Security Deposits and Selection for Deadbeats

Most landlords require their tenants to provide security deposits. What if you own an apartment building and consider no longer requiring a deposit since you have never before had a problem with tenants? Every other landlord in your area requires security deposits, so up to now you have too. Over 95 percent of the prospective tenants in your area are honest and responsible, however, so you figure there is no need to inconvenience tenants with security deposits. Unfortunately, if you become the only landlord to not require security deposits, then adverse selection will cause you to get all of the deadbeats.

Irresponsible, destructive deadbeats would most like to rent an apartment for which they don’t have to provide a security deposit. If, alone among all the landlords, only you don’t require one, then adverse selection will manifest since you will attract most of the deadbeat renters.