Are Security Deposit Alternatives A Viable Method Of Increasing Access To Housing?
With the state of housing affordability seemingly mired in intractable crisis, both the public and private sectors are seeking changes to any part of the system that would make a difference. Though it might not be the central issue, needing an upfront cash security deposit is one barrier a growing number of companies are targeting.
Rhino, a startup founded in 2017, bills itself as offering security deposit insurance for landlords and property managers while offering renters an alternative to traditional security deposits. Qira, formed in October out of a merger of two other startups, offers a similar service as part of what it calls an end-to-end financial services platform for the rental industry. Both companies, as well as a handful of others, take monthly payments from renters and guarantee repayment of claims for damage or unpaid rent to landlords.
“If this is a creative way for somebody to be able to afford to live in housing that they wouldn’t otherwise be able to live in, I could see how [security deposit alternatives] could be a good thing,” said Ian Sobel, vice president of asset management for nonprofit affordable housing developer NHP Foundation, which has used Rhino and similar services at some of its properties. “But essentially, you have to make sure that you’re not taking advantage of the little guy.”
In a country where 40% of citizens don’t have savings to cover a surprise expense of $400, the benefits of spacing out a payment of what can in some cases be multiple months’ worth of rent are obvious. Cities like Cincinnati and Atlanta became among the first in the U.S. to mandate that landlords offer alternatives to security deposits last year, and many forms of designated affordable housing have government-mandated options for paying deposits in installments or restrictions on required deposit size.
Rhino is offered by landlords representing over 2 million units across 46 states, double the number it had a year ago, CEO Paraag Sarva told Bisnow. Qira services more than 20,000 units across 30 states, with plans to triple that number by the end of next year, representatives for the company said. The rapid rate of growth comes primarily from landlords adopting the companies’ services, but both Qira and Rhino tout their benefits to tenants, with Rhino’s company blog stating, “Our mission is to give renters financial alternatives to afford the homes they want.”
Qira’s model charges tenants 1% of their monthly rent, while Rhino’s charges depend on a property’s location and rent, a tenant’s risk assessment and the landlord’s chosen coverage level. While Sarva said those charges can be as low as $5 per month, a $3K deposit would correspond with charges of $24 per month in Philadelphia or $18 per month in Los Angeles, Shelterforce, a publication of the National Housing Institute, reports. Neither company charges landlords fees for usage of their product.
The models offered by companies like Qira and Rhino have the potential to satisfy the requirements of some of the new local Renter’s Choice laws, adding an arrow to the quiver for entities working to ensure access to housing. (The term Renter’s Choice comes from the political advocacy group of the same name, which was created by Rhino, pushing for such legislation in cities nationwide.) But they also come with material downsides and risks that could jeopardize the benefits of circumventing security deposits, housing advocates say.
Unlike deposits, the fees that fund Qira, Rhino and the like are nonrefundable and, in the case of damage or unpaid rent, could still leave a tenant vulnerable to collections action. While Rhino is a registered insurance provider in all of the jurisdictions in which it operates, Qira Chief Operating Officer and Chief Financial Officer Revital Gadish stipulated her company isn't an insurance provider but an intermediary that reserves funds in escrow and assumes the risk of tenant repayment. As an insurer, Rhino has claims adjusters that operate as third parties to validate claims of damages, while Qira requests information from both parties but doesn’t independently verify it.
“We haven’t had many cases like that, but if the landlord would insist, we are there to support the landlord,” Gadish said. “So we would tend to go with the landlord's request.”
Between the two, only Rhino seems set up to address one of the most common criticisms of security deposits: that landlords will seemingly use any excuse to withhold or reduce the refund when a tenant moves out. That opens up its own set of problems, National Housing Law Project Director of Litigation Eric Dunn said, adding there is little case law regarding which legal protections, such as the right of tenants to sue a landlord for improperly withholding a deposit, would apply to alternative models.
“There’s a lot of moral hazards with these products, because if the person benefiting from the product is not the person paying for the product, it skews all the usual incentives you would have,” Dunn said.
Rhino has also been accused of finding in favor of landlords in cases where the damages a tenant owes wound up being more than a security deposit would have cost, without explaining the reasoning behind its decisions, Shelterforce reports. In a marketplace in which landlords choose the product, Rhino could be pressured to favor landlords more often, Dunn said.
Whether a company labels itself as an insurance provider like Rhino or simply mimics an insurance product, it runs a serious risk of leading tenants to believe the fees they pay are in exchange for protection against damage claims, Dunn said. Even so, such programs might be worth it in the most expensive cities, where ponying up multiple months’ worth of rent can mean lump-sum payments over $5K — eliminating many renters and potentially straining the finances of tenants with incomes well above those qualifying for financial assistance.
“It’s really an opportunity for tenants to save a ton of money at move-in and have us involved in the process if something does wind up happening,” Sarva said. “The most important thing is that it’s an option that’s presented to the renter. The whole point is, ‘If you want to pay a cash deposit, great.’ But most people don’t want to pay a cash deposit.”