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.
