In recent years, the rental market has seen an increase in “zero-zero properties,” where no security deposit or key money is required. This trend is driven by rising vacancy rates due to intensifying competition and changes in tenant preferences, prompting landlords to reduce initial costs to attract tenants. This article provides a comprehensive overview of the basic mechanisms, benefits, risks, and drawbacks of zero-zero properties, as well as strategies for addressing these factors, tailored for real estate owners. We will also touch on key points to consider when deciding whether to adopt a zero-zero strategy, taking into account area characteristics and market trends. We hope this article will be useful for your rental property management strategy planning.
The Mechanism and Background of Zero-Zero Properties
First, let's clarify the basics of zero-zero properties. Deposit is a security deposit paid by tenants at the time of contract signing, which is used to cover rent arrears or restoration costs upon move-out, with any remaining amount refunded at that time. On the other hand, a key money is a non-refundable fee paid as a token of appreciation to the landlord. Typically, each is equivalent to 1–2 months' rent, but in zero-deposit properties, neither is collected.
Why is this possible? The background lies in the use of rent guarantee companies. In recent years, contracts utilizing rental guarantee companies (rent guarantee companies) as alternatives to joint guarantors have surged. By using a guarantee company, if a tenant defaults on rent, the guarantee company will cover the payment to the landlord, effectively eliminating the landlord's risk of unpaid rent. In this way, by having the guarantee company cover the owner's financial losses, more owners are choosing to eliminate the security deposit for peace of mind.
Additionally, the online publication of rental information has made it easier to find properties with low initial costs, and the growing demand among younger generations to minimize initial expenses has also contributed to the increase in zero-zero properties. While zero-zero properties were first introduced by some major real estate companies in the late 1980s, they are no longer uncommon and have become mainstream in response to market demand.
Benefits of zero security deposit and key money
Eliminating security deposits and key money reduces the initial financial burden for tenants. The main benefits for property owners adopting this strategy are as follows:
- Faster tenant placement: By significantly reducing initial costs, the property becomes more attractive, making it easier to secure tenants. This is particularly appealing to younger generations and first-time renters, who are more likely to choose such properties. As a result, vacancy periods are shortened, increasing the likelihood of early lease agreements. Filling vacancies quickly reduces vacancy losses (losses from periods without rental income), which is a major operational advantage.
- Shortened vacancy periods and stabilized cash flow: Zero-zero properties can serve as a powerful tool for filling vacancies. When competing with other properties, the lower initial costs give a competitive edge, making it less likely for vacancies to persist. Reduced vacancy periods lead to smaller fluctuations in annual rental income, ensuring stable cash flow. Additionally, by utilizing a guarantor company, monthly rent is reliably deposited, minimizing the risk of income disruption due to rent arrears. Overall, the zero deposit and key money strategy effectively stabilizes rental income in property management.
- Enhanced recruitment and property differentiation: Zero initial costs are a major selling point in marketing. While other similar properties require security deposits or key money, offering zero initial costs for your property can differentiate it from the competition, potentially increasing the response to advertisements and the number of prospective tenants. When searching for properties online, many prospective tenants look for properties with “no security deposit or key money,” so this condition can increase the visibility of your property. As a result, the efficiency of tenant recruitment improves, and recruitment strength is enhanced. In areas with high vacancy rates, such relaxed conditions can be a major advantage in securing tenants.
- Tenant Satisfaction and Long-Term Tenancy: Lower initial costs reduce the financial burden on tenants, leading to a more positive impression of the property owner. The sense of satisfaction from being in a “fair and reasonable property” can positively influence post-move-in relationships, leading to a greater willingness to use the space carefully, and ultimately may encourage long-term tenancy. Eliminating renewal fees could also make it easier for tenants to feel motivated to continue living there. These soft benefits are also important considerations in rental property management.
Drawbacks and Risks of Zero Security Deposit and Key Money
On the other hand, waiving security deposits and key money also entails risks and disadvantages for landlords. Let's examine the main points in detail.
- Responsibility for restoration costs and risks at move-out: Without a security deposit, the costs for restoring the property to its original condition (cleaning fees, repair costs, etc.) at move-out must generally be recovered directly from the tenant. Typically, these costs would be deducted from the security deposit, but with a zero deposit, they must be billed directly at move-out. For tenants, this can create the impression of a large lump-sum payment, increasing the risk of disputes. For example, tenants may complain that “if there had been a security deposit, it would have been deducted from that.” Additionally, if the tenant refuses to pay and defaults or abandons the property, the repair costs become the landlord's responsibility, potentially resulting in financial loss. It is essential to fully understand the risks associated with restoring the property to its original condition and to clearly stipulate cleaning costs in the contract.
