You have bought your first Short-term rental and are about to list your property. Awesome, congratulations… But how do you protect your property? Insurance vs Deposit?
The first, step is to get additional insurance specific to short-term rental properties. (Check out this post to learn more). Yes, above and beyond the 1 million dollar VRBO/AIRBNB policies…
The second, step actually occurs when setting up your listing on these various channels.
In VRBO, you will have the option to choose between insurance or collecting a deposit. So which one is the best option? The answer depends on your market and how you are approaching your investing strategy. Both options have their positives and negatives…
VRBO selects this option as the “preferred” option. You can choose between three plans that offer various levels of coverage. The guests purchase a non-refundable insurance plan from VRBO to cover any damage during their stay. Clearly it is “preferred” because it is profitable for VRBO to offer these policies.
The renter policies provide more “coverage” than a deposit at a lower cost to the guest.
As an owner, you may get more guests because they do not have to put a high deposit down when booking the property.
Have you ever rented a car and purchased the additional “no questions asked insurance” policy? And then proceeded to bring the car back missing a wheel or two? Ok, maybe that was just me… but I think you get my point.
By paying for insurance the guests feel covered for any damages at a low out-of-pocket cost to them. However, as an owner the bar to receiving a claim can be time consuming and difficult.
Personally, I would prefer the guest have some significant money to lose and therefore be more considerate of the property.
You can set the amount of requested deposit in VRBO/AIRBNB etc.
The guests have to provide a deposit to rent your property. This has two advantages.
One, you are selecting for a guest that can afford to rent your property.
Two, the guest now has their own money at risk if the property is damaged. The risk of personal loss can go a long way in ensuring the guest and their friends/family respect the property.
A guest is more likely to be worried about losing their $500 deposit than they are about damaging a property that they already paid a non-refundable insurance policy to cover them.
With a $79 insurance policy they are “covered” for the damage they cause (see the car example) and will have no further out of pocket loss.
The deposit however would result in further cost and I think that is the major advantage of collecting a deposit….
Some guests may fear putting down a deposit due to bad experiences from prior hosts. Or they may not want to have the deposit money “locked up” for a few weeks. I actually see this as a selection tool.
If the guest is worried about losing their deposit or the expense then they may not be the guest for our property.
We rent properties that we use for personal use. We are not running a mill, so we are ok being a little more selective on our bookings.
However, if you are looking for pure volume then you may want to look at whether the deposit is worth it. By not having a deposit you could increase volume but you may also increase maintenance. It all depends on your goals and cost benefit analysis.
My bias is to collect a deposit. I think the risk of losing a deposit has more of a preventive effect than an upfront insurance policy.
By purchasing a policy the guest is “covered” for anything they do, up to a point, so it actually decreases the sense of personal responsibility/liability.
However, in the end, this a personal decision for your property. There is no must do answer. The option you choose depends on how you plan to use the property, your financial goals and your tolerance for maintenance.
Good luck out there
“Enjoy Your Journey to Financial Freedom”
Carpe Diem MD
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