The pandemic outbreak causes tourism industry to collapsed. Many businesses in this industry hit the most. The same is happening to short-term property owners. Unable to get any bookings, the short-term property owners switched to long-term rentals. However, switching to long-term rental is not as easy as the owners thought. Not only the owners need to collect monthly rentals, they also need risk damages to the contents in the property too. Insurance cover commonly marketed as ‘Zero Deposit Scheme’ could be the answer for property owners.
But what is Zero Deposit Scheme anyway?
To understand why zero deposit scheme even exist, we have to look at the problems that property owners and tenants are facing.
Huge Deposit – Typical long term rental requires two months security deposit, half month utilities deposit and one month advance rental. That accounted for 3.5 months upfront deposit.
If the monthly rental is RM1,000 per month, then the tenant would need to fork out RM3,500 to start the rental. Now for this, we haven’t include tenancy agreement fee and stamping fee. If we include that, the upfront cost would be even more. The owners will usually transfer these costs to the tenants.
Many tenants are facing problems with the initial deposit. And when the owners unable to compromise on the security deposits, then the deal won’t work.
Content Damages – Many property owners are converting their properties for long-term rental. Most short-term rental properties are fully furnished with beautifully designed theme. When the units are being rented for long-term basis, there would be risk of damage to the contents in the unit.
Standard long-term rental properties will have items such as kitchen cabinet, washing machine, refrigerator etc. They don’t include other items such as bed and mattress unless the owner specifically rented as fully furnished.
Default – Owners that renting out their units for long-term rental will always exposed to the risk of non-paying tenants. There is always this risk that tenant defaulting on the rentals. It is not something that the landlord can guarantee even with best practices implemented i.e interview and background checking.
See also: How to Invest in Rental Property
Zero Deposit Scheme a Friend or Foe?
From what I observed, many websites out there that offering Zero Deposit Scheme are actually insurance companies. From the first impression they look like typical property websites that offering rental solutions to property owners. They help to match property owners with tenants. But they are actually an insurance company, to be precise an insurance agency. I’m quite impressed that they managed to position themselves in this property market niche.
The core product is insurance on the rental. This is typically covers runaway tenants. That’s all. They are technically replacing the security deposits with insurance.
But of course, there are other USPs for each companies. Some of the additional services as follow:
| Services | Comments |
|---|---|
| Guaranteed Rental | This is only applicable when the tenant signed up for Direct Debit. |
| Eviction Process | This is handy when the tenant is not paying the rental but continue to stay at your unit. This is a very tedious process to go through by the owners. |
| Tenant Screening | Not all the owners know this, but similar paid service is offered by CTOS. If the agency is giving this as part of package, then it would be good. |
| Loss of Rental | From what I noticed, most agencies offer upto 2 months rental. If we look at it, it is similar to our security deposit. |
| Content Coverage | This is to cover the content in your unit. Do take note that it would not be the same if you are renting your property as a whole unit or room. Some agencies would not cover rental by room. |
The above are the typical value added services if you signed up for their packages.
Unfortunately, at the point of writing, I am unable to obtain any policy relating to the Zero Deposit Scheme insurance coverage. Please do take note that before you sign up for any insurance scheme, do request for the policy. Read the terms and conditions especially on the claim. I’m not against any insurance companies, it just that there are a lot of fine print that we should know about.
I can’t comment much on the advantages and disadvantages at this point of time as I never engaged any of them. But if you did, then remember to ask about cooling off period just in case you find any terms that you are not comfortable with. Most insurance companies do not pass you the policy until you signed up for their insurance. Make sure that your know your rights especially on the cancellation part.
Conclusion
This is my take on the Zero Deposit Scheme. First, the insurance premium would be minimum one month rental. Meaning if your rental is RM1,000 per month, then the premium would be RM1,000. Some of the insurance companies are charging 1.5 months rental. You can do the math if the insurance is worth for you in the event of default. Since the premium is one month rental and they only cover upto two months rental, meaning your net would be one month rental.
The question you should ask if the insurance really worth?
Perhaps we can get separate content insurance from insurance company and then we collect security deposits as usual. Would that be more cost efficient? And of course, if you engaged these agencies they will help you from A-Z including finding and matching potential tenants. This is the one that I find the most value in their services.
Tips:
What I usually do these days is that I offer tenants to pay security deposits in stages. Example, if I were to collect two months security deposit, I would allow them to spread the security deposit over three months. This will reduce their upfront burden and I will be allowed to collect security deposit while reduce my upfront cost (without insurance).
What is your method to secure your rental property? Have you engaged any of these agencies before? Comment below.
