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Security deposit or insurance: What’s best for your vacation rental?

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, when 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 from 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 administrators. 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

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.

Airbnb security deposit

If you’re renting out your property on Airbnb, the platform doesn’t give you the option to charge guests a security deposit. Instead, any damage that takes place during a guest’s stay must be brought up in Airbnb’s resolution center. This can be a frustrating experience for hosts, as it is essentially a game of he-said-she-said. While guest payment information is kept by the platform, there’s no guarantee they’ll pay for damages, and filing a claim can lead to friction and low reviews.

VRBO security deposit

On VRBO, hosts can ask for one of three options upon booking to help cover guest damage to their property. They can request to keep a card on file, which can then be charged for damages upon the filing of a claim; they can take a security deposit up-front for any damages; or they can require guests to pay for damage insurance themselves.

Having all three options is definitely a benefit to hosts, as it gives them flexibility. However, it can still lead to friction with guests, as it doesn’t provide them with the same flexibility — the choice is made for them — and still puts them in the center of the claim process.

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 to guests. A HomeAway research study found that approximately 80% of guests would rather pay a small, non-refundable fee than a larger, refundable deposit. 

There are a few alternatives out there that shouldn’t be confused with proper damage protection. Airbnb offers its 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.

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.

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.

But when it comes to maximizing your revenue and time, purchasing insurance is unbeatable.

Damage protection through Guesty

Purchasing damage protection helps both you and your guests have the best of both worlds — protection without the hassle. If you manage your business with Guesty, you can add Guesty’s Damage Protection to all of your listings, across all channels. 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.

Using damage protection instead of a security deposit will help you convert more bookings, better protect your properties, and free more time to scale your vacation rental business.

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