What makes more sense if you aren't eligible for a NYC apartment: Hiring a guarantor or paying a year's worth of rent up front?
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Renting an apartment in New York City requires quite a few lesser of two evils calculations—Is a sixth-floor walk-up worth it for a large apartment? Does a large living space make up for a teeny tiny bedroom?—in a new column called "What Makes More Sense?" we'll compare two choices you may face in New York City real estate and help you make a decision once and for all.
In order to nab a New York rental apartment, most landlords require that you make 40 times the monthly rent. That means for example, if you're looking to rent an apartment for $2,000 a month, you'll have to make $80,000 a year. But what if your income isn't steady (we're looking at you freelancers), or you're starting college and aren't making any money at all?
The good news: There are workarounds. First off is the guarantor: A person who makes 80 times the monthly rent—and generally who lives within the tri-state area—can agree to guarantee your rent in the event that you stop paying. But if you don't have someone who meets those requirements, there are two other choices New Yorkers commonly try: Paying an institutional guarantor or, for those who are cash-rich but not making a lot on paper, paying for a whole year's rent up front. Landlords are usually okay with either.
So what makes more sense?
Sometimes you don't have a choice
Some landlords may relish the idea of getting a year's worth of rent up front (for the above example of a $2,000 a month apartment, that's $24,000 in cash plus an additional $2,000 security deposit). However, owners of rent-stabilized apartments are actually prohibited from accepting more rent up front—they’re only legally allowed to ask for one month’s security and one month’s rent at lease signing. So if you're renting in a stabilized apartment, don't make 40 times the monthly rent, and don't have a guarantor on hand, an institutional guarantor will be your only option.
"On the other hand, if you have bad credit (below 630), you may be out of luck getting a guarantor," says Bailey Gladysz, an agent with Triplemint. "In which case, you’re likely going to have to pay up front."
Paying a guarantor is cheaper in the short-term
So how much does it cost to have someone else vouch for you financially?
Jeffrey Geller, vice chairman and chief operating officer of Insurent Lease Guaranty (a Brick Underground sponsor) says his company charges 70-95 percent of a month's rent for a U.S. citizen, and between one month's rent and 110 percent of one month's rent for a foreign renter.
For the example of a $2,000 apartment, that means $1,400-$2,200, depending on who you are.
"It's a one-time fee," says Geller. "And many of our clients are grad students or self-employed people that don't have tens of thousands of dollars to put down at once. A lot of the apartments we're guaranteeing are for $5,000 dollars or more. You're talking about putting down $65,000 in one shot. For someone who doesn't make 40 times the monthly rent that's usually hard to pull off. You don't want to empty your bank account to get your apartment."
Gladysz adds, "Even if you have a ton of cash on hand, you may not feel comfortable coughing up rent worth tens of thousands of dollars all at once (plus security deposit, plus broker fees, plus moving expenses, plus new furniture, etc). Using an institutional guarantor won’t break the bank in the scheme of things. Assuming you have decent credit and make 27 times the monthly rent (a huge break from the 40 times), you can apply and get approved within minutes."
Paying up front could save you money overall
Assuming you do have the money on hand to pay your rent up front, this workaround can be helpful because you're off the hook for the rest of the year, and you can save a couple thousand dollars on the institutional guarantor fee. There are downsides, too, though.
"If you need to move out a little early for some reason, it can be harder to get your money back," Gladysz says. "Also, if you have a repair that isn’t getting attention, you have less leverage i.e.: you can’t threaten to not pay our rent on time."
To protect yourself against a landlord not returning a the lump sum in case you move out early, attorney Jeffrey Reich of Schwartz, Sladkus, Reich, Greenburg, Atlas LLP suggests negotiating the number of days the landlord has to return that money if that happens, and including that in your lease.
"It is a cashflow issue: since the institutional guarantors charge a fee, it would usually make financial sense to pay up front and not incur that fee," Reich says. This rule doesn't work if "the tenant has great investments which will see that same money that would be paid up front returning a higher rate than the guarantor fee."
"If your money can work for you over the year, that's a good thing," he says.
Another problem that could arise if you put down all cash, Reich says, is that "if the landlord goes bankrupt, that money is part of his bankruptcy. The chances of something like that happening aren't huge, but it's something to think about."
As such, if you are planning to put down a lump sum, you may want to make sure you're going with one of the "larger, more reputable landlords and management companies that are much less likely to go bankrupt."
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