Unlocking social impact: the key to affordable rental housing with lease insurance

ESG’s social pillar is gaining momentum. Investing through social impact programs is becoming a greater priority in the rental housing landscape, regardless of affordability. With housing costs at record highs and most Americans living paycheck to paycheck, rental housing investors and operators play a critical role in facilitating accessible housing.

Social programs are vital in fostering diversity and inclusion, and in improving outcomes for all constituents in the rental housing ecosystem, as it supplies a basic human need through housing. Having a dedicated, long-term social impact plan is imperative.

The meaning of affordable rental housing

Affordable housing is a pressing issue, gaining increasing attention from policymakers, governments, and communities worldwide. The current presidential administration highlights housing insecurity as a critical concern, recognizing its profound impact on economic confidence and societal well-being. As such, rental housing owners and operators face increasing pressure to incorporate social principles that address the challenge of housing affordability.

Deposits pose a notable housing barrier for renters and are mostly unrefunded or unclaimed, creating marginalized communities and persisting financial hardship.

In their Renter Needs Research study, Fannie Mae identified that “renters faced more challenges in 2023, largely due to increased costs associated with renting, beginning with the move in phase.” The security deposit (81 percent in 2023 vs. 72 percent in 2021) was rated “significantly higher” in terms of challenges faced. Expanding access to quality, affordable homes is a priority to both Fannie Mae and Freddie Mac, who offer incentives to borrowers that implement clear and measurable social impact programs. Fannie is seeking for “options to defray and/or decrease the cost of renter security deposits, to help renters qualify for quality rental housing and increase savings.”

Not only do deposits reduce housing access and hinder occupancy, they create substantial operating burden and generate complaints and legal disputes, driving financial strain for renters, operators, and investors.

Deposit-related obligations are complex, ever evolving, and easily breached. As such, deposit-related lawsuits have become common nationwide. In the state of Georgia, ECI Group endured a USD$ 2.4 million settlement for partially withholding deposits without adequate time for dispute. National advertising is popular amongst firms pursuing renters who are willing to engage in deposit-related class action suits.

While deposits exacerbate financial challenges most renters face, bad debt is increasing for investors due to unpaid renter balances at move-out. Between 1-2 percent of a property’s income is typically written off. These losses not only affect financial performance, but also impact housing equity and social inclusion, as they lead to increased deposit costs for renters with affordability challenges.

Deposits have unsuccessfully generated the financial protection they were originally designed to deliver, which is why bad debt has grown considerably over the past few years. The industry has adopted a common practice of discounting and waiving deposits, ensuring bad debt and creating fair housing exposure due to inconsistent implementation. Therefore, a deposit alternative is necessary to increase housing affordability and provide greater financial protection for investors, owners, and operators.

Lease insurance: The socially responsible deposit replacement

Lease insurance replaces the need for deposits entirely. Replacing highly regulated, burdensome security and pet deposits with reliable lease insurance eliminates a significant leasing roadblock, making housing more accessible for all renters. With millions of leases insured to date across the socio-economic spectrum, a majority of renters, regardless of affordability challenges, prefer lease insurance over traditional security and pet deposits.

Programs with a social focus, like lease insurance, staunchly maintain the best interests of renters. Unlike surety bonds, lease guarantees, and similar alternatives, lease insurance prioritizes affordability, accessibility, and social impact. While advocacy for deposit-related legislation has led to explicit support for deposit alternatives in several states, it is still crucial to educate about the difference between lease insurance and alternatives.

The primary difference between lease insurance and a bond or guarantee is the financial impact on renters. Lease insurance provides coverage for an entire property, while alternatives provide coverage for specific renters. While most renters prefer lease insurance regardless of income level, alternatives solicit affordability-challenged renters who simply can’t afford to pay a deposit. With lease insurance, there is no renter subrogation. With alternatives, renters are personally liable for all claims, which damages their credit and creates more barriers to future housing.

Lease insurance underwrites and insures properties – not renters. Coverage to offset write-offs is offered via a pass-through expense to renters, which is designed never to exceed the cost of a deposit. Unpaid balances are offset through property claims, and the insurance provider never pursues renters for collection.

Conversely, bonds and other alternatives underwrite renters, who remain fully liable for reimbursing the full cost of all claims filed by the property, regardless of payments made. Once enrolled in a bond, renters assume they are offsetting risk similar to a deposit, which is not the case. Full claims paid amounts are pursued for collection by bond providers, impacting the renter’s ability to obtain future housing. Bonds ensure renters maintain a cycle of financial struggle and create additional barriers to housing, exacerbating a growing housing problem nationwide. Offering a credit building program (like Esusu) to renters while offering a bond program is incongruous, as subrogation negatively impacts credit.

Lease insurance prioritizes the best interests of renters in all efforts. It creates greater access to housing and addresses the preference of all renters to avoid upfront move-in cost and the risk of deposit loss at move-out. Lease insurance fosters trust and goodwill with renters and aligns with ESG principles by promoting fairness and social responsibility, while preventing credit damage caused by deposits and bonds.

According to a report by NBC News, Cierra Winzor, a mother of two, was left without a home or job after Hurricane Dorian struck Florida in 2019. She didn’t have the time or resources to save up for a security deposit. She learned about security deposit alternatives during her apartment search and said it saved her approximately $2,500 upfront, allowing her to instead pay a small monthly fee for insurance.

“I was able to save that money that I would have spent on a security deposit to build my credit, and get into a better financial standing,” she told NBC News. “I was able to put my kids into a nice daycare and thrive from that because I was able to keep that money and do what I needed to do to be in a better financial place.”

Winzor is just one of many examples of how switching from deposits to a mutually beneficial solution like lease insurance can deliver social good for renters while appropriately mitigating risk and replacing avoidable lost income.

The win-win of lease insurance

Lease insurance represents a paradigm shift in rental housing, offering a win-win solution for property owners, operators, and renters alike. By eliminating security and pet deposits and prioritizing affordability, accessibility, and social impact, lease insurance is a much-needed solution to drive positive change within the industry. As stakeholders in the multifamily real estate realm, leveraging lease insurance not only enhances financial performance but also fulfills the broader social responsibility to contribute to the well-being of those whom we house in our communities.

This article was written by Janine Jovanovic, CEO at LeaseLock.

References

Evans, Michele and Jonathan Gross. “Fannie Mae research identifies challenges faced by today’s renters.” Fannie Mae. Accessed June 17, 2024.

Agadoni, Laura. “Here’s how a tenant can sue you for 2-3x the deposit amount.” Apartments.com. Accessed June 17, 2024.

Georgia apartment security deposit ECI Group $2.4M class action settlement.” Top Class Actions. Accessed June 17, 2024.

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