Original version posted on July 7th, 2023 on Medium.
The real estate industry is in a period of turbulence.
Home prices have soared. Institutional home buyers have intensified competition. On top of that, high interest rates are exacerbating both of these problems.
It is clear that a new age of real estate is upon us.
Startups have responded to these challenges. They are challenging long-held assumptions and re-asking the basic questions:
- How can we better equip renters to become future homebuyers?
- How can we reduce the barriers for people buying their first home?
- How can we rethink what homeownership means in the first place?
Today, we want to hone into one of these solutions.
It’s a solution that can help single-unit landlords fight back against big finance. It’s a solution that can break down barriers to renting and promote equity in our country.
The solution we’re talking about? Rent guarantee insurance.
It may not sound sexy, but its potential is powerful. You may have never heard of it, but you will soon.
In this article, we’ll explore the history of this rent guarantee insurance. We’ll look at how it has traditionally been offered to tenants & landlords and we’ll dive into the startups building novel products with it. We’ll also look to the future and consider what may be the next big startup created in this space.
Let’s dig in.
Historical context
At its core, traditional renters insurance covers several categories of risks for tenants & landlords. These include:
- Property damage: This insurance covers the tenant & landlord in case there is physical damage to the property resulting from incidents such as fires, leaks, or vandalism.
- Liability: This insurance covers the tenant & landlord in the event of injuries to tenants or guests on the property.
- Personal contents: This insurance reimburses tenants for damage to their personal belongings caused by events such as fires, thefts, or natural disasters.
Any large insurance provider will generally offer renters insurance products that cover these risks. For example, here is a policy overview from State Farm.
However, there is one crucial risk that is not covered for either the tenant or the landlord: the risk of a tenant defaulting on their lease.
Let’s individually look at how landlords and tenants could view this lease default risk.
Landlords
The more straightforward way to view lease default risk is starting on the landlord side.
Landlords often worry about tenants being unable to pay their rent, despite signing year-long lease contracts and providing security deposits.
What can landlords do?
To address this concern, various companies have emerged over time with a solution known as “rent guarantee insurance.” This insurance protects landlords in case a tenant is unable to pay their rent.
The product works mechanically similarly to traditional insurance products seen in health or auto insurance. The landlord pays a monthly premium to a 3rd-party insurance company, and if a tenant defaults on their rental contract, the insurance company will pay the landlord a portion of the remaining rent for the year.
RentRescue, a smaller company based in San Diego, is an example company who offers this rent guarantee insurance. They offer a rent guarantee product to landlords for $25 per unit and reimburse up to six months of lost rental income in case a tenant defaults.
Tenants
Somewhat counterintuitively, tenants can also benefit from their landlords being protected.
How? It all happens at the time of the application.
Let’s say a landlord had to pick between two identical tenant applications — but one that came with a literal guarantee that the tenant would pay their rent — who would the landlord pick? It’s a no brainer.
Historically, some tenants accomplish this by getting a “guarantor,” a person / entity that takes on the financial obligations of their lease if they fail to pay. A guarantor is typically someone with financial stability and good credit — often a parent.
If you don’t have a rich parent, smaller companies such as HousingHand in the United Kingdom have introduced guarantor products. In exchange for a small monthly payment (or a premium) paid by you, they will pay your landlord in case you default. This, in theory, should dramatically increase the odds of your rental application being accepted.
Does this product sound familiar? It’s rent guarantee insurance again! This time, though, the tenant is paying for it — not the landlord.
Interestingly, these companies have really found a sweet spot with people that have no credit history, such as expats or college students.
Insurtech market layout
There’s a lot of interesting stuff happening in residential property insurance. Some examples include home warranties (Super, Puls), digital-first insurance (Hippo, Kin), and deposit insurance (Rhino, Jetty).
The rent guarantee insurance space also fits here.
Looking just at the rent guarantee insurance space, there are two different approaches that we have seen. We’ll focus here just on companies in North America / Western Europe that have raised venture capital funding.
On the left, several companies have gotten traction by offering this rent guarantee insurance solution as a 3rd party. The top player in this space is TheGuarantors, which was founded in 2015. Rhino (founded in 2017) started with a deposit insurance product before moving into rent guarantee insurance as well.
On the right, several companies have started offering rent guarantee products as an add-on to their existing property management services. Belong, Doorstead, and Nomad are promising startups in the space, having raised $138M, $37M, and $24M respectively.
Novelty
Here are the recent attempts that we find particularly novel:
- Doorstead (founded in 2019): Doorstead’s offering is simple — a traditional and a “rent guarantee” property management offering. For slightly higher fees, their rent guarantee offering pays landlords a fixed monthly payment, regardless if the property is leased out or not.
- TheGuarantors (founded in 2015): TheGuarantors was one of the first companies to really gain major traction with this “guarantor-as-a-service” model. They found a niche with international students with limited U.S. credit history. They’ve signed a ton of huge apartment management complexes with a pitch of a guaranteed rent insurance product that is paid for by the tenants — a no-lose solution for landlords.
- Nomad (founded in 2020): Nomad is super novel — they’ve combined about 5 novel products in one. Their main product — a rent guarantee property management offering (like Doorstead) — is novel in its own right. In addition, they offer rent advances to landlords (like Nectar), a home buying/selling marketplace, flexible rent payments for renters (like Flex), and the ability for renters to build their credit from their rent payments (like Esusu). Lots of interesting stuff here.
- Qira (founded in 2021): Qira has an innovative “Pay Later” program for renters. If a renter struggles to pay their rent, Qira will pay the rent directly to landlords and then put the tenant on a payment plan.
- Fronted (founded in 2019): Fronted in the UK has raised $27M to solve a very specific problem — the time discrepancy between receiving your security deposit from your old place and paying your security deposit at your new place. For a small fee, they will pay your next security deposit and then give you a no-interest loan until the old security deposit comes back.
So what’s next?
What could this industry look like in 20 years? Here are some areas we think are promising to explore:
- Try before you buy landlord: How can we encourage people who are interested in being a landlord to actually become one? Could we facilitate some sort of “try before you buy” to allow someone to try this out before fully committing?
- Upfront friction reduction: Most of the friction for prospective single-family landlords is getting everything setup (e.g., finding the home, financing it, rehabbing it, finding a tenant). Could we build a product that significantly reduces these frictions? Can this be tacked onto property management + rent guarantee insurance?
- Buy an investment property you can’t afford: Could we build a property management company that co-invests in homes in addition to offering rent guarantee property management services? This would allow buyers to buy larger homes and us to experience price appreciation. Like Virgil + Doorstead.
- Other proptech products: There are so many other interesting angles of proptech for renters, such as rewards (Bilt Rewards), credit building (Esusu), flexible rent payments (Flex), and rental advances for landlords (Nectar). Nomad is piecing these together in a strong flywheel. Is some bundle of these products with a rent guarantee the answer?
There is SO much going on at the intersection of proptech & insurtech. There is no doubt that this industry will look wildly different in 20 years.
What do you think is next?
