By Mike Rudoy (MultiFamilyExecutive.com Article) —
When looking for a new rental home, affordability is the most important concern for renters, even outranking location as the top priority. And while monthly rent is the most obvious factor in affordability, upfront costs can also be prohibitive.
In Jetty’s 2019 Renter Sentiment Report, we found that almost 60% of renters have been prevented from moving into a rental home or apartment they wanted because of high upfront costs. This means that properties could be missing out on a significant number of residents, simply because security deposits are too expensive or because competing properties make it less expensive to move in.
As a result, many properties opt to reduce security deposit amounts, or eliminate them altogether. Unfortunately, this makes those properties more vulnerable to risk, as they have less protection against damage and missed rent. If a resident causes damage or skips out on their lease, for example, the property will need to choose between eating the loss or incurring additional costs while attempting to collect—with no guarantee that those attempts will be successful.
That’s why in recent years, some properties have started utilizing liquidity products. These products drive demand by reducing up-front costs (and making it easier for residents to move in), without reducing protection for the property.
What Are Liquidity Products?
In a broad sense, liquidity products allow consumers to keep cash in their pockets. Within the context of renting, they’re products that help renters sign leases and move into rental homes without having cash tied up in a security deposit.
Up until relatively recently, the only alternative to paying a security deposit was to take out a security deposit loan. For example, the Ready to Rent project lets renters take out loans of up to $1,000 with a 5% interest rate for up to three years.
Today, there are financial service providers that offer other options. Instead of taking out loans, renters can pay a provider a one-time fee that costs a fraction of the cost of the required security deposit. Jetty is one of these providers, and, in our case, it costs 17.5% of the deposit amount. For example, if a property requires a $1,000 deposit, a renter could purchase Jetty Deposit for $175.
Then, the provider covers the property up to the amount of the deposit for covered incidents if a resident fails to pay. If a resident causes damage or skips rent, they’re still the primary responsible party—but if they fail to meet that responsibility, that’s when the provider steps in. So even though the renter pays less at move-in, the property has the same coverage as they would if the renter had paid a full security deposit.
When properties partner with providers that offer liquidity products, they can drive demand by advertising low move-in costs to prospective residents. In many cases, these move-in costs will be lower than that of properties offering reduced deposit amounts as a lease-signing incentive.
So, for example, if two properties have comparable units available at a rate of $1,000 per month, with a required security deposit of $1,000 to move in, one property might decide to drop that deposit amount to $500 to become more attractive to prospective residents. This can be effective in the short term, but if a resident causes damage in excess of $500, that’s a likely loss for the property.
If the other property opts to offer a deposit alternative instead, it could not only drop move-in costs lower than the first, but it could also retain the full $1,000 in protection. As a result, the property would be the more affordable option for renters, while retaining all the same protections they’d have with the full deposit amount.
As properties look for new ways to stay competitive and attract renters, an increasing number of owners and operators are already turning to liquidity products as a solution. And while they’re still a relatively new addition to the multifamily space, it’s only a matter of time before renters begin expecting them as an option.