As a landlord, you’ll have vacant units every so often. A vacant unit means losing out on income that could otherwise go toward paying your property debts, repairing the building and realizing your personal financial goals. If you are lucky to have your building in an area with insatiable rental demand, you’ll probably not have a hard time finding someone to move in quickly. For many landlords though, finding a suitable tenant can take weeks or months.
Large property management firms overseeing a long list of Frisco TX apartments can afford to leave a unit vacant for a year or more as they wait for an applicant who meets all the requirements on their tenant evaluation checklist. As an individual landlord, you have no such luxury. The faster you can get someone to move in, the better. That might mean some flexibility in your review of tenant applications.
One area that proves a stubborn barrier to tenants is their credit score. Nearly 7 in 10 Americans tarnish their credit before age 30. Yet, the vast majority of this segment of the population are well-meaning individuals who, for the most part, meet their financial obligations on time and as required. It’s possible to find a great, dependable tenant that has bad credit. The following tips can help you do just that.
1. Find Out from the Applicant the Circumstances Leading to Bad Credit
A credit report is a fairly reliable record. However, it doesn’t explain the circumstances that may have led to the individual landing on hard times. Even where there’s a reasonable explanation, there’s no way of knowing. Unless, you get in touch with the person and find out.
Many responsible persons get caught up in a financial storm due to a one-off blunder or a financially-draining illness in the family. Nothing guarantees that the story the applicant will share with you is true. But if they are dishonest, there are ways you can find out. You could for example request for proof in the form of additional documentation.
2. Have a Guarantor Co-Sign the Lease
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A guarantor co-signing a lease is common practice where a tenant has no credit history. Like a young adult who’s just moved out of home. However, this practice can be extended to individuals who do not satisfy the credit requirements of a good tenant.
For residential leases, the guarantor or co-signer, commits to ensuring the rent will be paid on time. If the tenant fails to do so, the guarantor will stand in and make the payment. The role of a guarantor gives a tenant’s application substantial weight since a default has real consequences on the guarantor’s credit record as well.
A crafty applicant could pick any random friend or relative to be their guarantor. To avoid nasty surprises later on, you should screen the guarantor with as much rigor as the tenant. Actually, if the tenant has bad credit, make sure the guarantor offsets this by demonstrating excellent credit.
3. Ask for a Larger Deposit
What do banks and other lenders do when a loan applicant doesn’t have a stellar credit score but can otherwise demonstrate an ability to comfortably pay back the debt as expected? They apply a higher interest rate and, for a mortgage, request for a large deposit. For a landlord, a security deposit can serve the same purpose.
The riskier a tenant appears, the higher the security deposit you should ask for. This helps minimize your losses in the event that the tenant does default later. Note that some states prohibit landlords from requesting a security deposit that exceeds the monthly rent. Before you settle on a figure for the deposit, check your state’s mandated limits.
4. Shorten the Lease
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Breaking a residential lease before time can be a pain. Depending on the tenant’s tenacity, this action can suck you into a costly, drawn-out legal battle. At the end of it all, it could bleed you money on all sides i.e. a unit that stays vacant thus no rent coming in and the legal fees incurred to argue your case.
You can preempt this problem by shortening the lease from the onset. If you usually sign a 12- or 6-month lease, you could reduce this to 3- or 1-month. This allows you to terminate the tenancy early if you run into difficulties. In any case, if after a while of the tenant demonstrating they are creditworthy, nothing prevents you from increasing the length of the lease in future renewals.
When you receive several tenant applications, you should choose the person with the best credit. However, if the person who demonstrates the best ability to pay has unflattering credit, you don’t have to leave the unit unoccupied. Apply the above safeguards to put your mind at ease and you can have them move at the earliest.