PBSA and BTR rental deposit schemes: the pros and cons

Rental deposit schemes: Should or shouldn’t you ask for a deposit?

This article will explore the pros and cons of accepting rental deposits in the UK’s PBSA and BTR industries and whether they are worth it for landlords. 

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What you need to know before you consider any rental deposit scheme 

Ok, so you have a decision to make on rental deposits, and we will offer lots to think about both for and against the idea, but there is one thing we need to tell you first. 

England and Scotland's rule differences 

While we don’t have hard borders within the UK, there are statute and guidance differences between countries. Scotland and England, in this instance, are great examples as they differ in rules on deposit schemes.

Here are the information pages for you: 

• England’s Tenancy Deposit Protection  
• Scotland’s Safe Deposits Scheme 
   

Rule differences will affect your portfolio, so you will need to decide if deposit schemes are the right way to go and how you manage that if your stock portfolio crosses borders.

Secondly, and also very important, you’ll need to consider future-proofing your deposit strategy in case stock opportunities take you to different ends of the United Kingdom.

Let’s examine the pros and cons of offering deposit schemes to your tenants. 

Pros of rental deposit schemes in PBSA and BTR industries 

When it comes to renting out properties in the purpose-built student accommodation (PBSA) and build-to-rent (BTR) sectors, landlords often require a rental deposit from tenants as a security measure.

A rental deposit is a sum of money that tenants pay upfront as a guarantee against any damage to the property or unpaid rent.

Accepting rental deposits in PBSA and BTR industries can have several advantages for landlords.

• Protection against property damage - A rental deposit provides a financial cushion for landlords in case of any property damage caused by the tenant. It can cover repairing or replacing damaged items, ensuring that the property remains in good condition for future tenants. 
• Security for rental income - Rental deposits also provide landlords with a layer of security against unpaid rent or other fees owed by tenants. If tenants fail to pay their rent or bills, landlords can use the rental deposit to cover the costs. 

• Screening potential tenants - Tenants willing and able to pay a rental deposit are often more reliable and trustworthy, reducing the risk of missed rent payments or property damage. 
• Incentivises tenants to maintain the property - Tenants are more likely to treat the property with respect and care if they know that they will lose their deposit if they cause damage or leave the property in an unsatisfactory condition. 

Accepting rental deposits can give landlords a sense of security and peace of mind when renting out their properties. However, there are also some drawbacks to consider, which we will explore in the next section. 

Cons of rental deposit schemes in PBSA and BTR industries 

While accepting rental deposits can have several advantages for landlords, there are also some potential drawbacks. 

• Extra administrative work - Requiring rental deposits means landlords must create and manage a separate account for each tenant's deposit. This can be time-consuming and add extra administrative work to the rental process. 
• Potential disputes with tenants - If landlords withhold a portion or all of the rental deposit at the end of the tenancy, there is a risk of disputes. This can lead to legal proceedings and additional costs for landlords. 
• Lower demand from tenants - Requiring a rental deposit can also deter some potential tenants from renting the property. They may not have the funds available upfront or prefer to rent from a landlord who doesn't require a deposit. 

• Limits affordability for tenants - Requiring a rental deposit can also limit the affordability of the property for some tenants, especially in expensive urban areas where rental prices are already high. 

While the cons of accepting rental deposits may seem daunting, it's important to weigh them against the benefits and assess whether rental deposits are worth it for your specific property and rental scheme.

Suppose you do accept rental deposits. In that case, it's crucial to make sure you have clear terms and conditions in your rental agreement and follow the relevant legal guidelines for handling and returning deposits.

Next, let's explore alternatives to rental deposits in the PBSA and BTR industries. 

Alternatives to rental deposit schemes for PBSA and BTR 

If you've decided that the cons of accepting rental deposits outweigh the pros, or if you want to offer an alternative to rental deposits, there are several options to consider. 

1. Guarantors - One alternative requires tenants to provide a guarantor, such as a parent or other family member, who agrees to cover any unpaid rent or damages if the tenant cannot pay. This can provide landlords with a similar level of financial security without requiring tenants to pay upfront. 
2. Insurance - Some landlords opt to require tenants to purchase rental insurance, which can cover the cost of any damages or unpaid rent. This is also a good option for tenants who may not have the funds available for a rental deposit. 
3. Monthly payment plans - Landlords could offer a monthly payment plan for a rental deposit, allowing tenants to pay the deposit over several months instead of upfront. This can make the rental property more affordable and appealing to more tenants. 

Ultimately, the benefits of choosing an alternative will depend on your specific rental scheme, financial goals, and the needs and preferences of your tenants.

It's essential to carefully consider each option and choose the one that makes the most sense for you and your property. 

Here’s something new - What if you just waive deposits altogether? 

We have seen this happening more and more among clients. By waiving the traditional rental deposit system altogether, landlords make their rental properties more attractive to a wider range of tenants. 

And it’s really helping them stand out against the competition. It’s also heading towards a possible new standard practice for the industry.

But how does that work?

Novel Student and Moda are great examples of this. In both cases, they ask for a holding deposit deductible from the first month’s rent. The continuing rental amount then covers the provision for rental upgrades or refurbishments if damage is caused.

As this idea rolls out, we’ve also seen tech providing streamlined processes that help manage a truly flexible no-deposit system. The flatfair and Spike Global integration is a great example.

Flatfair’s no-deposit solution allows tenants to join a membership program at the start of their tenancy, equal to one week’s rent ( plus VAT). Coupled with Spike Global’s easy reservation and tenant management system, you have a process that is as easy for the client as booking in and out of a hotel.

Here’s why we think this is a game-changer… Generation X has pathed the way for faster, more convenient ways to do things. They want more flexibility than any other generation and are also pretty savvy. They do more research before they buy things and invest in things that make their life easier - flexible renting just makes good sense at a time in their life when they are not yet ready to settle.

Wherever you fall on asking for deposits, you need to consider how this affects your bookkeeping, and this is what we will look at next. 

PBSA and BTR rental deposit schemes: Understand how your choice affects your bookkeeping 

As discussed, there are many factors to consider when deciding whether to accept rental deposits for your PBSA or BTR business. But did you know that this decision can also affect your bookkeeping process?

If you accept rental deposits, you must ensure your bookkeeping system is set up to handle these transactions correctly. This includes properly accounting for the deposit as a liability and accurately tracking any interest earned on the deposit.

On the other hand, if you choose not to accept rental deposits, you may have to find alternative ways to ensure financial security, such as requiring a guarantor or implementing a renter's insurance policy.

Then if you choose a no-deposit scheme, you’ll need to a bookkeeping system that tracks rental expenses so that your rentable amount always covers potential damage. You don’t want that eating into your profits!

Regardless of your choice, having a solid bookkeeping system is crucial to accurately tracking your rental income and expenses. This helps you stay organised and compliant with tax laws and provides valuable insights into the financial health of your rental business. 

 
If you need assistance with PBSA and BTR bookkeeping, we're here to help. Book a call to learn more about our bookkeeping services and how we can support your rental business.