Despite the persistent housing shortage, landlords are having a more difficult time qualifying potential residents, especially non-traditional applicants who don’t check the usual boxes for credit and employment history.
Renters are also facing bigger hurdles for income, credit and up-front deposits. “It has become increasingly expensive and challenging to rent an apartment in the United States,” says Eben MacNeille, senior director of sales at TheGuarantors. The New York-based financial technology company serves the multifamily industry by providing lease guarantees, security deposit replacements and renters insurance and compliance solutions.
Today’s renter pool is increasingly filled with reliable people who may have multiple streams of income but lack the typical 9 to 5 job and standard W2 income. In the United States, more than one-third of the labor force now engages in freelance work for all or part of their income, and that “gig economy” contributes an estimated $1.27 trillion in annual earnings to the nation’s economy, according to Upwork.
Verifying renter income has become very complicated in an era where applicants have a day job or side hustle that includes the likes of rideshare drivers, professional gamers or social media influencers. Other applicants lack the established credit history that owners are looking for — such as students, recent graduates and non-U.S. citizens, as well as thin-credit and thin-income renters. “Not everyone has an 800 credit score. TheGuarantors gives residents the opportunity to qualify to live in a property, but also protects owners and operators from various expensive risks like renter fraud, renter default, vacancies, no-shows and more,” says MacNeille.
TheGuarantors offers rent coverage and deposit coverage solutions that benefit both renters and operators. The renter-paid products ease the path for residents to find desired housing, while at the same time empowering operators and owners to mitigate the risk that comes with not being able to qualify a prospective renter in a traditional manner.
Speeding Lease-Up
Lease guarantee and security deposit replacement products are even more attractive in the wake of the surge in new multifamily supply that has come online in the past 12 months. Operators that are competing for renters and are looking to quickly but responsibly lease-up new projects are using solutions offered by TheGuarantors, including rent coverage and deposit coverage to expand their pool of potential applicants.
As an example, TheGuarantors worked with one owner-operator in New York City that had built a new project with 1000-plus units. The owner was motivated to fill that building up as quickly as possible. The project was seeing high interest from international students, but applicants were difficult to qualify because they had no U.S. social security number, no U.S. credit history and, in many cases, no reported income, notes MacNeille. TheGuarantors underwrote a large portion of the leases in the building with rent coverage and deposit coverage, which ultimately helped approve more than 60 percent of the residents for the property while securing rent roll and minimizing bad debt.
TheGuarantors’ underwriting model uses an AI algorithm that can, with very high accuracy, predict the likelihood of renter default. “One of the key features of our product is that we look for what we call the ‘probability of default,’ which is really renter behavior,” says MacNeille. What’s the likelihood that the resident will pay their rent on time?
Students, for example, have no income and have typically relied on their parents to sign guarantees to backstop the lease. That has become increasingly challenging to do because operators have put parameters in place to qualify a guarantor, and not all parents are in a position to or even want to sign those guarantees. Even when students secure a guarantor, operators often spend significant resources tracking them down when issues, such as rent default or apartment damage, arise with student renters.
“We give students the opportunity to qualify to live in a building without having to go to a parent and say, ‘Hey, I need you to co-sign my lease’ because we step in and play that role,” says MacNeille.
Managing Risk
The apartment industry is seeing the rise in legislation across the country that aims to protect residents’ rights. “Those rights are necessary, but in some cases, it can be tricky with respect to how operators protect their income,” says MacNeille. Products such as rent coverage and deposit coverage are a way to do both — help residents qualify for needed housing while helping owners and operators protect their financial interests.
These products are used for all types of applicants, including declined, conditional and approved applicants. Rent and deposit coverage products also offer more appropriate coverage for owners and operators should the need arise. “Rent coverage is really meant to cover the larger losses that are incurred from things like abandonments, eviction or just general rent loss, which a traditional cash security deposit isn’t going to be able to fix,” says MacNeille.
Traditional security deposits are somewhat antiquated because they only offer a limited amount of protection if someone decides to abandon their lease or if an operator has to evict someone. Deposit coverage is meant to replace cash security deposits, offering owners and operators a better way to manage deposits. TheGuarantors’ product allows operators to remove the burden of returning cash deposits to residents within a very specific timeframe. For renters, the deposit coverage is also typically less expensive, removing a potential renter hurdle for properties that require a high deposit.
Products are scalable to fit the needs of the renter and the operator. For example, in some markets, evictions may take longer, while in others, higher market rents can lead to greater financial loss for operators. TheGuarantors accounts for that by scaling coverage for approved, conditionally approved and denied applicant types. This covers up to the full value of the lease (up to 36 months) in some cases or down to a few months of the lease. And the renter pays for the coverage, meaning there is no added cost to landlords.
Financial risks associated with evictions, vacancies, no-shows, lease breaks and rent skips can be substantial for both small and large apartment owners. Losses can range from 0.25 percent of rent roll up to as high as 5 percent in some cases. “These numbers can add up pretty quickly,” says MacNeille. “Our objective is to do two things — ease the pathway for renters to get into properties, while at the same time eliminating financial risks that present a big obstacle for multifamily owners and operators across the United States.”
— By Beth Mattson-Teig. This article was written in conjunction with TheGuarantors, a content partner of Multifamily & Affordable Housing Business.
Learn more about TheGuarantors here.
For more information on becoming a Multifamily & Affordable Housing Business content partner, contact Jill Dickstein.