters.
Below we’ll explain how to collect a vacation rental security deposit without losing your guests.
What is a vacation rental security deposit?
A vacation rental security deposit is usually a fully refundable agreed amount set by you, that guests pay to cover the costs of any damages they may cause during their bookings, such as breakages, missing items, and other incurred costs, like excessive cleaning fees.
If there is no damage after check-out, the deposit is returned to the guest in full. If the damage has been caused or additional cleaning is required, then the cost of those repairs or services is deducted from the deposit. You use the deposit to cover the expenses before returning the rest of the amount to the guest.
Types of damages and when vacation rental damage deposits can cover them
Now that we’ve clarified what is a damage deposit, let’s talk about the types of damage you may face. Unfortunately, most damages are unavoidable if you rent out, especially short-term. Accept that no stranger will care about your flat or house as much as you do, and that’s okay.
But forewarned is forearmed. So here are the main damage types to brace yourself for:
Wear and tear
As people live on your property, minor damage is sure to happen. They may scratch your kitchen table, break a plate, or stain the walls. You typically won’t use vacation rental damage deposits to cover such damage, as it’s a normal part of property rental. Some local regulations even prohibit using a vacation rental reservation deposit in such cases.
What can you do then? The first option is to include wear and tear expenses in your rates after calculating how much you need to avoid financial loss. The second option is gathering a damage waiver by Superhog. It’s non-refundable, covers small damage, and allows you to accumulate an emergency fund for fixing the damage in the long term.
Take a look at the top 30 must-have Airbnb amenities to get some inspiration.
Occasional damage
This type of damage is harsher than wear and tear and happens less often. These are the cases when the property requires deep cleaning or some items are broken and need replacement.
Occasional damage is when you usually would need to withhold a part of the security deposit for short-term rental and have the talk with your guests. Chances are they won’t be pleased with paying for the damage and may leave a negative review. But sometimes, you must make people pay for what they’ve done if you want to keep making money in the rental business.
Intentional severe damage
This category of damage is a true nightmare for property owners. It may never happen if you are lucky enough, but if not, expect broken furniture, missing stuff, and other expensive damage.
A story like this has happened to Lori Silvers:
“My tenant damaged my rental property and skipped out on the rent. Now she owes me two months’ rent for not giving me notice she was leaving. Someone in the house kicked in two doors, the closet doors are missing, she took the refrigerator, left the oven filthy, left the backyard and shed full of her belongings, including a trampoline, left large nail holes in the walls, along with about 200+ stickers on the kid’s wall, 100 + Command Strips on the walls, two deep fryers full of grease, left two mattresses and a box spring, took a light globe. Left a rusty dryer, a washer, and a non-working ceiling fan. She left no forwarding address.”
In such cases, you should not doubt whether to withhold the deposit, but make sure the damage is the guest’s fault. Regularly take pictures of your property or pricey items. You may ask the cleaning staff to send photo reports each time after cleaning your property. This way, you will have the proof to justify the use of the deposit.
But note that with severe damage, a refundable damage deposit may not cover the full expenses. Yet, it is at least something to reduce financial losses.
Learn more about top 10 guest damages from a resolution advisor.
The pros and cons of a vacation rental security deposit
Many property managers charge a deposit to help protect their homeowners and the properties they manage. However, there are plenty of pros and cons that come with collecting a security deposit:
The pros of taking a security deposit
- It’s one way to ensure that as the property manager, you aren’t financially responsible for any damage caused by any guests. If you don’t collect one at all, it will be very hard for you to get a guest to cough up the sum needed, and you’ll have to dig deep into your own pockets.
- If a guest does cause damage and the amount is covered by the security deposit you’ve collected from the guest, you have instant access to the funds and are therefore able to resolve the issue quickly. Learn how to prevent guest damage in vacation rentals.
- Relying only on insurance or a platform’s (OTA) damage reimbursement scheme (if they have one…) can be time-consuming, with payouts taking weeks/months (or longer!) and will negatively affect your business by preventing you from taking bookings until the issue is resolved.
- When there is the risk that a guest could lose their deposit, it gives them a greater sense of responsibility and respect for the property, making them think twice about their behavior.
- Unfortunately, 1 in 20 guests admit they treat a rental with less respect than their own property, and 1 in 10 guests have caused damage of $200 or more, so having the funds in place to account for that one guest is crucial.
- Like guest screening, vacation rental security deposits are a great deterrent to guests who might have a hidden agenda for renting your property – e.g. to throw a massive party.
The cons of taking a vacation rental security deposit
- Having to hand over extra money and the worry of surprise charges can deter some guests from reserving your properties. Read how to balance security and guest experience.
