Deposit Free Home Rentals - A crossover between PropTech, FinTech and InsurTech
One of the biggest pain points in the rental industry is over the deposit amount paid at the start of the transaction. Tenants always feel it’s too much, while landlords/property managers feel it’s too less!
There are 2 big questions around deposits -
How much deposit should be charged?: In cities like New York, it is 1-month rent as deposit vs cities like Bangalore, where 6 months of rent as deposit is fairly common
Practices around collection, deductions and return of the deposit
The internet is filled with stories of both tenants and landlords on how they feel they are getting the short end of the deposit stick and the need for better solutions.
Over the past few years, a slew of technology companies have come up who focus on solving this portion of the rental equation and are trying to foster a new era of ‘Deposit free rentals’.
Let’s take a closer look.
Rent a home without paying a deposit
The words above are strongly compelling for tenants everywhere - And there are many companies that are focussing in making this a reality.
Rhino, Jetty, Rimbo Rent and LeaseLock operate on an insurance based model. Tenants pay an upfront fee (or in some cases, a monthly fee) as an insurance - Whey they move out of the property, these companies reimburse the landlord for any property damages or unpaid rental dues they may have.
The Guarantors goes an extra step and even co-signs leases along with tenants and guarantees rental payment on their behalf to the landlord.
Eqaro Guarantees operates on a bond subscription model. Essentially, for an upfront fee paid it covers up to 6 months of lock in, unpaid rent/utilities, damages, etc. to the landlord.
Obligo has adopted a different concept called ‘Billing authorization’. Tenants sign up with Obligo and authorize them/the landlord to withdraw money from their bank account when they exit the premises post tenancy for unpaid rent, damages, etc.. This way, there is no deposit transferred at the start of the contract.
Most of these companies charge between 8-18% of the deposit amount in lieu of their services, which seems to be an acceptable number from tenants.
Deposit free rentals is alluring to tenants, especially younger ones. Photo by cottonbro from Pexels.
Challenges in this nascent industry
While the solutions appear perfect on paper, it has had it’s fair share of challenges and criticisms as well.
While most tenants are happy to sign up initially, they feel let down during claims and settlement. There have been many complaints that landlords are charging significantly higher amounts during exit and levying fees which are otherwise waived off.
Another reported issue is that landlords are taking insurance/coverage for amounts much higher than the deposit. In many cities/countries, the deposit amount is capped but there is no cap to insurance amount.
Take the case of Peter Steininger, a college student who was renting an apartment in Brooklyn, New York. Along with his room mates, he had previously paid a deposit of $3,000 to his landlord. After a few months, the landlord asked them to move onto Rhino’s rental insurance plan through which they’d get their $3,000 back in exchange for $45/mo in insurance. Being cash strapped college students, they jumped at the opportunity.
They did not realize that the landlord had insured the rental for $7,000 (instead of the $3,000 deposit paid earlier). When Peter and his roommates moved out, the landlord billed them for $6,000 with multiple deductions and got his payment reimbursed through Rhino. Peter and his roommates are fuming. Rhino customer support was of no help when Peter contest many of the charges imposed on them.
This also highlights a significant challenge for these companies.
‘Deposit Removal’ intermediaries will always have to deal with 2 parties who are at opposing ends of the transaction. The deductions in question will always remain a grey area due to the nature of the transaction. Will a replace for a bulb cost $50 or $65? Does the master bedroom need a coat of paint or not?
In an ideal scenario, they want the landlord and tenant to sort out this matter and only want to be involved in settling finances. In reality, they are more likely to be perceived as the party that settles disputes, and that will always leave 50% of their customers unhappy with their decision.
For further reading:
https://www.outlookindia.com/outlookmoney/real-estate/now-rent-rooms-in-bengaluru-without-worrying-about-security-deposit-7616
https://therealdeal.com/national/2021/01/26/rhino-raises-95m-and-eyes-ipo/
https://shelterforce.org/2020/12/10/security-deposit-alternatives-the-misleading-marketing-of-renters-choice/
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Mark Hurst is one of my favourite people in #PropTech and Proptech Espresso is easily one of the best podcasts about everything happening at the intersection of real estate and technology.
So when he asked if I could come on his show, I jumped at the opportunity! Some of the things we talk about -
- What is PropTech?
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- Impact of pandemic on different ecosystems within PropTech
- And of course, we talk about TheHouseMonk :)
Give it a listen here - https://www.buzzsprout.com/1273409/8668328-ajay-kumar-building-an-operating-system-for-rental-real-estate