Soaring rents have created a new hurdle for apartment owners and operators across the country. It’s now much tougher to find qualified renters to fill their vacant units. Income and wage growth have struggled to keep pace with the double-digit rent increases that many metros have experienced. Over the past two years, the average national rent has grown nearly 16% while wage growth has lagged at 4%1.
The growing gap between rent and income growth means that are having a more difficult time meeting standard application qualifications. In New York City, for example, annual average rents on a studio apartment have jumped 17% to $3,2002. For in New York that require an applicant’s gross income to meet or exceed 40x the monthly rent, that would mean that they’re now searching for individuals or co-tenants that earn upwards of $128,000 per year. Although rent increases are slowing, other major metros saw similar spikes in rents last year, including Seattle at 17.1%, Miami at 13.3% and Boston at 11.8%3
“Being able to recoup 76% of your bad debt is pretty awesome.” – Traci Baumgarten, Residential Financial Director, Equity Residential
Owners and operators want to fill what vacancy they have with good renters, and they are reluctant to bend on income and other credit requirements. Effectively, the pool of candidates who can qualify is shrinking, and many owners and operators are seeing a spike in applicant denials. In high-cost markets such as New York, Boston and Miami, some property owners have seen denial rates double in recent months from 30% to 60%.
Instead of turning away prospective renters that fall short, multifamily owners and operators are turning to insurance products that can bridge that gap and mitigate risk. “A big line item on a property owner’s P&L statement is bad debt. We help insure property owners against rent defaults, property damage, vacancy loss and more,” says Jesse Schmidt, Senior Vice President of Sales at TheGuarantors. TheGuarantors is the country’s largest guarantor of residential leases. The firm currently provides over $3 billion in renter coverage with surety products that insure residential leases and security deposits, as well as renters insurance.
Apartment owners and operators are understandably sensitive to the risk of renter defaults following the pandemic where it was difficult – and expensive – to regain possession of units where residents had stopped paying rent. “They’re also wary about a looming recession and what will happen if residents lose their jobs,” says Schmidt. “Essentially what we do is allow them to approve a wider funnel of their applicants without increasing their risk.”
Turn a “no” into a “yes”
Rental insurance products can help owners and operators boost bottom-line revenues by guaranteeing rental income. Especially in high-priced markets, lease agreements can represent tens of thousands of dollars. If a renter defaults on that lease, the landlord is usually stuck with the loss or has to resort to what can be a lengthy and expensive collection process. If that renter has a rent coverage policy, the landlord can file a claim and be reimbursed for losses. And in the case of TheGuarantors, those policies are backed by A-rated insurance carriers.
In addition to boosting occupancies, improving acceptance rates helps improve a property’s operating efficiency. Most owner-operators try to maintain an approval rate threshold of at least 40% to 60% so that they’re not spending operational dollars on things like showing apartments, marketing and reviewing applications. “If an owner gets close to denying a majority of applicants, the marketing efficiency starts to plummet and the operational spend for leasing teams starts to become a big issue,” notes Schmidt.
“The one time a tenant did default, I had a check from TheGuarantors for every dollar of rent that the ex-tenant did not pay me. This was truly incredible.” -Fred Fragano, R. A. Cohen & Associates, Inc.
Although some firms offer a “cookie cutter” product, TheGuarantors offers landlords comprehensive, customizable coverage that ranges from one month of protection to as much as guaranteeing the entire value on a two-year lease. “We take a very consultative approach with the owners and operators that we partner with to make sure that we rightsize the coverage amount to account for price sensitivity of renters,” says Schmidt. The firm also works to make sure that the coverage amount is sufficient to mitigate all of the bad debt that covers not only lost rent, but also any property damage, legal fees and vacancy loss. In addition, renters pay for the coverage, so there is no added cost for property owners and operators.
Scientific approach with a human touch
For renters, obtaining policies can take some of the stress out of the rental process and help them get into the property of their choice. TheGuarantors Founder & CEO, Julien Bonneville, in 2015 with the goal of mitigating risks for property owners, while also improving rental housing accessibility. It was a problem he experienced firsthand. Bonneville came to New York from France to pursue his MBA at Columbia University. He was denied by apartment landlords several times because he lacked a U.S. credit history and proof of income. “As a company, we’re happy to be helping these renters get the apartment they want,” says Elsa Liao, Vice President of Risk Management at TheGuarantors.
TheGuarantors employs a sophisticated underwriting model based on machine learning to evaluate the default risk of each renter. The model incorporates macroeconomic and multifamily housing trends, in addition to the standard qualifiers such as credit history, credit score, rental history, income, and savings. By taking a more granular approach to data analysis, TheGuarantors considers many factors that can be key predictors of renter payment behavior. Through the use of machine learning, TheGuarantors can focus on important data points instead of relying solely on a general credit score. Moreover, the company examines a wide range of data to underwrite applicants, including side jobs that may not be reflected in regular W2 income and the affordability of the apartment. This approach enables TheGuarantors to accurately assess the risks associated with renters, even during times of rapid shifts in the rental market and economy.
TheGuarantors’ customer service team is available seven days a week to answer questions, help renters navigate the process of getting qualified for an apartment and obtain the necessary coverage that allows them to move in. TheGuarantors also provides post-closing customer service. So, if a renter does have a problem, such as losing a job or a divorce, TheGuarantors has someone available to help educate the renters on handling lease changes responsibly instead of abandoning their lease.
There are plenty of renters whose risks are difficult to evaluate, such as students, retirees, foreign visa holders and small business owners. TheGuarantors evaluates non-traditional applicants with ease–from freelancers to Instagram influencers. “Our machine learning model created with vast amounts of data is able to quantify their risk much more accurately than a human reviewer can,” says Liao. “In addition to approving applicants, we add value by helping owner-operators find the optimal level of coverage based on the risk.”
3. Moody’s Analytics