Maxwell Frost was the first member of Generation Z to enter Congress, but he couldn’t rent an apartment. Despite his high-profile position, his poor credit rating took prominence.
Frost is far from alone. The current method of assessing potential renters is damaging not only for them, but for property owners and operators who are missing out on valuable renters. And as worker demographics evolve, the situation is getting worse.
“Simply put, there’s not enough in an application for an owner or operator to get to know the applicant properly,” said Bob Schmidt, Chief Revenue Officer at TheGuarantors. “Often, applicants are more than what they appear on paper; there are many reasons for a thin credit score. But how can an operator determine who qualifies and who doesn’t? The system needs to change.”
One of the key reasons people find themselves unable to rent a home is a lack of fixed income. However, the demographics of the U.S. workforce have been evolving for years, to the point where more workers are freelancers or self-employed. This evolution was accelerated by the pandemic; people often no longer have a fixed place of work, so can move between areas or even jobs more fluidly.
The freelance workforce in the U.S. stands at around 59 million people, which, at 39% of the overall workforce, is an all-time high. This is expected to increase to 90 million people by 2028.
Freelancers’ average income is higher than 70% of overall workers, which is one reason it is growing in popularity. The demographics of freelancers suggest that they will continue to become more affluent; 26% of freelancers hold a postgraduate degree, up from 20% in 2021.
But despite these figures, many find themselves unable to meet operators’ criteria, Schmidt said. Millennials and Gen Z are most likely to explore freelancing and are also most likely to be renting a home, which is creating a broken system.
“Because freelancers’ incomes vary, they are seen by operators as risky,” Schmidt said. “But they could earn a whole year’s income in just two months. If they have a low credit score, it might be because they’re young and trying to build it up.”
Other potential renters are unable to lease a home because of a thin credit score based on historic information. “A low credit rating could be down to something as minor as having missed a cellphone bill for $60 when they were a student,” Schmidt said. “Or they once missed a student loan repayment, which will count against them even though they are now vice president of an international advertising agency. This will affect them for years.”
Another category of people who miss out on being able to lease a home are those from overseas. Many people move to the U.S. to study or for work, but without a Social Security number it is extremely difficult to rent a home, even if they have higher than average discretionary income.
People falling through the system is damaging to owners and operators as well as to potential renters. In times of uncertainty, they need to reduce vacancies as much as possible.
“There are many factors at play, and owners and operators are looking for ways to stabilize their bottom line, conversion rate and ROI,” he said. “These factors can change dramatically for renters during the lease term, but an operator can only look at a renter at one point.”
To create a solution, TheGuarantors has turned to technology. The firm has developed an AI risk model that predicts renter default with 89% accuracy. While owners and operators can only support default rates of 3% on average, TheGuarantors is able to take on higher levels of risk, protecting owners’ and operators’ net operating income.
“Traditionally, the operator will see a credit problem and flags will go up,” Schmidt said. “We fill in the gap. We take a more three-dimensional approach to underwriting, which allows an operator to take on more renters.”
The service works by the renter taking out rent and deposit coverage, in order to be able to lease their home. TheGuarantors takes the role of a guarantor if one isn’t available. The operator gets additional security and benefits by broadening its pool of renters to include people who might otherwise be denied, Schmidt said.
“Owners and operators send prospective renters our way, then it’s up to the renter whether to take the offer of insurance or carry on their property search,” he said. “The operator can take on more renters, thereby increasing occupancy rates, at no cost to them. Increasingly, this type of offering is considered a financial amenity for renters.”
Schmidt said he believes this solution can help solve a problem that will only grow more pervasive as working habits continue to change.
“Traditional ways of working will continue to evolve,” Schmidt said. “We see the service as becoming a lifeline for many and essential security for operators.”