- It’s often the guest’s word against yours and this can lead to big disputes, bitter guests, and negative reviews.
- Guests can always dispute the charge with their credit card company and request a chargeback. Fraudulent chargebacks are on the rise in the vacation rental industry and are something that property managers need to watch out for. For more information, take a look at our blog post on how to manage and prevent fraudulent guest chargebacks.
- Deposits involve a lot of extra work for you and your team and take up valuable time that could be better spent elsewhere, such as on host acquisition or guest experience.
- If you rely on an OTA/Platform (like Airbnb or Vrbo etc.) to collect a damage deposit and then reimburse you in the event of damage, this can be a long and painful process.
Are there any alternatives to vacation rental security deposit?
What if you know that your guests won’t agree to submit a vacation rental security deposit? Then we have good news. There’s still a way to secure yourself spending a big buck on damages.
A damage waiver fee is a small amount that hosts charge guests for short-term rentals. This fee shields guests from bearing the full cost of any damages that happen during their stay.
For example, instead of collecting a $500 deposit, you may choose to collect a $35 damage waiver. The benefit of collecting a damage waiver over a deposit is that you never run out of money. You also remove the friction from collecting a security deposit, improving the guest experience.
Because the damage waiver fee is substantially less than the deposit amount, guests are more comfortable purchasing it and it gives you that extra peace of mind that you have the funds if needed.
Read a full explanation of how to gather a damage waiver fee.
How much should you charge for a vacation rental security deposit?
As mentioned at the start of this article, getting the balance right for how much you charge is important.
You’ll want to charge your guests enough to deter them from causing damage or throwing a party, but you don’t want to set it so high that it drives a guest to not even consider booking your property and sends them to a competitor instead.
You also must consider the type of property and what it offers in terms of amenities. The security deposit on a smaller one or two-bed apartment will be much lower than on a 5-bedroom 6-bathroom villa.
There are two types of vacation rental security deposits that property managers can choose, depending on their business model: fixed-rate and percentage.
Charging a fixed-rate security deposit
This is a fixed amount regardless of the nightly rate and length of stay, with the most common amount in the industry being between $250 and $500. If you manage luxury rentals or larger properties then, of course, you may want to charge more, with these vacation rental damage deposits ranging from $500 up to $2,000+.
One of our top tips if you are unsure about how much to charge, is to check what similar properties in your area are charging. The reason is that it’s important to stay competitive with your surrounding competition as the security deposit could be the deciding factor for the guest.
Charging a percentage rate security deposit
A percentage-based vacation rental deposit is calculated based on the total price of the booking. Most property managers set this at between 10% and 12%, so if you manage a villa that costs $5,000 a week, you may ask the guest to pay a $500 to $600 security deposit.
When it comes to which to choose, it’s entirely up to what works best for you and the types of properties you manage. Most property managers go with a fixed-rate security deposit because it’s easier to manage and automate as the amount never changes.
4 ways to collect a vacation rental security deposit
When it comes to collecting a security deposit from a guest, it’s crucial that you make it clear to them the amount you are collecting, what the deposit covers, and most importantly, how long the deposit will be held for. This should be explained in detail in your terms and conditions and your house rules.
Here are 4 ways to collect a vacation rental security deposit:
- Via a payment provider (Stripe, PayPal, Worldpay, etc.)
- Via a credit card pre-authorization
- Via the OTA that you use (Airbnb, Booking.com, etc.)
- Via a specialized security deposit provider
1. Via a payment provider
Using a payment provider like Stripe takes all the hassle out of collecting, handling and refunding a security deposit and is integrated with most property management software (PMS) providers. There are of course fees that come with collecting and refunding a security deposit through a payment provider and they vary from between 3-5% per transaction but come with added security.
2. Via credit card pre-authorization
This is where you place a temporary hold on your guest’s card for the security deposit amount. Due to there being a short time limit on how long the funds can be held for and with the process being easy to integrate, this option is favorable for short-term rental businesses.
3. Via the OTA that you use
Here’s an overview of how the top booking platforms handle security deposits:
Airbnb – Airbnb keeps a credit card imprint that gives you 14 days after the guests left to report any incident and request funds from the deposit. This is handled directly with Airbnb and if you do not make a request within the 14-day time frame, Airbnb will remove the guest’s card details from their system. Read into Airbnb’s damage policy.
Vrbo – Vrbo allows you to collect either a card to put on file, an upfront refundable damage deposit, or you can request that a guest purchases property damage protection to cover potential damage. You then have 14 days after checkout to assess if damage was caused and make a claim with Vrbo.
