Whether someone trips and breaks a dish over dinner or one of your guests throws a wild party, it’s almost inevitable that at some point, your vacation rentals will suffer some damage.
Because of the near-inevitability of this, property managers often choose to implement either security deposits - also referred to as damage deposits - or insurance to protect their properties from guest-caused damage.
While each one has pros and cons, which one you use comes down to two factors: what protects your properties the most and what is easiest for you.
Today, we’ll break down each option and give our recommendation based on our experiences with thousands of properties and helping convert hundreds of thousands of bookings.
Evaluating vacation rental security deposits
The standard security deposit is around $500 or up to 10% of the total rental price. Deposits are widely used because of their ease in implementing on the front end. They are typically collected via credit card either at booking or before the stay begins and held until after the guest leaves, where a staff member then conducts an inspection of the property.
Any noted damage or extra attention needed from staff (e.g. additional cleaning) can then be deducted against the amount, with the remainder of the deposit being refunded.
It should be a pretty straightforward process. But security deposits can create a fair amount of work for property managers. Some pain points for managers include:
- Holding and refunding security deposits are an administrative burden
- Daunting deposit fees create booking friction, causing you to lose leads
- Limited coverage forces you to pay out of pocket if the damage exceeds the deposit amount
- Charging guests for a small incident leads to bad reviews, scaring off future guests
- Suffering from inflated prices, as some channels lump your deposit into your rates
And, deposits can also become a source of contention for your guest too - for a number of reasons:
- Deposits can be a burden to guests; a significant credit hold can tighten a guest’s finances, especially during a vacation
- Travelers are wary they won’t get their deposit back; handing over an additional sum of money to a property manager can be unnerving for them
- Guests are concerned about being wrongly charged; they don’t want to be forced to spend time in mediation to receive their deposit back
Beyond that, some jurisdictions have requirements or timelines that need to be followed; for example, vacation rental owners in Hawaii have 14 days to make a claim against a damage deposit.
Is insurance any easier to manage? Many short-term property managers think so.
Assessing vacation rental insurance as an alternative
Vacation rental insurance, also called damage protection, offers an alternative to security deposits; instead of a deposit, managers can either 1) offer renters the option of purchasing an insurance policy or 2) take on additional coverage for the rentals that cover what the home-owners policy doesn’t.
In both cases, this costs significantly less than a damage deposit - typically starting around $40 - but offers exponentially more coverage - up to $25,000 in some cases.
Less hassle for greater coverage is an option that appeals to many managers - and guests. A HomeAway research study found that approximately 80% of guests would rather pay a small, nonrefundable fee than a larger, refundable deposit.
So what are the cons to offering insurance? While damage protection is a method of coverage that is easier for you and a tool that guests prefer, it can be hard to set up.
Airbnb offers it’s Host Guarantee product, but specifies that it is not an insurance alternative. HomeAway offers another type of coverage, but it protects guests’ liability, more than your properties. Even then, those options are limited to only protecting you on bookings made on those two channels.
The challenge with insurance is finding the right carrier on the open market. If you contract directly with an underwriter, this can typically be time intensive and require a lot of paperwork and logistics - which may only make sense for the largest of property managers. Alternatively, you can opt to self-insure, but this comes with a high degree of risk.
While finding an insurance product that is easy to implement can prove difficult at this time, MyVR recommends choosing this method over the age-old security deposit. When it comes to maximizing your revenue and time, this option is unbeatable.
Not only does it incentivize guests to book your properties by removing any hesitation, but it also provides exponentially more coverage than the small premium costs. To top it off, you no longer have to spend time returning deposits to past guests, allowing you to reallocate your time to what really matters - growing your business.