Rent deposit - Profiting from Yields: Alternatives to the Classical Deposit Account
Renting a apartment for rent is becoming increasingly expensive. Particularly, those who move and sign a new lease often pay significantly more than the average market rent. This is evident from the Federal Government's response to a query from The Left in the Bundestag, which relies on figures from the Federal Institute for Building, Urban and Spatial Research (BBSR). For instance, new arrivals in Berlin pay 26.7 percent more than in 2022.
Moreover, the security deposit, which is calculated based on the Net Cold Rent – the higher this amount, the higher also the security deposit for the new tenancy relationship – is also on the rise. However, tenants should at least make the best of this additional financial hurdle before moving. Landlords and landladies are required to invest the security deposit at market interest rates. With the agreement of both parties, they or the tenant can also invest the money in financial products that yield more than minimal returns and at least offset inflation.
Classical Rent Deposit Accounts: Secure, but weak in returns
Landlords and landladies usually require three Net Cold Rents, i.e., monthly rents without additional costs, as security. This is not mandatory; the security deposit should not be higher than three times the Net Cold Rent according to the law. Tenants usually transfer this amount to the landlord's account. Some pay in cash. If tenants do not pay the rent or damage the property, landlords can retain the corresponding portion of the security deposit. Landlords must deposit this money on a fixed-interest escrow account at market interest rates – separate from their other assets – according to Paragraph 551 of the Civil Code. They cannot access the money easily, as it still belongs to the tenant.
Paragraph 551 of the Civil Code obliges landlords and landladies to deposit the amount and pay back the interest upon termination of the tenancy agreement. To ensure that landlords actually deposit the interest and keep track of the sum, tenants can request proof at any time. If landlords fail to provide proof, tenants, according to a Federal Court of Justice ruling from 2009, can reduce the rent by the amount of the security deposit.
Despite slightly rising interest rates, the returns on traditional rent deposit accounts are surprisingly low: For example, the DKB offers a free rent deposit account for those who have a checking account there, but it only pays 0.01 percent interest. The Commerzbank offers 0.5 percent, but the account comes with a one-time fee of 59 Euro. The traditional version of the rent deposit account offers security, but the returns, despite slightly rising interest rates, are still quite low.
Landlords can open their own rental accounts that offer better conditions or propose more profitable investments. For example, a savings account: These are currently quite attractive, with approximately three percent interest. However, this option is less common, as the organization is somewhat complicated. The account must also be a trust account – access to which is not the tenant's or the landlord's, but the landlord's. The bank must also approve of trust accounts, as they have stricter requirements. Tenants should ask their bank directly if such an account is available.
Mietkautions Depots
Rental deposit accounts offer significantly better investment opportunities than traditional rental deposit accounts. For instance, the Berlin asset manager Growney, in collaboration with the Sutor Bank, offers such a product. The security deposit flows into ETFs. The tenant chooses a investment strategy, and Growney manages it. The earned returns are not paid out until the end of the rental period, but reinvested.
Depending on the chosen investment strategy, Growney expects returns between roughly 2.5 and 6 percent. Tenants and landlords sign – as with a rental deposit account – a pledge agreement. This separates the funds from the property and protects them from potential insolvencies of both parties. However, Growney charges a one-time fee of approximately 30 Euro and an annual service fee of 0.68 percent of the deposit value. For a deposit value of 4500 Euro, this amounts to about 31 Euro. For comparison: With a yield of only 2.5 percent, the tenant would earn approximately 346 Euro in interest after three years of rental duration.
A similar concept is offered by the Swiss startup Evorest. It allows both tenants and landlords to invest their security deposit in ETFs and thus earn returns. However, only a certain percentage of the deposit can be invested depending on the strategy – up to 75 percent. The startup also charges fees: For the Invest-25-Percent Plan, the opening fee is 25 Swiss Francs (around 26 Euro) and 0.4 percent of the deposit value as the annual fee; for the 75-Percent Plan, there is an additional 0.6 percent of the deposit value as the annual fee.
Moreover, Evorest requires depositors to top up the amount if it falls below 80 percent of the original amount due to market fluctuations. The tenant is responsible for any losses, and the landlord can also access the profits. If, for example, 4500 Euro was deposited when the tenant moved in and the deposit value has increased by 30 percent by the time of moving out, the landlord can access the entire deposit sum, including the gains. In the example, the total amount could be 5850 Euro for potential damages.
The increase in rental costs, including the Net Cold Rent, raises concern for tenants, as they end up paying significantly more than the average market rent. To mitigate this, landlords can invest the security deposit at market interest rates, providing an opportunity to at least offset inflation.
Financial products like rental deposit accounts with better returns, such as savings accounts or specialized platforms like Mietkautions Depots, can be an alternative for landlords, enabling them to earn more than the minimal returns from traditional accounts.
