350. Security Deposits vs Damage Waivers: Which Protects Your Short-Term Rental Better?

**Tim Hubbard** (0:00)
If you've ever had a guest cause some damage in one of your short term rentals, and you wondered whether a damaged deposit would have helped you out, well, this video is for you.
A lot of hosts out there have the wrong idea of how a security deposit actually works for your short term rental, and a lot of them set it up incorrectly too. So today we're gonna give you all the details on how we use security deposits with the thousands of guests that we manage in hundreds of properties across the nation.
Welcome to Short Term Rental Riches. We'll discuss investing in real estate, but with a specific focus on short term rentals. Quick, actionable items to acquire, manage, and scale your portfolio.
I'm your host, Tim Hubbard.
Welcome back to the show. Today we're talking about security deposits. Before we jump right into it, a lot of you are probably a little confused between security deposit and a damage waiver. Lots of different short-term rental markets in the country charge damage waivers, but this might be hurting you if you have it set up. So how do we decide? Well, in a nutshell, the lower your ADR is, the lower your average daily rate is, the less likely you're going to want to charge a damage waiver. Why?
Because the damage waiver is an additional cost to your guests. So let's say you have a $100 average daily rate, and you have a reservation for two days, and then you want to charge them a $70 damage waiver.
That increases their total reservation costs significantly. And that difference in increased costs could mean them booking at someone else's property instead of yours. So in general, the lower your average daily rate is, the less you want to be tacking on additional fees, because it's going to make you less competitive. Now, there are a lot of rental markets out there, a lot of vacation rental markets, where it's very normal for someone to be charging a damage waiver. And so if you're a guest, and you're out there on VRBO, and you're looking at 10 different listings, it's likely that a lot of them have a damage waiver. And that would be a market where you could have a little more incentive to do that instead of collecting a damage waiver. But in general, my recommendation is to not increase your reservation price, but still protect your property, and you can do that with a security deposit. So let's get into security deposits, because most hosts set this up wrong. A lot of hosts out there are actually collecting the money. You're only going to be using a security deposit outside of Airbnb, because Airbnb has their own damage program, right? They have air cover, and you also don't handle the payments for Airbnb. So every other rental or OTA source outside of Airbnb where you are collecting the payment, you have the ability to charge a damage waiver. Most people do that through Stripe. Now, if you're using VRBO, not connected through a PMS, they also may be handling your payments for you, in which case you wouldn't be able to set up a security deposit. booking.com also has their own option for them to handle your payments, payments by booking, it's called. If you're using that program, well then again, you wouldn't be able to set up a security deposit. But basically, anytime you're receiving money, you have this ability and you should be doing it. So basically, anytime you're receiving the money through a direct booking, through VRBO direct, through booking.com direct, through Google Vacation Rentals, I hope you're on all these channels. Assuming you are, you're probably using Stripe, and so the correct way to set this up is to place an authorization hold on their credit card, not actually collect the damage deposit. So the difference there is, it's just like a hotel. When you check into a hotel, they ask for your credit card. They tell you, we're going to place a small authorization hold on your card in case of accidental damages. And before you check out, they review the room. If there's any damages, they have the authorization to charge up to that amount that you let them. And that could be $250. It could be $500. It could be $1,000. It could be more than that. Really, it's up to you what that authorization charge limit is. And that essentially reserves those funds on your guest credit card until they check out. But it doesn't charge them. If you were to charge them and receive those funds, then Stripe's going to charge you a processing fee. And assuming there's no damage at your property, which most of the time there is very little damage. I know there's a lot of doom and gloom out there, but we've managed hundreds of thousands of guests and our rate of incidence is very, very small. And I would say getting smaller and smaller as our team perfects every single little piece of the puzzle. So make sure you're not collecting the funds and sending it back because you're losing processing fees on every single one of those transactions.