- Rent default risk and reliance on guarantees: A security deposit is intended as a safety net to cover rent defaults, but it does not exist if the deposit is zero. Using a guarantee company significantly reduces the risk of default, but it is important to note that reliance on the guarantee company remains. In the event that a tenant defaults on rent for an extended period and the guarantee company ceases to cover payments, or if unforeseen circumstances arise outside the scope of the guarantee company's contract (e.g., the tenant disappears mid-lease, requiring the removal of left-behind items or legal proceedings), the owner may ultimately bear the financial burden. Many contracts with guarantee companies only cover rent debt and exclude property damage, so it may be difficult to address damages that could have been covered by a security deposit. While the risk of non-payment itself is largely covered by the guarantee company, it is important to remember that it is not 100% guaranteed.
- Risks associated with changes in tenant attributes: Properties with no security deposit or key money make it easier for prospective tenants with limited financial resources to move in, thereby expanding the pool of applicants. While this makes it easier to attract high-quality tenants, it also tends to attract economically unstable individuals or those who barely meet the screening criteria. There is even a common perception that “those who cannot afford the initial costs are unlikely to pay rent afterward,” making it crucial for landlords to carefully assess the quality of tenants. While some may view “zero-deposit properties” as having lower-quality tenants, it is entirely possible to secure reliable tenants through thorough screening. However, the lower initial costs also lower the barrier to moving, increasing the risk of tenants leaving after a short period. This can result in shorter average tenancy periods, leading to frequent recruitment and restoration of the property, which may increase operational burdens and costs.
- Reduction in initial income (zero key money): Key money is a pure income (profit) for the owner, but eliminating it means losing the opportunity to generate initial income. For example, if a contract that would normally include one month's key money (equivalent to 100,000 yen in rent) is set to zero, the owner forfeits that 100,000 yen in income. While this may be offset in the long term by the benefits of securing tenants sooner and generating rent income earlier, it can be a significant loss depending on the property's occupancy rate. Additionally, security deposits are typically refundable deposits, but they can also be temporarily utilized as the owner's funds depending on how they are managed. Eliminating them completely eliminates this flexibility in fund management. Overall, the zero-zero strategy reduces the cash the owner receives at the time of contract signing, which is a drawback.
Specific countermeasures for risks
To address the drawbacks of zero security deposit and key money properties and maximize their benefits, the following countermeasures and strategies are effective:
- Proper use of guarantee companies: As already mentioned, it is essential to use a reliable rent guarantee company. Partner with a reputable guarantee company to ensure that rent is paid even in the event of default. By requiring tenants to join a guarantee company at the time of contract signing, owners can significantly reduce the risk of unpaid rent. Additionally, review the guarantee terms and select a plan that covers costs such as restoration expenses or litigation fees if possible. The results of the guarantee company's screening can also serve as a reference for tenant eligibility, so using a company with strict screening criteria can help filter out high-quality tenants.
- Strict tenant screening: Even if you waive the security deposit and key money, it is crucial not to relax the screening process for prospective tenants. In fact, more thorough checks are necessary than usual. Specifically, thoroughly verify income proof, employment status, and past rental history to assess payment ability and character. While referencing the guarantee company's review information, comprehensively evaluate factors such as the rent-to-income ratio, length of employment, stability of the employer, and financial capacity of the guarantor (if required). In some cases, it is important to conduct interviews to confirm the tenant's character and narrow down the list to trustworthy candidates. Since tenants may be more likely to move in with the intention of “trying it out first and leaving if they don't like it” due to the low initial costs, it is important to ask detailed questions about their motivation and plans during the screening process.
- Establishment of contract terms (tenancy rules): To prepare for risks specific to zero deposit and key money properties, it is also important to clearly state any special terms or rules in the contract. For example, including a clause stipulating that the tenant is responsible for a fixed cleaning fee upon moving out can make it easier to recover restoration costs even without a deposit. Additionally, clauses such as “If the contract is terminated within ○ years, a penalty of ○ months' rent will be charged” are commonly included to deter short-term cancellations. This ensures that even if a tenant moves out extremely quickly, the landlord can receive some compensation. Furthermore, rules tailored to the property's characteristics, such as pet ownership or musical instrument use, should be clearly stated to prevent disputes. Explaining these regulations thoroughly during the contract signing process and ensuring tenants understand them can help prevent future conflicts.
- Property management and insurance utilization: Maintaining the property in good condition on a daily basis and creating an environment where tenants can live comfortably for an extended period is also an indirect risk mitigation measure. High tenant satisfaction can help prevent early move-outs. Additionally, requiring tenants to include a “tenant liability insurance clause” in their fire insurance policy ensures that insurance coverage applies to property damage caused by tenant negligence. Owners should also consider compensation programs for landlords (such as rent default insurance or plans with legal support) and ensure they have comprehensive preparations in place.
