Rent to be paid by student loans?
O Fallon, IL · Member since 2016 · 48 posts · 19 votes
I'm screening for my first rental tenant. Would you ever consider renting to someone based on them paying 4 month chunks at a time, this to be paid fully by their student loan distribution and not working income. This is a 3 bedroom 1 bath house, in a great city outside of St Louis; located in a decent older community there. That being said just, there are much more economical situations to rent for a single mother/student; and I'm uneasy about their understanding of what's best for them financially to correctly judge what they can handle? Also worried that what if the next loan down the road falls through, how is that rent paid. Since I wasn't planning on this being a student rental, once not thought through how to proudly respond.
Thanks in advance for any thoughts added!
-James
Whether she meets your requirements depends on whether you have clearly articulated requirements. Do you? Do you require net income as a certain multiple of the rent? Do you allow gifts and loans to form the basis of the "income?" (Usually not, for most landlords) Do you require a certain number of months in the same job, unless someone has a social security or disability award letter? Do you have credit scoring requirements? If so, and she meets them, you should rent to her or risk a Fair Housing/Familial Status complaint.
If not, then create some criteria right away. Ask your friends on BP about their requirements. Then evaluate if she meets them or not. If you did not gerrymander your requirements to exclude her, but instead use requirements commonly used in the residential rental community, then you should be safe if you have to turn her down for not meeting them. Just make sure you stick to those same requirements from now on, unless you have a well-reasoned and supportable justification for changing them. It cannot seem like your prior rules were merely a subterfuge to exclude someone in a protected class.
I do not think lenders are set up to make disbursements to vendors such as landlords. They don't much like to do it with large construction loans, unless they get paid huge fees by the borrower. I just don't see it happening for a student loan and rent. Also, the prospective tenant says she will prepay you each semester.
Eh, im on the fence. A parent as co-signer might push me to say yes. When I went to ohio state, every place I rented required parent co-signers.
James, safest bet is their income is 3x rent (some require more/some less). I have had friends live off of their loans...I married one. We still owe $70k due to living off of loans. It's ultimately your call. I would consider it if I really like the individual AND had a consignor who's qualification matched my rental rules. I love helping good people...but I can't if I let people take advantage. Your situation is great, and scary, based on the lack of income...but...the upside is being paid in advance! Get a parent of friend to cosign and it seems like you have a win! Plus, they will likely feel like they are indebted to you for bending the riles for them. You can use that in the future if they ask for grace on another issue in the future.
@James Fowler The amount of hesitation in this post alone tells me that you might want to avoid the student loan distribution conversation all together. Losing sleep for the next year doesn't sound healthy to me, especially if you have other alternatives.
That being said, you can always ask the student to provide a guarantor. Also, getting paid in 4 month increments is definitely a plus.
When you rent to students you must have a parent co-signer and it is the parent you screen for ability to pay and ability to collect if payment stops. A student by themselves has no credibility. However you do not need to have a co signer if you simply decide you do not want this person as a tenant.
Having said that , 3 bed, I bath, single mother, student......I would not rent to this applicant. Nothing to do with fair housing this is a bad choice as a tenant and you need to find a more qualified applicant. When you do you can reject this applicant with a clear mind in light of the fact she does not qualify and you are not obligated to seek out co-signers..
Every student rental i have, My PM has the parents co-sign, i told them it's a must and was a practice of theirs anyway. I have never done this nor have i asked my PM about this, but is there a way the draw for rent can come directly form where the student loan is coming from ? this way you are not relying on the student to pay you.
Whether she meets your requirements depends on whether you have clearly articulated requirements. Do you? Do you require net income as a certain multiple of the rent? Do you allow gifts and loans to form the basis of the "income?" (Usually not, for most landlords) Do you require a certain number of months in the same job, unless someone has a social security or disability award letter? Do you have credit scoring requirements? If so, and she meets them, you should rent to her or risk a Fair Housing/Familial Status complaint.
If not, then create some criteria right away. Ask your friends on BP about their requirements. Then evaluate if she meets them or not. If you did not gerrymander your requirements to exclude her, but instead use requirements commonly used in the residential rental community, then you should be safe if you have to turn her down for not meeting them. Just make sure you stick to those same requirements from now on, unless you have a well-reasoned and supportable justification for changing them. It cannot seem like your prior rules were merely a subterfuge to exclude someone in a protected class.
I do not think lenders are set up to make disbursements to vendors such as landlords. They don't much like to do it with large construction loans, unless they get paid huge fees by the borrower. I just don't see it happening for a student loan and rent. Also, the prospective tenant says she will prepay you each semester.
