Attracting new residents in a down market can feel like a race to the bottom, and property managers often wind up offering concessions in an effort to stay competitive. These strategies can be effective, but they come at a cost to the property.
Today, liquidity products offer a better alternative, as they appeal to renters looking to put down less money upfront, while enabling property managers to avoid the financial downsides of standard concessions. Some renters, for example, take out security deposit loans to cover part of their move-in costs. Others turn to companies like ours for security deposit alternatives, which enable them to pay a one-time fee at a fraction of the cost of a traditional security deposit.
Both of these liquidity products drastically reduce renters’ move-in costs, without costing property managers a thing — or negatively impacting property values.
The rental market is getting crowded.
Increased supply in the rental market has put property managers in a tough spot, and the situation won’t be changing any time soon. With over 600,000 new units in the construction pipeline, supply will continue to outstrip demand in major markets including Denver, Seattle, New York, Phoenix and Miami.
These conditions favor renters by giving them more housing options, and they force property managers to find new ways to make their units more appealing. While some choose to lower monthly rents, this can have a long-term impact on property values. As a result, many property managers opt to instead offer concessions to prospective renters, typically in the form of a reduced security deposit or a month of free rent.
Concessions help properties fill units, but at a cost.
On the surface, concessions may seem like a great compromise, as they enable property managers to attract residents without lowering rent. Still, they aren’t without consequences. According to one report, as of March 2018, the average rent discount among lease-up properties in the top 15 markets for new supply in the U.S. was 7% — which works out to roughly three weeks rent-free. This negatively impacts the entire rental market, because properties are forced to match lower monthly rents.
Markets in the south and southwest in particular offer high rates of concessions to tenants — San Antonio, Texas, leads with a rate of 33%, according to one analysis, followed closely by Houston, Las Vegas, Austin, Phoenix and Dallas. And despite the clear downsides, it’s likely that concessions will become even more common as rental inventory increases faster than demand.
Security deposit concessions, on the other hand, can increase operating costs and put properties at risk. Security deposits are designed to protect property owners and managers from damage, as well as from financial loss if a resident fails to pay rent. If deposits are discounted or waived, funds may not be easily accessible for repairs, or to make up for lost revenue.
Liquidity products appeal to renters without requiring property managers to make concessions.
In this context, liquidity products are third-party offerings that enable a renter to move into a unit without paying the standard move-in costs in full. The most common of these products are security deposit loans and surety bonds.
Option 1: Security Deposit Loans
As the name implies, a security deposit loan is a loan that can be taken out specifically to cover the cost of a security deposit and then paid back with interest. The NeighborWorks America pilot project, Ready to Rent, for example, offers security deposit loans of up to $1,000, with a 5% interest rate over a maximum period of three years.
Renters can seek these loans independently and then use the funds to cover the cost of their security deposit. Encouraging renters to use these products requires no additional work on the part of the property manager and is a great option for those who want to quickly lower the barrier to entry for residents without getting involved in the process.
Option 2: Security Deposit Alternatives
Surety bonds, on the other hand, are typically referred to as “security deposit alternatives” for renters. With these products, the renter pays a fraction of the cost of the security deposit directly to a third-party provider. (Full disclosure: My company is among these providers.) Then, that provider offers to cover damages up to the amount of the full security deposit if the resident fails to pay for them.
Unlike security deposit loans, these products are only available for purchase at properties that have partnerships with providers. This way, if the renter damages the rental unit or fails to pay rent, the property manager can file a claim with the provider after unsuccessfully seeking damages from the resident.
While this option requires property managers to establish partnerships with providers, it also enables them to take a more active role in the lease-signing process. Instead of instructing potential residents to seek out loans on their own, they can direct those would-be renters to their provider’s site to complete the transaction within seconds.
The Bottom Line
Like concessions, liquidity products are attractive to renters. They reduce upfront costs and make units more affordable. But liquidity products are a better option for one important reason: They don’t require a sacrifice on the part of the property manager.
By encouraging renters to use liquidity products instead of offering rent concessions, property managers can remain competitive while avoiding the risk of lost rent or being stuck footing the bill for damage.