Renting out an apartment or home can be a difficult task for some landlords. After spending time preparing your unit for renters and then advertising it, you need to find a suitable tenant from a long list of applicants.
Many landlords begin by sifting through the applications, ensuring each potential tenant meets a certain set of criteria. For instance, do they have a good credit score? Do they pay their bills on time? Do they have a good reference from their previous landlord? These questions help a landlord decide if they should invest in an applicant or move on to a new contender.
While the ideal tenant is certainly out there, it may take some time—and many applications—to find that person, which could leave your unit unrented and your property debts unpaid. Essentially, this means it may be worthwhile to sign a lease with an applicant who does not meet all of your expectations as opposed to waiting for an applicant who does.
When renting to a tenant with an imperfect rental or credit history, landlords can minimize the risks they face by discussing any issues with the applicant, having the tenant sign the lease with a guarantor, asking for a higher security deposit, shortening the lease term, or requesting automated or post-dated rent payments.
This post can offer tips to help you protect your real estate when renting to someone with flaws in their application.
1. Discuss Any Rental Application Issues with the Applicant
When deciding if an applicant is worth renting to, the old adage, past behavior is the best predictor of future behavior, certainly applies. However, responsible people, and more importantly, good tenants, can make financial blunders and bruise their credit. In fact, nearly 70% of Americans admitted to making a substantial financial error resulting in low credit before the age of 30.
Therefore, the first and most important step is to discuss the problem with the applicant: what about this applicant makes them risky? Perhaps their credit score is low, or maybe they have high credit card debt. Finding out what the applicant has to say about the issue is a good way to determine if you should approve their rental application.
Some individuals have understandable reasons for the blemishes in their credit history and may even offer to ease your worries by providing some form of insurance (such as confirmation that a debt has been paid or agreeing to pay more rent per month).
Communicating with the applicant will allow you to understand their point of view while building your landlord-tenant relationship should you choose to sign a lease with them in the future.
2. Have the Tenant Sign the Lease with a Guarantor
Signing with a guarantor is common practice for individuals with no credit history, such as a young adult moving into their first apartment, but is also a good practice for handling an applicant that may not meet your expectations for a tenant.
When it comes to a residential lease, a guarantor, sometimes called a co-signer, is a person who ensures the tenant’s rent will be paid by agreeing to take on the payments if the tenant cannot. In other words, this person must fulfill the tenant’s lease obligations or suffer consequences to their credit record.
This person doesn’t live with the tenant. They are a surety, providing the landlord with an additional opportunity to collect rental payments. Like a tenant, screen this person to be sure they are financially stable and reliable.
3. Increase the Tenant’s Security Deposit
Asking for a higher security deposit is tricky, especially because it is illegal in some states to ask for a security deposit that is higher than one month’s rent. So, before requesting a higher deposit, it’s best to review your state’s mandated limits.
That said, raising a security deposit to the legal limit is a good way to minimize the risk of renting to someone with a subpar background.
For example, if your advertised security deposit is $700 but rent is $1,200, increase the security deposit by $500 to help safeguard your property. This will provide you with more money to cover any losses in case the tenant doesn’t pay their rent or needs to be evicted.
4. Shorten the Term of the Lease
Another option is to shorten the term of the lease you originally had in mind when signing with a tenant you are unsure about. This may mean changing a yearly lease to month-to-month or your 6-month lease to 3-month. This will allow you to end the tenancy early and easily in case you have any difficulties.
5. Ask for Rent Payments by Direct Debit or Postdated Checks
It’s recommended that you choose an applicant with a reliable source of income and a bank account. That way, you can ask for direct debit (also called direct bank withdrawal) or postdated checks to help make sure rent is paid in full and on time every month.
Evaluate the Risks and Decide Which Tenant You Should Rent To
If you have a long list of applicants, choosing the most qualified person is generally your best option. But if the only adequate applicant has an unflattering mark on their rental and credit history, you’ll need to decide if it’s worthwhile to rent to that person or to move on and re-advertise, possibly leaving the unit empty and uncompensated.
A Rental Application will allow you to properly access that risk by reviewing their credit history, rental history, and employment history or source of income, but you can add safeguards by reviewing any issues with the application with the applicant, asking for a guarantor, a higher security deposit, a shorter lease term, and direct or postdated payments.
Once you’ve hashed out terms that are suitable for both you and your selected applicant, creating a proper Residential Rental/Lease Agreement will ease your mind by further securing your income property investment.
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