[REN #815] Property Management: Do Rent Guarantees Make Sense?

Picture of ipad and tea and papers for Real Estate News for Investors Podcast Episode #815

A San Francisco start-up called Doorstead is hoping to take over the property management industry. It’s promising a risk-free experience for landlords by giving them rent guarantees. That means landlords will collect rent whether tenants are in place or not. It’s something that might help landlords sleep at night, but one of our Real Wealth Network Directors, Tim Horvath, says they may offer a false sense of security.

When it comes to buying rental property and getting management in place, the best thing you can do is buy and hire wisely. If you do that, you won’t need a rent guarantee. It’s not a bad idea for landlords. Tim says, they make sense in theory, but only if things are going smoothly and the property management company is not suddenly faced with a number of expensive vacancies. Tim says the two or three rent guarantee companies he’s checked into have failed because it’s expensive to offer this kind of rental insurance.

So Doorstead is not the first to offer rent guarantees, but it is grabbing a lot of attention from investors. The company just raised $3.3 million in seed funding and is hoping to become the “Opendoor for Rentals” or the iRenting counterpart to iBuying.

It’s starting off in San Francisco where it won’t have much trouble finding tenants, so that could give it a head start into the $50 billion property management industry. The core feature of Doorstead’s strategy is the rent guarantee, but it’s also promising more efficiency with technology and higher returns for landlords.

VC investor, Gautam Gupta of M13, says of the business model, “Doorstead is already surpassing expectations of property managers by delivering higher rental income with unparalleled quality of service, and it’s just getting started.”

Investor, Lara Druyan, of Silicon Valley Data Capital, says her company is excited about Doorstead because her company believes “the opportunity to apply technology to the currently inefficient property management industry is enormous.” Doorstead was co-founded by a former technology-operations expert from Uber, and plans to make use of technology for things like tenant screenings, rental showings, landlord-tenant communication, and repair management.

Eliminating Rental Vacancies

According to Doorstead, inefficiencies are the cause of prolonged vacancies. It says, the average is 43 days. That’s worth about $86 billion in lost rental income in the U.S. per year. The big promise, To eliminate vacancy risk and give property owners “true peace of mind.”
In the press release about the latest funding raise, it claims, “To date, Doorstead has met 100% of its guarantees, reduced vacancies by as much as 76% and helped owners earn up to 9% more in annual rental income.” (1)  It currently operates in the San Francisco Bay Area and plans to expand to Los Angeles and Sacramento.

So how does this work?

Similar to iBuying, which provides super fast offers to buy homes, iRenting also gives Landlords a quick rental offer. The offer consists of the amount of rent that landlords will get for their property, along with a start date. Doorstead offers an example of $5,500 a month starting in 28 days. Remember, they are currently only operating in San Francisco which is why that rent figure is so high.

Doorstead may also adjust it’s offer after it inspects the property, but the landlord will have final say on whether he or she accepts the rent figure. After that, Doorstead finds the tenant, manages the unit, and collects the rent.

Doorstead’s CEO, Ryan Waliany, told Inman news, “Opendoor and iBuying provide certainty of liquidity. We provide certainty of cash flow.” He says that iRenting is a complimentary business to iBuying, but with better economics because iRenting provides recurring revenue while iBuying is a one-time deal. (2)

As Inman points out, Doorstead isn’t the only company currently offering a rent guarantee. Bungalow and Blueground do something similar by leasing units from property owners and then subleasing them to tenants. Doorstead is a little different, however, because it doesn’t take on the role of “master tenant.” It serves as property manager with the rent guarantee.

So how does Doorstead make its money?

Inman offered three revenue sources:

  1. If Doorstead finds a tenant quickly but promises to start paying the landlord in 28 days, it can keep most of the first-month’s rent. You might consider that a “tenant placement fee.” 
  2. Once the rent guarantee is in effect, Doorstead collects an 8% management fee of the guaranteed rent.
  3. If the unit is rented for more than the guaranteed rent, Doorstead will get 20% to 30% of the additional rent. The rest goes to the property owner.

Making Sense of a Rent Guarantee

Does a rent guarantee make sense? Tim says they do and they don’t. Most rent guarantees are only offered for a limited amount of time. You might pay a small fee for six months of coverage during the first year of ownership. But, he says, you should also make sure you have enough money in the bank to cover expenses if your rent guarantee falls through. So that’s not much of a guarantee.

Tim says, you should still have money to pay for a vacancy, even if you have a rent guarantee. Tim says, “If you don’t have $5,000 in reserve for every property you own then you probably shouldn’t own those properties.”

So it’s not a bad idea for landlords but it’s not an ironclad safety net, either. Rent guarantees may also take a small bite out of your cash flow. They don’t typically cost much but you should still have your own reserves available for vacancies so the rent guarantee will be an additional expense.

Avoid Unwelcome Surprises

You also want to avoid any unwelcome surprises — other than a failed guarantee.
A real estate blogger out of Australia says, she had negotiated a rent guarantee at one time, but realized the drawbacks after the contract was signed. One of her concerns is that a rent guarantee may push the manager to rent more quickly, and with less concern about the quality of the tenant. The property manager chooses the tenant, but the property owner is responsible for property maintenance and repairs. Tim also agrees with that concern.

Other drawbacks might include when landlords receive payments. Tenants typically pay on the first of the month but a landlord with a rent guarantee would probably be paid in arrears. Landlords may also be responsible for inspection fees without the benefit of a look-see themselves, to see how tenants are treating their properties. And there will be back-ground checks and qualifiers to get the rent guarantee, in the first place.

The most important thing is to buy wisely from people you can trust and have the right funds in the bank to cover unforeseen circumstances. If a rent guarantee is available, it might not be a bad thing, but don’t let that guide your buying decisions. As Tim says, don’t rely on a rent guarantee. You need to do your due diligence and be financially prepared.

Links:

(1) Business Wire Article

(2) Inman Article

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