Criteria for Adopting the Zero-Zero Strategy and Area/Market Trends
Finally, we will explain the key points for property owners to consider when deciding whether to adopt a zero deposit/key money strategy, taking into account area characteristics and market trends.
1. Competitive environment and vacancy rate: First, assess the competitive landscape of the rental market in the property's location. In urban areas or popular neighborhoods, there are many competing properties nearby, and vacancy rates tend to rise. In such environments, the impact of zero initial costs is significant, and relaxing tenant recruitment conditions can be an effective differentiation strategy. On the other hand, in prime locations or popular properties where demand exceeds supply and there is a surge of prospective tenants, there is no need to force a zero-zero policy, as sufficient lease agreements can be expected. Additionally, in rural or suburban areas where rental demand is already低迷ing, adopting a zero-zero policy does not guarantee finding tenants, and other factors such as rent and floor plan must be considered comprehensively. Research the area's vacancy rate and competitive landscape, and use this information to determine whether your property needs to enhance its competitiveness through initial cost waivers.
2. Property appeal and target demographic: Consider the overall appeal of the property, including its age, equipment grade, and floor plan. Newly built properties with modern amenities are naturally popular, so there may be no need to offer a zero-zero deal to attract tenants. On the other hand, properties with less favorable conditions, such as older buildings, longer distances from stations, or unconventional floor plans, may benefit significantly from lowering the initial costs to reduce barriers to entry. The target tenant demographic is also important. For example, in areas with many students or young singles, a zero-zero strategy can be effective in appealing to those with limited financial resources. On the other hand, for properties targeting company housing or affluent families, tenants may have company-covered expenses or ample funds and may not be overly concerned about initial costs. In such cases, the benefits of a zero-zero policy are minimal, and it may be more profitable to collect a security deposit and key money as usual. Consider whether the zero-zero conditions match the property concept and target tenants.
3. Changes in market trends and customs: As a general trend in the rental market, the customs of requiring security deposits and key money are gradually becoming less common. In particular, key money is considered outdated, and in urban areas, zero key money is gradually becoming the standard. Regarding security deposits, since the 2020s, when the use of guarantee companies became commonplace, cases where the deposit is set at one month or zero have increased. By aligning with this market trend, reviewing your property's conditions can help you compete on the same level as other properties. However, there are regional differences in customs. For example, in the Kansai region, the “deposit deduction” (where part of the security deposit is deducted) practice is deeply rooted, and in some regional cities, key money is still common. It is advisable to consult with real estate brokerage companies about local customs and recent contract examples, and make a decision based on an understanding of the surrounding market conditions.
4. The owner's business strategy and risk tolerance: Ultimately, the owner's business strategy also plays a role. Whether to prioritize minimizing risks and ensuring stable income even if it means taking on some risk, or to avoid risks and secure the security deposit reliably even if it takes more time, the choice will depend on the owner's stance. The zero-zero strategy can be seen as an aggressive approach of “first getting tenants in and then addressing any issues through guarantee companies or contract terms.” This may be effective for corporate owners with a large number of properties who can diversify vacancy risks, or for those requiring bold tenant recruitment strategies. On the other hand, for owners with few properties who wish to manage risks carefully on a case-by-case basis, maintaining a one-month key money fee may be a viable option rather than forcing a zero-zero policy. Balance the risks your business can tolerate with the cost-effectiveness of implementing a zero-zero policy. In some cases, you may consider a compromise, such as waiving the key money but requiring one month's security deposit, or waiving the security deposit but requiring key money for a certain number of months. You could also test the zero-zero conditions on a small number of units and assess the market response before implementing them on a larger scale.
Summary
Zero-deposit, zero-key money properties are attractive to tenants and offer benefits to property owners, such as faster lease signings and reduced vacancy rates. With the widespread use of guarantee companies, it is now easier to implement zero-deposit, zero-key money conditions with reduced risk compared to the past. However, there are also several points to consider, such as concerns about restoration costs due to the absence of a security deposit and the loss of key money income. To successfully implement a zero-zero strategy, it is essential to take measures such as utilizing guarantee companies, conducting thorough tenant screening, and refining contract terms to prepare for potential risks.
There is no one-size-fits-all solution in rental property management, and the optimal approach varies depending on the property's conditions, market trends, and the owner's objectives. A bold policy of zero security deposit and key money can be a powerful tool to fill vacancies and contribute to stable operations if implemented appropriately. By correctly understanding the benefits and drawbacks, assessing area characteristics and competitive conditions, and determining the best strategy for your rental business, you can achieve a win-win rental operation that satisfies both tenants and owners through careful risk management.