Booking.com – Booking.com does not collect damage deposit payments from guests on your behalf. Instead, you need to arrange the security deposit payment directly with your guests according to your house rules.
4. Via a specialized security deposit provider
Superhog ensures a smooth booking experience that keeps your properties protected by combining guest screening, property damage protection, and vacation rental damage deposits collection into one easy-to-integrate solution. It allows you to control the required processes to protect your properties pre-stay, from one centralized account rather than bouncing around between different providers.
Our deposit collection is built directly into our quick and comprehensive verification process that saves you time and transaction fees, is protected from fraudulent chargebacks through 3D Secure authentication, and can be easily managed through your Superhog dashboard.
How Superhog’s damage deposit works
Step 1 – Collection: After completing our guest screening process, guests are asked to pay the deposit amount set by you, with the payment authenticated using 3D Secure to protect against fraud.
Step 2 – Handling: We keep the deposit securely in a trust account, taking a small handling fee to cover our administrative costs.
Step 3 – Refunding: If the guest does not cause any damage, we refund the deposit amount directly back to the guest. If damage is caused, then we will refund the required amount of the deposit to cover the damage back to you, and send the rest back to the guest.
If you would like to simplify your deposit collection process and benefit from our Know Your Guest checks and industry-leading $5,000,000 Damage Protection Plan for guest property damage, please get in touch with us below!
How to communicate with guests about the security deposit
Transparent communication is the only way to reduce the discomfort guests may feel when you ask for a deposit. You should explain the damage deposit meaning to people, inform them that it’s a refundable charge, and clarify in what cases you will withdraw the deposit for damage.
Write clear terms and conditions and ask renters to read and accept the deposit information when they make a reservation. It’s also important to specify how long it takes to return the deposit after the check-out.
Finally, you must remember that deposit terms are not only for guests but for you as a host or property manager. You cannot charge hundreds of dollars for minor wear and tear, and expect people would be okay with that. Play fair.
When should you return a vacation rental security deposit?
When returning a guest’s security deposit, you need to be very clear about the time frame and you need to stick to that time frame. You should always aim to return the deposit either partially or in full as quickly as possible, so we would advise that you inspect your properties for damage as soon as your guests leave.
If you don’t manage the turnover before a new guest arrives or are not within a commutable distance of the property, train your cleaning staff to know what kind of damages to report to you, or if you have a good rapport with someone local ask them to inspect the property.
Once you’re sure there’s no damage, let your guests know that you’re returning their security deposit. This also acts as a great opportunity to follow up with the guest and ask for any feedback on their stay and seal a repeat booking or a future direct booking!
What to do when the damage exceeds the security deposit
Sometimes, the damage may be severe, or the deposit is too small to cover the loss. Then, you have several options. Start a lawsuit to get your money back, talk to the guests and hope they will cover the expenses, or accept the poor fate and pay out of your pocket.
Lawsuits are usually the last resort when guests refuse to cooperate. But you will need to prove that the guest has caused the damage and it exceeds regular wear and tear and the deposit amount.
Tiffany Perez comments on such cases on Quora:
“The landlord is supposed to keep records of what was used and on what to get the unit back to how it was when the tenant moved in. If it costs more than to fix than what the tenant paid in security deposit, the landlord can sue for the difference.”
A direct talk with guilty guests is preferable. Most people want to avoid lawsuits and are ready to admit their wrongdoings, especially if you have photo proof. If you use Know Your Host for guest screening and ID capture before accepting a rental request, the chance of getting reimbursement is higher as you filter out suspicious people before they end up in your apartment.
Understanding local laws and regulations regarding security deposits
Another thing you must consider before collecting vacation rental damage deposits is local and federal regulations. Many governments aim to protect citizens from unlawful charges and impose limitations on deposit collection and withdrawal. Here are the main nuances to keep in mind:
- Federal vs state laws. There are no federal laws governing vacation rental damage deposits, but you must not discriminate against guests based on religion, race, and other aspects. The state legislation varies.
- Timeframes. Most states give 14 to 45 days to refund vacation rental damage deposits. Still, it’s better to inform guests about the charges and explain your decision as soon as possible. It reduces the risk of negative reviews or lawsuits.
- Amount. One month’s rent is a common limit for longer-term rentals. Short-term rental security deposits vary more significantly based on the property size and type.
- Holding the deposit. Hosts may be required to keep a deposit on a separate account for safety reasons.
Most legal requirements focus on fair deposit amounts, clear timelines, and safe money processing. For more specific information, you must address the local laws of the state or country where you rent our property.
