What Proptech is Doing to Address Housing Affordability

Part II: New approaches to rental housing

This article is the second part of a three-part series on Proptech innovation addressing housing affordability. To read Part I, which includes our introduction to the topic and covers home ownership, please head to the original piece.

Making rent

When we began our series on affordability last year, the end to eviction moratoriums was looming. By now, most have lapsed. In some places, the “tidal wave” of predicted evictions did not come; In others, surges were reported, followed by more government action to help stem potential disastrous results. The “V-shaped” job recovery after the initial phase of the pandemic has helped; Rents rising even faster than home prices have not.

Just as the pandemic sharpened the crisis for homebuyers, similar market swings are wreaking havoc on renters. But both conditions are only extensions of ongoing affordability problems that have been decades in the making. Driving the demand side are household formations, which exploded after the initial phases of the pandemic as families living together branched out for more space, resulting in a net increase of 1.48 million US households in 2021. The share of renter households has also increased, both willingly and unwillingly. Pressure on the buy side has kept more renters in the market who otherwise might have bought, and more affluent renters are squeezing availability on the lower end of the market. While supply has increased in recent years, the pace of construction hasn’t kept up: just 363,700 new multifamily units were completed last year.

Proptech to the Rescue?

Proptech solutions addressing affordability in rental housing are going beyond capital-A Affordable Housing. We see Proptech companies innovating in that segment in various ways — from compliance software like Pronto Housing, to data services that help developers find tax credits like Redist, to platforms that help property managers manage applications and waitlists like Housekeys.

But Affordable Housing in the U.S. has historically had a limited reach. More than 3 million units have been built via the Low Income Housing Tax Credit (LIHTC) since it was introduced in 1986, but some estimate that only 2 million or fewer are still affordable when accounting for expirations. In a separate program, 2 million or more families receive housing vouchers, but there is significant overlap between these families and the LIHTC units, meaning it’s likely that just 3 to 4 million households are receiving benefits altogether — or significantly less than 10% of the nation’s 44 million renter households.

As a result, many innovators have turned their interest and attention to the rental market at large. The promise is that rather than focusing impact on a small group of families who qualify for Affordable Housing with capital letters, technology solutions can transform rental housing to create a more affordable experience overall.

In this second piece, we’ll focus on a few approaches:

There are also numerous other innovations in the Proptech space that will reduce the cost of housing — for example by improving operating efficiency or by reducing the cost of capital for owners and operators — but those impacts would be indirect. So while we are bullish about many and have invested in companies like MeetElise (AI for leasing) and Lessen (vendor management) with the confidence that their platforms will improve rental housing overall, we’re omitting them from this piece.

You’ll notice that the first four categories we outline very much blur the line between Fintech/Insuretech and Proptech. Each of them tackles a current inefficiency in the renter journey that impacts access and affordability and provides a potential antidote in the form of financial products.

a. Alternative screening

Traditional screening processes usually involve credit checks, eviction records searches, criminal background checks, and employment verification. But the process can be quite flawed — tenants who don’t have a credit history, for example, may struggle to access quality apartments, despite steady incomes and a history of responsible rent payment. Workers who are self-employed or work in the gig economy may have steady incomes, but no ability to verify employment through traditional means.

Apartment owners and operators readily concede that credit checks and other screening tools have low correlation with actual rent collection or property risk. But until now they’ve had few means to deviate from the script.

A new wave of companies is stepping in by introducing alternative processes. Many rely on open banking, leveraging a fintech infrastructure that has emerged over the last decade, which allows screening companies to get a fuller picture of an applicant’s finances. By understanding wage and rental payment history through open access to an applicant’s banking records, these tools can use historical patterns to more accurately predict future behavior and risk. Rentify, The Closing Docs, Findigs and others all take this approach, sometimes combining that history with more traditional metrics.

