The Alternative To Security Deposits That Provides The Cover Multifamily Landlords Need Today

Today’s leasing reality for multifamily landlords is a balancing act: expand the renter pool to protect occupancy while minimizing bad debt. Unfortunately, the traditional toolbox wasn’t built for today’s risk environment, said Charlie Shelly, senior vice president of client relationships at TheGuarantors.

With shifting renter demographics, regulatory limits and the limited protection of security deposits and personal guarantors, the result is increased risk exposure, Shelly said.

“When a resident defaults or damages a unit, the security deposit rarely matches the actual loss, leaving the owner to absorb the losses,” he said. “Fortunately, there are innovative solutions available to landlords that don't increase cost or risk.”

Here’s a worst case-scenario: A landlord has to evict a tenant from a two-bedroom apartment. The lost rent for the six months the case is contested amounts to $30K, while property repairs cost $3K and legal fees reach $5K based on an hourly rate for multiple court appearances. 

At a total loss of almost $40K, this case is extreme but not unheard of, Shelly said. And a security deposit would only have provided one month’s rent — $5,000 — as cover.

The cost of evicting a tenant in the U.S. is on average $3.5K to $10K when all fees and costs are taken into account. Focusing on lost rent, the average tenant pays $1,627 a month, so losing up to four months’ rent due to an empty apartment could cost on average $6.5K.

A traditional security deposit of one month’s rent will only provide $1,627 of this loss, leaving the landlord to incur losses beyond this amount. This directly impacts a landlord's bottom line, Shelly said.

“The true cost to landlords will vary based on security deposit laws and eviction timelines, among other things, and has ballooned as rents have increased nationally,” he said. “A landlord's exposure at the point of default is much higher than in years past, even if they’re seeing a reduction in the number of defaults. The market is moving toward insurance, surety bonds and structured alternatives that spread risk more effectively.”

A typical security deposit is one month’s rent, the most landlords can ask for in many states and cities that have deposit caps. In states such as California and New York where this is the case, increasing regulatory pressure is reducing the upfront cash deposit a landlord can ask for, increasing their risk exposure, Shelly said.

“While the goal of security deposit caps was to lessen the financial barrier of renting, it instead reduced the approvability of applicants,” he said. “Landlords became unwilling to take on the risk of default for folks who don’t meet stringent application requirements.”

If a landlord attempts to reduce their exposure to defaults by shrinking the potential pool of applicants, they increase the risk of vacancy and lost rent roll, Shelly said. Simply put: There aren’t enough renters who fit neatly into traditional categories.

In today’s environment, landlords see a wider variety of renter demographics and an increase in applications from credit- or income-challenged applicants. 

Take renters who can easily afford rent today but whose credit scores have been impacted by challenges from several years ago. They often can’t meet the qualification criteria on paper that landlords traditionally need to see to approve them, even though they would make high-quality renters.

When landlords are unable to approve these types of renters, there will inevitably be an impact on the bottom line, Shelly said. 

The alternative is to look at solutions such as TheGuarantors’ lease guarantee product, he said. A one-time, non-refundable fee paid by the renter gives them access to a home they may not have otherwise been approved for, without the landlord compromising rent roll.

“Our goal is to provide protection that aligns with actual landlord losses, not outdated, one-size-fits-all deposit assumptions,” Shelly said. “This gives landlords the ability to approve more renters while increasing leasing velocity, decreasing bad debt exposure and sustainably strengthening the bottom line.”

TheGuarantors' flexible solution offers coverage for defaults, damages, vacancy, and more for up to the full lease term, Shelly said. Three months of coverage will never cost more than one month’s rent for renters, while it offers landlords three times the coverage for the same cost as a security deposit. 

TheGuarantors’ solution allows landlords to requalify applicants without taking on the cost or risk themselves. It essentially widens the pool of applicants, opening the door for conditional and declined renter applicants who owner-operators are otherwise hesitant to approve, Shelly said. 

“TheGuarantors' lease guarantee product also tackles other aspects of the burden that a traditional security deposit places on both landlords and renters,” he said. “From the landlord's perspective, deposits create issues such as the accounting nightmare of collecting, tracking and returning deposits.”

The market has been asking for innovation for years, Shelly said, and technology is now at the point where service providers can offer solutions that bring a whole raft of benefits to landlords and tenants.

This article was produced in collaboration between TheGuarantors and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.