I have a question for multifamily guys and apartment renters in general.
I was cold emailed the other day about a service that would serve as an alternative to the standard "one month rent upfront" deposit, or whatever it is in your respective market. Essentially, they charge the renter a non-refundable monthly fee of $5/$1000 of what the original deposit would be (So $10 if rent, and thus the deposit, is traditionally $2,000).
I typically disregard a lot of these cold email schemes, but I'm genuinely interested in this one. I think that students, new grads, or anyone else really who doesn't want $1,500 or so tied up with their landlord may honestly be interested in this type of deposit structure. The downside is, of course, that it is non-refundable, but in my experience as a renter, I rarely get your full deposit back from a landlord anyhow, even after taking good care of my unit.
With people now incredibly used to paying $10-ish a month many times over for a variety of services, like Netflix, as well as used to paying small monthly fees in the apartment world for things like valet trash, am I wrong to think that people would be interested in this type of monthly deposit fee as an option in place of a standard upfront deposit?
Was it from Say Rhino? Got a similar email yesterday.
My personal opinion is maybe. If a renter is living in a Class B/C product and is extremely sensitive to total nominal rents, this is definitely something advantageous that would grab their attention. But, does someone living in a Class A downtown apartment payment $3,000+ really care enough to have this impact their rental decision? Unlikely.
Hah, you nailed it.
I am not personally a fan of their "You can advertise deposit free renting" pitch, because that's not a marketing pitch that I think would be particularly effective for class A new construction, but the more I think about it the more I kind of like it as an option.
People are so used to paying smaller dollar amounts monthly these days - whether it's for a streaming service or their iPhone - that I'm not sure they wouldn't take landlords up on this. Plus I remember when I was coming out of school, dropping $1,500 for a deposit when I hadn't even started work yet was hands down my biggest concern and I even negotiated a moving bonus specifically to cover that.
Beyond that, $120 or so a year as a deposit just seems like a steal.
i think it's good for renters of any class apartment. Class A doesn't mean they're sitting on a pile of cash, BMW is one of the most leased cars. This would have helped me as a poor man in NYC having to dish out first and last, plus security deposit.
What does the landlord get out of it though, besides being friendly to tenants? Is a Class A tenant that doesn't have enough cash for deposits as desirable as one who does? What's the motivation of a person who is not getting a deposit back to honor leasing commitments?
I’ve seen this advertised more and more, usually for larger multi complexes that are slightly less stringent on qualifications, in high COL or for student housing. It can definitely make sense for some people (new grads in NYC that are renting 4K a month apts with a roommate but finding 80x guarantors is hard, or people just starting out on their own).
Honestly, it may even make sense for people that have more money if you can make over 6% with that money invested vs. sitting as a security deposit.
Also, in places like NJ where deposits are 1.5 months, so moving into a place with stub, first month, broker fee and security deposit is really needing 4 months upfront, having an option to insure the SD, would probably be attractive to a whole lot of people. Same with NYC even with the deposit only being 1 month.
When I moved into my place last year, I wrote checks totaling $15k after condo board applications, broker fees, security deposit and first month + partial stub. Lots of people couldn’t do that.
Good Lord. That's more than my entire year's worth of rent up front.
What does the LL get? Cash security? LC? IOU?
Last I crossed this type of scheme it was more of an insurance policy where the LL would submit a claim for damages while the renter paid the premium. Shitty system for LL's.
If I was given cash that would be OK (I doubt its what we'd get) although there does become a bit of a power shift in that the person looking for their deposit back is no longer an individual with little recourse but now a large(ish) company whose security you're holding is supposed to be a return of capital.
I think Lemonade might have some type of add-on that is competitive with this. I've also seen versions that charge more to act as a guarantor in cities like NYC where income requirements can be very high. I think Insurent is the guarantor service but I don't recall.
From the landlord perspective, tenants who put $2,000 down as a security deposit vs $10 a month should in general take better care of the unit and might think twice before dragging a couch across the fake the hardwoods. I’m doubtful this opens up the renter pool for Class A new development, as credit rating and income requirements filter the most likely users of this service.
My favorite sceme was one that offered to fill tenants cars with gas every Sunday night and add the gas bill to the rent...
So in this scenario you would collect $120 in nonrefundable fees over 12 months vs collecting a $2,000 refundable deposit up front? Analytically, you would want to look at historic op-ex and determine whether avg tenant damages per unit are greater than or less than $120 per year. Conceptually, I think this structure is disadvantageous to both LL & tenant:
Risk to LL - what if a tenant abandons their unit in month 3? You would only have $30 on hand to address any damages they may have made to the unit.
Risk to LL - I would assume that a person who cannot come up with a security deposit is a greater financial liability. Leasing agents are only looking at gross income & standard consumer credit reports to qualify a tenant, but I would argue that ones ability to put up a security deposit is a basic indication of their financial health.
Risk to tenant - In my opinion, this new world of every expense being amortized is creating a situation where people are living further and further beyond their means. It also exacerbates the reality that market rents are generally out of touch with most american's income/savings levels. I would rather lower rent for a qualified tenant than stretch for an unqualified one.
I would think this would be a liability to the landlord. In the units I own, I charge one month's rent for security deposit. This helps cover not only damage but also at least I have a month of rent if the tenant quits paying and I have to kick them out.
As a renter, I would take this all day. Take my current 2br apt I rent now - Deposit was $2,400. So I pay another $12/month instead of giving them that deposit. Even if I leave the place PERFECT at the end of the 12 months, they're going to hit me with at least $150-250 for a professional cleaner to come prep the place for the next renter. They'll probably nickle and dime me for some other crap that was already in there prior to move in that I'm too lazy to look over our photos to fight.
From an owner's perspective... This seems like a major liability and there's no way I'd offer it. Places already get trashed as is, if a tenant has even less liability I would expect unit turn costs to increase far more than a few hundred more you're collecting per year
I think this would have a lot of adverse selection where the people taking it have less incentive to care about getting the deposit back.
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