Let’s talk about security deposits as ancillary income. I’m sorry but it bothers me to categorize an extra cost burden to prospects that will likely impair their payment performance as an income source. Of course, property companies need protection against potential loss, but for the majority of professionally managed portfolios it can be argued that the majority of losses start with residents’ inability to keep up with rent. And that’s where the story begins…

The Current State of Affairs

Since huge swaths of Americans earning as much as $50,000 or more don’t have $1,000 in the event of an unexpected expense, it makes sense that asking them for first month rent and security deposit at lease signing sets up them up to fall backwards on rent. Bleeding water from a stone only makes the stone crumble…

In the good old days of multifamily, security deposits were intended to cover losses. Today, however, the amount of cash deposits required upfront has become a competitive lease term tied up with concessions and special offers. As such, prospects compare lease costs from one community to the next with the cheapest offer often winning.

To be clear, moving in more residents is the goal, yet anyone worth their CRE knows that two truths:

1.     Making it cheaper for prospects to move in only makes it cheaper for prospects to move in without any assurance of payment performance throughout a lease
2.     Losses are less when rent is delivered on time

And therein lies the rub between the desire to count security deposits (or pooled deposits) as ancillary income or the little effort needed to figure out how to really help put safeguards in place for timely rent payments that add more to the bottom line than security deposits ever can.

Better Income Optics

Around the same time as the multifamily industry was (finally) adopting credit card and ACH payments for rent for qualifying residents, my company introduced rent from payroll as an a option to assist the 35-40 percent of residents who presented a higher risk profile based on credit. In addition to essentially providing an alternative to the security deposit cost drain on prospects, we’ve become something of the gold standard in conditional offers by providing a mechanism to link rent to payroll throughout the entirety of a lease. We’ve earned our stripes by giving prospects the incentive to agree that rent money won’t ever hit their paycheck or personal bank account. That means residents make a commitment tied to automated payroll as a condition of signing a lease before they ever get keys or unpack a box.

That also means rent on time. It’s that simple. In fact, we’ve redirected the optics in evaluating ancillary income to business basics. For example, among rental applicants approved conditionally based on credit, our rent from payroll platform has helped property companies to increase conversions by 57 percent, reduce unexpected move outs by 77 percent, and achieve average retention of more than 600 days, or twice the industry average in the category. That’s performance that adds to revenue in ways an extra security deposit never can.

Here’s the kicker: while we believe providing residents with the tools to achieve timely rent performance is the ultimate way to go, we also feel strongly there’s a good case for using several products in concert to create the greatest bang for the buck. That’s means options that address all rental prospects not just those who can benefit from more discipline in managing their money and their bills. But that’s a longer discussion we can have in a call for sure, or comment here.