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Single-Family

Increase Value of your SFR Portfolio with Rent Protection Insurance

Improve Your Bottom Line by Offloading Risk by Adam Meshekow Every real estate investor can recall with great clarity and detail a time when a defaulting tenant caused thousands of dollars in damage to an apartment or home rental. While infrequent occurrences, when they do happen, they can ruin an otherwise strong annual financial performance. In a year of unprecedented rent default and massive unemployment, missed rents and bad debt have reduced portfolio returns and humbled investors and operators alike. Furthermore, Rent Reform continues to gain traction across the country, with many sponsored bills coming to statehouse floors in the coming months. The CDC eviction moratorium—an extreme example of rent reform—may wind up costing owner/operators billions of dollars in lost rent. In the midst of all of this adversity, new and innovative rent protection products are helping to deliver economic value and true risk transfer to the SFR industry. Let us start with security deposits, which have been used for generations to limit the amount of risk that a landlord takes when renting out an asset. In most jurisdictions, landlords are required to follow strict rules and regulations governing how large of a deposit they can demand, how to hold cash deposits, and for what they can be used. The process of administering, accounting for, and returning security deposits represents a cost center for landlords across the country, costing $35-$60 per door per year to manage. Landlords have been self-insuring bad debt through the use of cash deposits for generations. This form of self-insurance is useful to cover a small loss or minimal damage to the asset, but fails to cover most losses resulting from skips and evictions, such as rent, utilities, late fees, legal fees, etc. Much of the innovation in rent protection and security deposit replacement insurance is being driven by rent reform. New rent reform legislation limiting the amount of cash deposits and requiring landlords to offer insurance alternatives has passed or will pass in cities such as Atlanta, Cincinnati, Baltimore, and New York. The good news: these new products truly are a win-win for both the operator and the resident. Residents are feeling the pinch from COVID-related loss of employment and reductions in income. Liquidity is at a premium today and residents are loath to fork over one month’s rent to a landlord and have it sit in the bank. Cash security deposits are a highly inefficient use of capital and a poor form of self-insurance when compared to these novel soft-capital products. Security deposit replacement insurance products allow landlords to enjoy as much and often more coverage than what a traditional cash deposit provides and allows the consumer to finance the cost over time by paying a low monthly fee. For example, let’s say the rent on a single-family rental in Florida is $1,800 per month and the landlord wants a $2,500 security deposit to cover damage, utilities, rent, and legal fees. In lieu of cash up front, the resident could pay roughly $25 a month in insurance premiums. Allowing the resident to pay overtime at a rate of approximately 1% of the cash security deposit per month is a true win/win for both the owner/operator and the resident. It gives the resident flexibility to move in without having to come up with all of the cash required, it saves the owner-operator around $50 per door in security deposit administration, and it allows the owner to have almost 50% more coverage in the event of missed rents and fees and damage. When applied across all properties, security deposit replacement insurance improves portfolio value by increasing occupancy, reducing vacancy loss, and improving overall NOI. Owners/Operators across the country are embracing this type of insurance technology across multifamily, student housing, and single-family rentals to boost NOI as much as $900,000 per every 1,000 doors. There are not many products out there that can have this type of impact on your bottom line by offloading the risk to someone else so you can focus on growing the value and operations of your assets.

Single-Family

Security Deposit Replacement Insurance

A New Sought-After Amenity by Adam Meshekow Everyone remembers their first time renting an apartment and having to put up a security deposit. I certainly remember. After finishing college, I moved to New York City and, after an exhausting search, found my dream studio apartment in Greenwich Village. Only when reviewing the lease terms did it become clear to me that the security deposit would wipe out all the savings I had earned during the past four summers of college. Security deposits have been used for generations to limit the amount of risk that a landlord takes when renting out an asset. In most jurisdictions, landlords are required to follow strict rules and regulations governing how much they can demand, how to hold security deposits, and to what they can be applied against. The process of administering, accounting for, and returning security deposits represent a cost center for landlords across the country, costing $35-$60 per door to manage. As rents have steadily risen over the past decade, so too has the average size of cash security deposits. Prospective residents need to come up with a substantial amount of cash to move into a new home. In a city like Boston or New York, where it is customary to put up a one-month security deposit, move-in costs can easily exceed $5,000. It should be clear to all by now that cash deposits are a poor form of self-insurance for the landlord and an inefficient use of capital for all parties. When they are applied in the case of a default, they rarely cover the total losses incurred. An Alternative to Security Deposits Pandemic-driven headwinds, pro-tenant legislation and innovative new products are quickly changing the landscape for security deposits. Today, cash deposits are being replaced by smarter alternatives—soft capital solutions to replace hard cash deposits. These new security deposit alternatives free up critical tenant liquidity which is important in today’s declining credit environment. For example, let us say that a landlord’s average security deposit is $1,000. With security-deposit replacement insurance, the renter would instead pay about $10 a month, and the landlord would receive the same $1,000 in rent and damage protection. In July 2019, the State of New York passed sweeping rent reform law. In part, the bill limited the amount that landlords can require as a security deposit to one month. Soon after, several states followed suit. In recent months, certain cities have passed legislation that goes even further. For example, the city of Atlanta began requiring landlords to provide tenants with installment plans for security deposits or to offer security deposit replacement insurance. Today, there are a dozen states in varying stages of considering legislation that, if passed, will require landlords to offer similar alternatives to traditional security deposits. The next generation of renter is the “subscription model generation”. Generation Z are used to paying monthly fees (think Netflix, Spotify) and using new financing tools (Affirm, Klarna) in lieu of putting cash up front. Generation Z moves frequently and demands flexibility. Market data shows that when a security deposit alternative is offered, roughly 90% of Gen Z choose to keep their cash and go with the alternative. In the near future, this new apartment generation will consider a small monthly payment for security deposit replacement insurance as an amenity. Those who do not offer a choice to tenants will find themselves at a competitive disadvantage.

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