From Deposits to Fees, Renters Struggle with Up-Front Costs
In rental markets across the country, renters often must pay substantial sums in up-front costs to a landlord to secure a unit. These costs can include application fees, a security deposit, first and last month’s rent, and in some markets a broker fee. While these costs can serve important functions, high up-front costs can exacerbate affordability challenges. Indeed, even before accounting for these costs, renter households nationally are already burdened at record-high levels. Additionally, many renters have minimal savings to draw on, making it harder for them to secure a new unit. In response to these challenges, several insurance products have been developed in recent years to manage and streamline up-front costs for both tenants and property owners.
Very little data exist on up-front rental costs, and the specific charges renters face can vary considerably from property to property, across markets, and even within markets. But a large share of renters pay at least one of these up-front costs, and the costs can be high. According to a Zillow survey of recent renters, 83 percent paid a security deposit, 73 percent an application fee, 73 percent first month’s rent, and 24 percent last month’s rent. Renters who paid these costs paid a median of $75 in application fees and $795 for a security deposit. Meanwhile, the median monthly contract rent was $1,400 in 2023 for tenants who lived in their home for less than 12 months. If a renter paid all of these fees at the median, they would need $3,670 in cash to afford them.
Up-front costs can be even higher in some markets, especially in places like New York City and Boston where broker fees have been commonplace. Before recent legislation, broker fees in New York commonly ranged from one month’s rent up to 15 percent of the annual lease amount and nearly half of all rentals required a broker fee. In New York, these fees pushed average up-front costs for new tenants to nearly $13,000.
In many cases, up-front fees defray costs that would otherwise be paid by the landlord. Indeed, application fees are often used to cover costs related to background and credit checks, processing, and administering applications. Security deposits are used to cover damage to a unit beyond normal wear and tear during a tenant’s stay but are typically returned to the tenant (though in many cases without interest). First and last month’s rent go towards servicing the rent. Broker fees cover the services a broker provides in matching available units with a tenant, though in most markets the landlord hires the broker and covers these costs.
Many renters lack the liquidity to easily cover up-front charges. According to Center tabulations of the most recent Survey of Consumer Finances, renter households had a median of just $1,810 in cash savings in 2022, and these rates were even lower for Hispanic ($690) and Black ($1,000) renter households, who are more likely to experience housing instability. At the same time, renters of color with more meager resources on average are generally more likely to pay application fees, security deposits, and first and last month’s rent.
While minimal research has been done on the extent of up-front rental costs, how they’ve varied over time and across housing markets, and what types of renters are more likely to pay the fees, even less research has been done to explore how up-front costs affect tenants and housing markets. In theory, up-front costs likely exacerbate already record-high affordability challenges. If properties in more affluent neighborhoods are likely to charge high fees, it’s possible these costs can also reinforce income and racial segregation within housing markets. High up-front costs might also contribute to declining mobility rates by driving up the cost of moving. Further research is needed to explore these questions.
High up-front costs can also burden property owners. Indeed, when these expenditures stretch renters too thin financially, it can lead to lower rent collections, higher rates of turnover, and ultimately worse property performance. As a result, an increasing number of commercial products have been introduced as potential solutions. For example, security deposit insurance products allow renters to pay a monthly premium on an insurance policy in lieu of a one-time security deposit. While these products can spread up-front costs into more manageable increments, renters may end up paying more overall. Similarly, other products might cover a range of up-front costs and allow the renter to repay the loan in monthly installments, plus interest. Regardless of the product, legal guardrails should be in place to ensure both renters and property owners benefit from these arrangements.
Numerous states and localities have also recognized the burden and negative implications of high up-front rental costs. In our next blog, we’ll discuss the growing number of legislative actions undertaken to regulate these costs for renters.
