Rent Break: New Startups Help Remove Financial Hurdles to Finding Dream Apartments

iStock

Mike Catanzariti and his fiancée were relieved when they found an apartment they liked near his new job at an investment management company in Manhattan. There was just one catch: The midtown building required two months’ rent as a security deposit, or over $6,300.

“That’s just too much money to just put up into a [landlord’s] savings account,” says Catanzariti, 26, who is trying to bank some savings to help pay for his upcoming wedding. “I basically called up my broker, and I was telling him, ‘let’s find someplace new.'”

Instead, his real estate broker and the building’s management company came up with an alternative solution: security deposit insurance.

In lieu of handing over all that cash, Catanzariti will pay $26 a month over the life of his lease to Rhino, a startup insurance company. The company guarantees that if the couple violate their lease or trash the apartment, it will reimburse the landlord for any damages. As an incentive for the landlords to accept the insurance, the insured amount is double that of the security deposit. In turn, the tenants are expected to reimburse the insurance company for any damage they may incur, or a broken lease.

Rhino is just one of a wave of new startups trying to address some very old problems: the staggering costs and financial hoops that renters in the most expensive cities face trying to get into apartments.

For would-be tenants who don’t have thousands of dollars for a security deposit or who have lousy or no credit, these tech-savvy companies will step in to help—for a fee.

But critics warn these services could promote poor financial planning as renters might take apartments they really can’t afford. Are they worth the risks?

The security deposit hurdle

A traditional security deposit is usually equivalent to one month’s rent, although in some markets (and buildings) it can be higher. And making it all even more onerous, it’s usually due at the lease signing—along with the first month’s rent and potentially a real estate broker’s fee, which is usually about another month’s rent. Phew.

Jetty is another company that has stepped into the fray to help renters deal with the challenge. Rather than a monthly fee, the company charges renters a one-time, upfront fee of 17.5% of the value of their security deposit. So for a $1,000 security deposit, the fee is $175.

Security deposits are “a massive amount of money that many people don’t necessarily have on hand,” says Patrick Briggs, vice president of growth at Jetty. “This is really a good way for people to access the apartments they don’t have the upfront cash for.”

Such services aren’t just for those on a limited budget—they’re also being made available as a perk by landlords of newer, luxury buildings who are competing for a limited number of wealthy tenants. They’re currently offered by some large New York City real estate companies, including Stonehenge Partners and Tishman Speyer.

“At first I wasn’t sure if [the security deposit insurance program] was real. It was too good to be true,” says Catanzariti, who eventually signed up for the service. He plans to move from his nearly $1,400-a-month, one-bedroom apartment in Philadelphia to a studio for $3,000-plus a month in New York on April 1.

“I only have to pay a little over $300 a year to keep control over $6,000 a year,” he marvels.

Currently Jetty operates in 45 states and Rhino serves only the New York City metro area, including parts of New Jersey. While both plan to expand, they were not the ones to come up with the idea of security deposit insurance. In 2000, SureDeposit launched its program, working with landlords of larger buildings across the country, many in the Midwest.

“It effectively allows a renter to move in at a lower price point,” says Kyle Gelsthorpe, vice president of the company, which was acquired by insurance company Assurance in 2011.

If the landlord says you can’t afford the apartment, get a guarantor

Another major hurdle for many renters is the income requirement. In cities such as New York, most landlords require tenants to have an annual income that’s 40 times their monthly rent. (In other parts of the country, the multiplier is a bit lower, usually in the mid-30s.) Do the math—that can be a heavy lift. The alternative is to find a guarantor who will ensure that the rent is paid every month.

Even renters who can afford high security deposits may have trouble moving into their rentals of choice. New York City restaurateur Giles Russell, 30, ran into problems when he and his wife wanted to upgrade from a one-bedroom apartment in Manhattan to a two-bedroom apartment across the river in Brooklyn to accommodate their growing toddler.

The couple, who both hail from Australia, could afford the more than $5,000 monthly rent on their apartment in the Williamsburg neighborhood. But because Russell is self-employed—he co-owns two Australian restaurants and his wife stays home to take care of their 18-month-old—they didn’t meet the income requirement.

So their landlord suggested The Guarantors.

The Guarantors, which launched in 2016 and serves the East Coast, guarantees a rental for a one-time fee. Within 24 hours of filling out an online application, Russell was approved. And in September, he and his family moved into their new apartment building, which features views of the East River.

“It was 100% worth it,” says Russell, who paid the company close to one month’s rent for the service. “Otherwise, I wouldn’t have been able to rent this apartment.”

The Guarantors’ founder, Julien Bonneville, moved to New York City from France to attend business school. Because he didn’t have a U.S. credit history, he needed a guarantor to get an apartment. And the idea for the company was born.

The company caters to foreigners, students and recent graduates, the self-employed who don’t have much of a credit history, and those with spotty credit issues. Clients are charged about 5% to 10% of their annual rent through the term of their lease for the service; rates vary depending on how risky the client seems. The company also offers rental insurance.

“Landlords just look at surface-level finances like credit score and income. We dig a bit deeper to understand the real financial picture,” says Michael Mirandi, chief of staff at The Guarantors. The company looks at bank statements and assets, as well, and then uses a proprietary algorithm to assess risk.

Jetty offers similar services, as does Insurent, a New York–based company that has been around since 2008.

“The different people we assist are [often] college and professional school grads entering the workforce who don’t meet the 40” times the monthly rent requirement, says Jeffrey Geller, chief operating officer at Insurent. “Think of us as the institutional Mommy and Daddy.”

Is it really worth it to get around rental restrictions?

Despite the potential that these programs offer, would-be tenants should proceed with care.

“I’d caution people [against] using these services,” says Roger Ma, a certified financial planner and real estate agent based in New York City who runs the financial planning company lifelaidout. “Doing so may allow you to overextend yourself [financially].”

If tenants don’t fork over a deposit and their dog ruins their apartment or there are other unexpected damages, they could be on the hook for quite a bit of money they don’t have.

Similarly, the requirement of earning 40 times the monthly rent isn’t just a mean rule to keep folks from renting. It’s a measure to ensure they aren’t spending too much of their income on rent, at the expense of daily living costs and savings for emergencies and retirement.

“Find a less expensive alternative, whether that’s moving to a different area that gives you more bang for your buck or having a roommate or multiple roommates or finding a cheaper apartment,” Ma says.

The post Rent Break: New Startups Help Remove Financial Hurdles to Finding Dream Apartments appeared first on Real Estate News & Insights | realtor.com®.

from DIYS https://ift.tt/2uwxdM4