A new company has entered the Phoenix market after success in Denver offering guaranteed rent and two-year leases for rental property to landlords to help ease pandemic concerns and vacancy issues with tenants.
Nomad, which started in Denver, said their research shows the Phoenix metro market is a good market for their expansion, according to P.J. O’Neil, founder and a veteran operator of Opendoor.com, which buys homes from individual sellers.
A key is that the company is not a property manager, but it does guarantee leases, so landlords can continue to manage their own properties if they desire, or choose a third-party property management company.
O’Neil said the Phoenix market was chosen for three key reasons:
- A stable economy with growing job market
- Rentals are easier to price in the Phoenix metro market
- The team comes from Opendoor.com, which launched originally in Phoenix
“When we’re guaranteeing rent, we’re taking risks that we may be guaranteeing rent too high, or if we are guaranteeing too low, no one’s going to sign up with us. We wanted to make sure that we could accurately predict rental rates in Phoenix and because of the housing stock in Phoenix, it’s a little bit more homogenous than many other markets,” O’Neil said.
The company has about 20 homes under lease in Phoenix right now and a little over 300 in Denver. O’Neil predicts they will be getting closer to about 750 properties by the end of this year in the two markets.
Why the guaranteed rent model works for landlords
With the guaranteed-rent model, “We want to pay our landlord clients market rent, guaranteed, and charge them a fee equivalent to how risky it is for us to do that every month. So they’re never worried about vacancy costs. They’re never worried about a delinquent tenant.
“If you’re a big investor, you experience vacancy as sort of an average across your portfolio, but if you’re a small mom-and-pop landlord, you experience vacancy in a very binary, very visceral way.
“One month you have rent supporting your mortgage. The next month you don’t. And then in the time during COVID, during these eviction moratoriums, that fear is even greater for landlords. They may have a tenant who loses their job and they can’t evict them and they’re now stuck paying a mortgage without any rent coming in for an unforeseeable amount of time.
“We really want to limit some of that downside risk for property investors and give them more certainty over a long period of time. That’s the pain point we’re trying to solve,” O’Neil said.
What is the cost to landlords of the guaranteed rent model?
The cost to landlords of the guaranteed rent model depends on the risk to the company and the length of the lease. However, Nomad does the tenant screening to help the landlord get a good tenant.
O’Neil said, “The guarantee fee ranges we offer are a one-year guarantee, a two-year guarantee, or a three-year guarantee.
“So a three-year guarantee is the riskiest for us because inevitably over three years there will be vacancy or delinquency on that property, or there’s a higher likelihood of that happening.
“And then the one-year, there’s less risk of those things. The one-year lease can range from anywhere from two percent to five percent of monthly rent, and the three-year can range anywhere from seven percent to 10 percent of monthly rent. And then the two-year falls in between.
“You really choose your adventure. You decide, ‘Hey, how long do I want certainty for, and how much am I willing to pay for that certainty?’ “O’Neil said.
The guaranteed rent fees are reflective of time and “how risky we think the property is. A single-family home in central Phoenix is going to have a lower risk fee than a condo further outside of town.”
Guaranteed rent is not property management
O’Neil reiterated that “We are not property managers ourselves. If you do want property management, we introduce you to a partner property manager in the area.
If a landlord or property owner wants to layer on property management on top of the guaranteed-rent plan, “You’re introduced to a partner on the ground who charges seven percent a month of rent.
“We have a lot of owners who are getting property management plus guaranteed rent for 10 percent a month. That includes a one-year guarantee plus seven percent property management fee,” O’Neil said.
Any plans for guaranteed rent for multifamily properties?
While O’Neil says the company is focused on single-family right now, they can work with multifamily owners as an individual unit turns.
“The product really works for smaller landlords and so we’re single-family, but that includes single-family homes, condos, and town homes. We’re not doing a lot of multifamily yet,” he said.
He said they have found there are multifamily owners “who are getting guaranteed rent from us every time one of their doors turns.
“They may have a 10-unit building and every time one of those units comes available for rent, they’re handing it over to Nomad to guarantee the rent, get it leased, et cetera, but then they’re handing them over to us as they turn.
“They’re not necessarily handing the whole building over to us. They’re getting guaranteed rent as each of the units turns,” he said.
Do you strictly deal with landlords or could tenants contact Nomad directly?
O’Neil said a Nomad resident has a better or at least a more consistent experience with Nomad and guaranteed rent than with individual landlords.
“We are the ones collecting rent from the resident. The way it’s structured is we sign a master lease with the landlord, so we are technically the landlord’s tenant and that’s how the landlord thinks of us, and then the resident is our sub-tenant.
“(The tenant pays) us rent every month. We give them a better experience. They accrue rewards with us over time. The more often they pay rent on time, every time they renew a lease, they’re accruing rewards with Nomad and those rewards can be turned in for discounted rent.
“We’re still building the rewards platform out, but the idea is you as a Nomad resident should have a superior experience, and so when you’re ready to move to your next place, you’re starting at Nomad – not Zillow – to look for your next place because you understand the experience you get with Nomad,” he said.
The Guaranteed Rent Innovation Model following Opendoor.com
O’Neil said many of the Nomad Lease team came from Opendoor.com, which was founded in Phoenix and has had a lot of success there.
“We were able to pretty quickly grow the team from ex-Opendoor.com talent who understand the business very well. It’s a pretty powerful story for the first i-renter, is how we think of ourselves.
“We’re pioneering the i-rental business to launch in the birthplace of the i-buyer movement. Opendoor.com was founded in Phoenix. Zillow offers has a big operation in Phoenix. OfferPad has a big operation in Phoenix. We thought that the population of Phoenix was more accustomed to these new offerings than some of the other markets out there.”
The company does plan expansion of the guaranteed rent model.
“There’s a lot of un-served markets in the middle of the country that often are overlooked by Silicon Valley startups and so we want to address those markets. As a Denver-based company, I think we have a real spirit of helping to solve problems for everyone in between LA and New York.”
O’Neil’s own story of rental property
“When I graduated from college, I bought my first investment property. When I was very young, I put as little money down as I possibly could, because I had not a lot of money to put down, and I rented it to college students.
“I started my investment journey early and I’ve kind of grown my portfolio, but every month any of my properties are vacant, that’s a really painful month for me.
“I may cut back that month. I may not be going out to dinner as often with my wife and it’s just the uncertainty around vacancy and delinquency is something I’ve historically solved for that by keeping the rent low on my properties and actually not maximizing my rent to ensure that I kept tenants in there for a long period of time.”
“And so, at Nomad , we figured there’s a better way.”