Landlords gain by increasing screening accuracy and reducing fraud — and may also be able to lease up faster by expanding the pool of potential tenants. Rent Rezi, a rent securitization platform that helps landlords lease up apartments, uses this approach to speed leasing and reduce vacant time. Renters, meanwhile, get increased and more equitable access to housing.

b. Security deposit replacement

Security deposits are costly to renters, who must park cash (often a month or more of rent) with their landlords and don’t get regain access until after move-out. For renters moving between apartments, that cash outlay is doubled, as applicants usually must post a deposit for the new apartment before getting the previous one returned. Given the number of households in the US that live paycheck to paycheck or with very limited savings, this cash impact can significantly reduce housing affordability.

Landlords aren’t in love with security deposits either. While local laws vary, security deposits usually require special handling and may have to be paid back with interest. They may or may not even cover the repairs needed when damage is incurred. Increasingly, states and municipalities recognize that security deposits impact affordability, and are passing legislation that requires landlords to accept alternatives.

In the past few years, a number of startups offering alternatives are gaining traction. They take several forms: In the insurance model, renters pay an ongoing non-refundable fee instead of a security deposit, and landlords are paid damages from the insurer when they occur. Since the risk is pooled, the total cash paid is lower to renters (although not refunded), but landlords are usually covered for larger losses than via security deposit. Leaselock uses this model.

Another common model is the surety bond model. Here, renters typically pay a lump sum fee that is lower than the security deposit but again, is non-refundable. However, renters are not covered in the case of damages. The surety bond transfers the risk onto the provider instead of the landlord, which means the renters may still face claims if they leave their units in disrepair. The insuretech company collects that debt from the renter directly. Rhino, Jetty and the Guarantors all take this approach.

The third model is direct credit underwriting. These companies, like Obligo and RoostEasy, use the open banking infrastructure discussed earlier to underwrite individual tenants. They use bank balances, payment history, and other factors to assess credit worthiness and pre-authorize withdrawal of funds in case of damage, similar to what’s done in the hotel industry.

In all cases, residents get to avoid the upfront cost, but the ongoing costs differ and the level of “coverage” varies.

c. Alternative rent payments and financing

We all know that traditionally, rent is due on the first of the month. At the same time, most workers don’t get paid until the end of the month, or at best at the end of two weeks. That means many people are trapped in a cash cycle making on-time payments difficult (and thus incurring fees) and may resort to high interest pay day loans. According to the National Multifamily Housing Council (NMHC), about 15% of rent payments were late in December 2021, which is slightly higher than it was two years ago prior to the pandemic.

There have long been companies like Plastiq that allow renters to pay a fee to process credit card payments when landlords don’t accept them. Bilt also recently introduced a card specifically for rent payments. Bilt is partnered with several major landlords but also makes rent payments on your behalf via check or ACH if your landlord doesn’t accept credit, without a fee.

These credit card based approaches help with liquidity, but require financial discipline from renters and can result in high interest payments. Other models like Till, Jetty, Boom, and Flex are taking a more hands-on approach by creating flexible rent payment schedules for renters so they can split rent payments out more evenly over the course of a month. These plans cost renters a few dollars a month, but they help avoid more costly late fees and are designed to keep renters in the habit of paying consistently.

For tenants who are already behind on rent, Esusu, a risk management and credit reporting platform for landlords, also offers a rent relief fund and no- or low-interest loans for tenants of partnered landlords. However, these are currently funded via philanthropic dollars.

d. Rent rewards.

As traditional rentals, short-term stays, and the hospitality sector have drifted closer, many landlords have embraced a hospitality-like mentality, including adoption of rewards and loyalty programs. Early incarnations like Modern Message (acquired by Realpage) were primarily used to manage referrals and renewals, but recent versions are tying rewards to on-time rent payments and are coming in the form of cash back. Given the significance of rent as an expense in most renter household budgets, even a small percentage of cash back to the consumer can have an impact on affordability.

