Credit Building: What is Multifamily’s Role in Helping Residents and Tenants Achieve Upward Economic Mobility?
The United States has a level of wealth inequality between the rich and poor that is larger than any other major developed country. While there are many reasons for this divide, one of the key contributors is unequal access to credit and other mainstream financial products and services. The last 18 months have opened many eyes to the severity and impact of this divide, leading many organizations and investors to commit to making change happen.
Elizabeth Francisco, President of ResMan, sat down with Talia Kahn-Kravis Manager of Program Innovations & Business Development at Credit Builders Alliance, Alex Buchanan, COO of Rent Dynamics, and Myles Howell, Credit Builder Account Manager at ResMan to discuss how limited access to financial resources and education is hurting both residents and property managers.
“Credit health impacts every aspect of resident’s lives,” Elizabeth starts off. “When I was in my early 20s, I was a single mom with two kids trying my best to pay my way through college. I had two jobs and like so many others in the industry, I fell into property management. And to say that my credit was less than stellar would be an understatement.”
“I had been a victim of predatory lending, having an interest rate on my car payment at 18%. Had I been able to benefit from the reporting of my on-time rent payments, I would’ve been able to secure a better credit score and a better interest rate.”
Credit Building in Multifamily
The opportunity for multifamily operators to help renters build credit is highly overlooked. At Credit Builders Alliance, Talia Kahn-Kravis has seen firsthand the impact credit has had on both property managers and tenants.
“1 in 3 are credit challenged,” Talia asserted. “There are nearly 53 million people who are un-scorable and approximately 38 million people with credit scores below 600.”
One might not realize how costly poor credit can be but the fiscal difference is staggering.
“Having a poor credit score can cost people $250,000 over their lifetime,” Talia added. “Renters are 7x more likely to be missing credit scores compared to homeowners. Renters of color are even more likely to be credit challenged. We see even senior housing in need of credit visibility. Many senior residents have never established a credit score at all.”
“The idea of going a lifetime being credit invisible is mind blowing.” Elizabeth responded in surprise. But just as homeowners pay their mortgage and get credit for on-time payments, shouldn’t tenants and residents be allowed to get credit for paying their rent on time? Whether it’s a mortgage or rent payment, housing is typically the largest monthly payment people make. Renters deserve the same opportunity to report their monthly rent payments.
Rent reporting is not a new concept, but it is a widely overlooked amenity by property managers. Talia mentioned how reporting on-time rent and utility payments to credit bureaus helps residents establish, maintain, and build their credit scores by simply paying their normal bills on time.
And it makes a massive difference. According to Credit Builders Alliance and their internal studies, 100% of residents with no score became scorable through rent reporting and those who had a score under 600 increased their scores by an average of 32 points.
“The FHFA (Federal Housing Finance Agency) is considering and in the process of adding on new types of scoring models for credit,” Alex Buchanan of Rent Dynamics chimed in. “And Fannie Mae just announced they are going to take bank statements as proof of rent payments for credit reporting. It’s really cool to see how this has evolved already. People are recognizing how important that reporting is considering it is most people’s largest monthly payment.”
Why Rent Reporting is a Win-Win-Win
Rent reporting isn’t just beneficial to the resident. While the resident is building credit without acquiring anymore debt, properties that offer it have a competitive advantage over others in the area. Rent reporting not only helps attract and retain residents, but it also incentivizes residents to pay their rent on-time.
Elizabeth chimed in to add some compelling statistics from Credit Builders Alliance around the benefits of rent reporting and credit scores:
· On-time rent payments increased 25% in one year since implementing credit reporting.
· 79% of residents saw an increase in their credit score, increasing by 23 points on average.
· The number of renters with a credit score above 620 increased 65%.
“The question is not why should you be doing this for your residents, the question is why not?” Elizabeth argued. “If you and your residents are both benefitting from rent reporting, it’s a no-brainer.”
Alex piped in to bring up how the market is changing as new generations come through multifamily. He mentioned how Gen Z is forcing property managers to step up their game when it comes to resident support.
“Gen Z is driving Corporate America to be more responsible,” Alex said. “They are voting with their dollars on which corporations they choose to support and they want to know they’re interacting with a brand that is doing something positive.”
Alex introduced some used cases, where property management companies saw resident retention increase by 1.28 months. Along with that, the property’s residents doubled their average credit score. The property teams and residents are both winning with this simple add-on.
Even better, property owners are benefitting massively from this, too.
“We always wondered what property owners were seeing on the other side in benefits,” Alex said. “It turns out, some of our properties reported $13k a year in ancillary income and sold at a 3.5% cap rate while also creating $386k in additional value at time of sale.”
“So, when we’re talking about this virtuous circle of everyone winning, it’s not just residents. Credit building is so impactful and boosts revenue for operators yet, adding a credit building feature doesn’t have to take any work to implement or manage as an operator.”
“For those working at an executive level, ask your property managers how often they are talking about credit scores,” Alex added. “I promise you it will surprise you. Property managers are thanking us because their residents are constantly asking about how they can build their credit.”
Trends and Legislative Activity
A focus on ESG (Environmental, Social and Governance) is absolutely critical to capital raising in this day in age. Those who don’t prioritize ESG programs, initiatives, and goals will not be able to keep up with investor demands and expectations.
“You can have a real material impact on the social side with your resident population,” Alex mentioned. “I was out at an event with some friends and they said this was so important. Their cost of capital was cut in half when they could show their ESG initiatives were having a positive impact. This trend is only accelerating.”
“Rent reporting is a socially responsible initiative that makes building credit simple for residents while still avoiding additional debt.”
Along with the capital market, legislation is beginning to spark around rent reporting. Today, we are seeing states intervene on behalf of rent reporting. Senate Bill 1157 in California went into effect in July. Multifamily portfolios with affordable communities are now required to offer rent reporting to their residents and must do so in writing. Colorado and D.C. are also following in California’s footsteps.
“Multifamily and affordable properties need to start getting ahead of this,” Alex said. “The impact is powerful, and it’s so much easier to get ahead and start offering this now instead of worrying about fire drills or adding something to your system later.”
“This should’ve been done decades ago,” Elizabeth remarked. “I’m glad to see this happening.”
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