Numerous acronyms serve as shorthand for real estate professionals to communicate about complex financial and investment concepts:
- PMI (private mortgage insurance)
- NOI (net operating income)
- CCR (cash-on-cash return)
- MLS (multiple listing service)
- FMV (fair market value)
Private mortgage insurance, for instance, is widely known to residential lenders and borrowers as a form of protection when a down payment is below certain levels relative to the amount borrowed.
But here’s another real estate acronym that should join the lexicon of residential property owners and property managers:
- RDI (rent default insurance)
Unlike many acronyms, though, RDI is easy to understand.
What is rent default insurance? RDI covers a risk that residential owners and managers face continually: tenants who fail to pay rent and default on their leases. This not only threatens the cash flow of a rental property, but also piles on the extra costs of legal action, eviction, and even property neglect or damage.
Long a staple in the real estate markets in United Kingdom and Australia, rent default insurance is relatively new in U.S.
Rent default insurance protects those who own or manage single-family homes, apartments, townhomes, condo units and multifamily dwellings. It’s also available to property managers. Owners and managers can pass on the cost of rent default coverage to tenants through an increase in monthly rent.
The financial protection that rent default insurance provides can plug the drain when there’s cash flow leakage from problem renters.
Rent Rescue provides rent default insurance that reimburses up to six months of lost rent and $1,000 of legal expenses when a tenant defaults on their lease. The coverage is available in all U.S. states except Kentucky.
Tenant default is, unfortunately, a well-known but largely uncovered financial risk for owners and managers. And it’s only going to grow, since residential rental real estate is a growing market. Between 2006 and 2016, the number of single-family homes available for rent increased by nearly 4 million, lifting the total to 18.2 million in the U.S., according to the Joint Center for Housing Studies of Harvard University.
And “continued growth on the low-end [rental market] could be due to 63% of younger millennials — ages 21–29 — opting to rent over purchasing a home,” notes research firm CoreLogic.
Landlords usually rely on security deposits and tenant screening to protect their property income, but they now have an additional risk management tool — similar to the insurance products they use to protect against financial loss due to fire, flood, liability and other property-threatening risks.
Next issue: In part 2 of this article about financial risks, I’ll cover three other financial risks property owners and managers face.
Aaron DiCaprio is co-founder and CEO of Rent Rescue, a rent default insurance product for real estate investors and property managers. A residential investor, attorney, and insurance executive, Aaron’s experience includes senior-level positions with privately and publicly held insurance organizations, including a Fortune 500 global brokerage. Contact: firstname.lastname@example.org, 619.332.2720.
Source for number of single-family homes available for rent:
Joint Center for Housing Studies of Harvard University, America’s Rental Housing 2017 (p. 2), www.jchs.harvard.edu/sites/default/files/harvard_jchs_americas_rental_housing_2017_0.pdf
Source for growth of low-end rental market:
CoreLogic, CoreLogic Reports Continued Growth of Low-End Rental Market Driven by Demand of Younger Millennials