Stake and Watson Living are both using this cash-back approach. They target landlords who want to incentivize renter behaviors, and help execute campaigns. Instead of spending on marketing or concessions that are blunt and peanut-buttered, and whose effectiveness is hard to measure, landlords can now be more targeted while capturing data on the best and worst customers.

One disadvantage with landlord-centric rewards platforms is that they work best for larger portfolios where owners or managers already allocate dollars to marketing and value creating a brand experience. But most renters live in buildings or single family homes owned by individual investors with fewer than 4 units.

Some rewards start-ups aren’t relying on landlord funding in an attempt to get broader reach. Bilt, the credit card mentioned earlier, also provides rewards points for rent payments, and funds its points program via interchange fees — but does require renters to qualify for the credit card. Pinata gives renters the option of its credit card or app-based rewards program, funding its “Pinata Cash” through its marketplace of consumer brands. Because these approaches don’t rely on landlord budgets, they may have more reach, but the impact to affordability is likely also less: The rewards tend to be lower in value and typically are tied to consumer spending instead of cash.

Gravy, a newer entry, is creating a banking platform that also rewards renters directly for rent payments. Gravy is geared around renter aspirations for homeownership: rewards can only be “cashed out” upon home purchase if the user elects to work with a Gravy-partnered mortgage lender and/or real estate agent. Because the platform is nascent, it remains to be seen how many renters who sign up will benefit, but given the number of renters who would prefer to own, we find the premise intriguing.

The approaches outlined so far can be considered features with potential to be incorporated into a larger financial platform for renters. We are seeing that convergence already happen as start-ups that initially focused on one category, like Jetty, begin to expand into others and cross-sell additional financial products into the same customer base. We expect there will be consolidation to come.

Ultimately, we think that platforms that follow the renter, vs. the landlord, may have greater potential for mass impact and adoption given rapid unit turnover and the “long tail” of mom and pop landlords that own most of the rental units in the US.

e. Co-living

Co-living isn’t a fintech or insuretech play. It relies on the age-old concept of trying to get more efficient with living in space: In other words, having roommates. We won’t spend too much time on the first wave of co-living — operators like Common, Ollie, Star City and WeLive (all RIP except Common) that were primarily playing lease arbitrage in expensive cities and ended up victims of the initial waves of COVID. A number of other players in that segment have seen more success recently, including Bungalow, which is focused on splitting up rooms in single family homes instead of urban, high-rise buildings, and UpsideHOM, which is targeting senior living.

Others are choosing to remain free of building operations or leases and are instead building marketplaces. Roomi, Roomster, SpareRoom, and PadSplit are among the many taking this approach. These marketplaces have the difficult task of building both supply and demand, and like the broader ILS segment have had difficulty reaching scale. Still other apps like Diggz take a roommate-matching only approach, and act more like Tinder or dating apps but for roommates.

A final segment of companies is trying to lower costs even further by allowing renters to trade labor in exchange for rent reductions: Nesterly is recruiting elderly people living alone who want help with chores, and matching them with students and young professionals who are willing to perform those duties for discounted rent in a spare room. Loftium helps renters with a portion of their rent if they act as hosts for attached or adjacent short-term stay units.

In general, co-living companies likely have the most direct impact on affordability, especially whether a renter will be able to live in the location they prefer with their budget. But they are likely most beneficial to students and young singletons rather than families.

Part 3

The impacts on rental housing affordability we’ve explored in this post have been, in some ways, marginal — they will make the most difference to renters on the margin, who are on the cusp of making rent on the first of the month, or being able to float a security deposit, or being able to qualify for the building they want to live in. These marginal improvements are still meaningful given the number of Americans who live on that margin, and given the real consequences of falling onto the wrong side.

Ultimately, though, bigger things have to change for the affordability landscape to be altered structurally. One of those could be innovation in construction — building more buildings, faster and more cheaply. We’ll explore the promises of construction tech in Part 3.

Questions? Comments? Did we miss something? Email jenny@navitascap.com