Advanced risk assessments for rent and deposit insurance products are helping a growing number of owners and managers of purpose-built student housing to streamline their businesses. Algorithms and models driven by artificial intelligence (AI) can improve the risk assessment process, indicating factors and patterns tied to the possibility of default.
For landlords that accept them, rent and deposit coverage policies take the place of personal guarantors or traditional cash deposits. For typically less than the cost of one month’s rent, renters can purchase a policy that pays their landlord if they default. Renters can also purchase deposit coverage for a fraction of the amount required for a traditional cash deposit, protecting owners and managers from damage to the unit. While relatively new to student housing, the approach is especially suited to mitigating the sector’s challenges related to approving student renters and the rental income loss that may result from doing so.
Student Housing Business queried Elsa Liao, vice president of risk management at TheGuarantors, about the pitfalls of landlords’ traditional reliance on parents and other personal guarantors, and how professional coverage and AI-powered risk models improve renter and landlord experiences while strengthening a landlord’s bottom line.
Student Housing Business: How have student housing managers historically assessed renter risk?
Liao: Most landlords set credit score and income thresholds, which are pretty ineffective at predicting default risk, especially in student housing. We’re talking about people who are early in their financial lives and haven’t had time to build lengthy credit histories.
Student Housing Business: Are there other limitations to conventional screening?
Liao: Income requirements eliminate a lot of applicants unnecessarily. Landlords typically want to see monthly income two to three times the monthly rent, or they want a parent or other cosigner with enough income to back the lease. The housing allowance from a student loan can count toward income, depending on the landlord. A personal cosigner may have to show a larger income, perhaps five times the rent. It’s a decision-tree process that adds complexity for both the applicant and manager before they even run a credit check.
Landlords’ credit score requirements vary. In the Northeast and West Coast, for example, a student would need 650 on his or her credit score to get an apartment, and in the South, it’s about 600. That can be a hurdle, and it doesn’t always serve the goal of effective screening. In fact, screening applicants by income and credit score is only 55 percent accurate at predicting default risk.
Student Housing Business: How does TheGuarantors’ risk assessment compare with the traditional model, and how is it different?
Liao: We screen applicants for our rent coverage and deposit coverage with an advanced AI algorithm that is 85 percent accurate at identifying default risk. Where most housing managers focus on income and credit score, we review a myriad of data points with every application. And because we’ve built this into an algorithm, our process is quick and easy, and we can help landlords requalify their applicants. For a landlord, that translates into lower vacancy rates and less risk. It’s a win for the renter and the landlord.
Student Housing Business: What are some of the data points you consider?
Liao: We review the renter’s personal financial information — that part is similar to the traditional approach — but we look beyond credit scores to consider all the other information that goes into a credit report, from income to liquid assets and credit history. An unsettled collection balance like an unpaid utility bill, for example, can be a red flag for elevated default risk.
We also weigh macroeconomic data and multifamily housing trends. Rent growth can tell us about renter demand for local housing — we find that increasing demand for a neighborhood correlates to reduced default rates. These kinds of external data points allow us to build a 360 view to help predict the likelihood of renter defaults with a high level of accuracy.
TheGuarantors’ AI-powered algorithm also uses natural language processing to gather and assess data from social media and the internet. That can indicate renter satisfaction or dissatisfaction with the property and management, which can influence renter performance.
Student Housing Business: How does an owner benefit from rent coverage or deposit coverage?
Liao: Although renters pay for the policy, the landlord can customize and pick the amount of coverage they want to require for their applicants. Once they begin working with us, the first thing management will notice is smoother, faster conversion rates because our algorithm lets us return screening results in real time. The applicant provides basic information through our website, authorizes a soft credit check and we take it from there.
Other benefits become clear over time as we work to ensure our residents fulfill their lease obligations. In the event that they don’t pay rent, don’t clean up the unit properly at move-out or otherwise default, the landlord can easily file a claim with us. That’s a lot easier than attempting to collect from a personal guarantor, and they don’t have to deal with a collection service, credit bureau or the courts.
Student Housing Business: You said you work to ensure residents perform. What does that involve?
Liao: We have a large customer service team that guides clients on the path of responsibly handling their lease and rent. Our team speaks Spanish, Mandarin and four other languages, and is available seven days a week. In many cases, we can communicate with the resident better than their landlord can.
First-time renters often don’t understand the most basic lease obligations like paying on the first of the month, so we remind them to pay on time. If they have a financial issue, we try to work out a solution for the renter and the landlord. At the end of the lease, we explain they have to fill out a form, remove all their furniture and leave a clean unit.
We’ve been called in when students have been partying and disturbing the neighbors to the point that the manager wants them removed, which can be costly for the landlord. We talk with the resident and let them know they’ve broken the lease and need to move out to avoid being taken to court and permanently damaging their rental history.
During the pandemic, a lot of students panicked and wanted to abandon their apartments. We calmed them down and explained they could move out but had to pay the rent, or they could pay an early termination fee to protect their credit and rental history.
Our post-move-in customer service is extremely valuable to the landlord because it takes so much work off their plate. That helps to reduce the property’s operating costs at the same time the management is widening its applicant approvals by accepting renters backed by our coverage.
— By Matt Hudgins. This article was written in conjunction with TheGuarantors, a content partner of Student Housing Business.
To learn more about TheGuarantors, click here.