I would not rent to this applicant. I know that a lot of people seem to get a level of comfort from a cosigner, but I don't. It's hard enough chasing a tenant for back rent owed, let alone a one-off, uninvolved second party who could physically be many many miles away. A promise of monies that "should ultimately be collectible" with enough time and effort, from a distant party who is "technically legally resposible" for the debt, is a far cry from actual money missing from my pocket today because I trusted that someone other than the tenant I screened would come up with the rent money. Obviously, formal student housing properties are not what I am discussing here. I have had this situation before, and have always turned it down. Hope that helps.
We did this one time and it backfired. The tenant lost her student loan eligibility prior to winter quarter and she didn't have enough other income to stay. She had to move out and skipped paying her last month of rent. We didn't have a co-signer either. Fortunately we had a good security deposit, but it was not enough to cover all of the unpaid rent, unpaid utilities and property damages.
@James Fowler When I was in grad school I paid my rent with student loans (housing cost was factored into the amount of loans I was receiving). I did have a cosigner (PM required either pay stub or co-signer to prove income). The PM was very familiar with student renters, as this was in a very college-dense area and they managed most of the available rentals.
Not totally sure what would cause future loan disbursements to fall through as long as she stays enrolled (I'm trying to remember if my loans had strings other than proof of enrollment provided by the university). If she drops out of school, I would presume she would be moving anyways...?
Big thanks to everyone who took their time! Your input was extremely valuable to me, as I've been struggling with the best response to give. We moved closer to having solidified our qualifications with your help!
I since have given a contingency of a co-signer if not able to meet the net income qualifications; sounds like that was offensive and pushed away a bad situation. :)
My wife and I just had our first child, and this strategy is enabling us to have her stay at home. So to us, we want to help others out, but this is very serious that we screen well.
This does not sound good OP. See if you can find a better applicant and keep this one on the backburner.
@James Fowler I'd say yes, rent. Those loans are always on time and I have never heard of them denying anyone yet (not saying it doesn't happen but the loan companies aren't very selective). Technically that's what (part of) the loans are for. Your risk would be in them dropping out and losing their loans. It might sound silly but ask for grades every semester for the first year, it should give you a good indication how they're doing. Also, there is a good possibility they are leaving some cushion in those loans for themselves. Ask for 6 months at a time, they will find a way to make it work. Some people don't have co-signers (like me - my credit is fine but if I had to get a co-signer I might not be able to) but are still hard working. I think it's great you're trying to help people but I would risk too much bc you'll eventually get burned. For the most part college students are creatures of habit. They don't want to move and if they can pay rent at every loan disbursement it's one less thing they have to worry about. Best of luck!
I run an all student property (570 tenants) and about 1/3 of them rely on some sort of financial assistance to pay for housing.
We apply, screen and sign leases with people on the SAME criteria as normal...income/credit/background etc. If they don't make it by themselves or with a co-signer we offer a prepaid rent (2 months) option.
If they have proof they're on financial aid and will receive a disbursement (or loan disbursement, same thing) then we defer that prepayment until a specified date when they get their check. In my experience most of my tenants will take their check and pay up 3-6 months depending on how much it is. When the next semester rolls over you just defer again.
Key point is sign to agree on it, and get proof from the school that they're getting it. --in your case the bank.
I run an all student property (570 tenants) and about 1/3 of them rely on some sort of financial assistance to pay for housing.
We apply, screen and sign leases with people on the SAME criteria as normal...income/credit/background etc. If they don't make it by themselves or with a co-signer we offer a prepaid rent (2 months) option.
If they have proof they're on financial aid and will receive a disbursement (or loan disbursement, same thing) then we defer that prepayment until a specified date when they get their check. In my experience most of my tenants will take their check and pay up 3-6 months depending on how much it is. When the next semester rolls over you just defer again.
Key point is sign to agree on it, and get proof from the school that they're getting it. --in your case the bank.
Thank you for sharing, some of the thoughts have opened my eyes to newer possibilities. There is definitely some appealing positives to how this could be arranged to reach an advantageous agreement; with what you and what other's have pointed out. My brain is spinning with ideas to find properties that would well suit this type of renter!
Being that it doesn't meet my standard requirements; I'm happy having my out from having to consider it this time. The house I'm screening for may draw upper end of the scale of rent when compared to comps like it; there is too much to risk for me to feel good about that arrangement.
@James Fowler Another suggestion - You could always rent rooms instead of the entire house. Maybe your house would rent for say $700 (totally arbitrary number), but if you rented rooms you may be able to get $300-$350 per tenant and make a little more cash (really nice for students). It's probably more risk, but the extra money is worth the risk to some. When I was in school I rented a house in a shady neighborhood but it was right next to the university. The house was probably worth $35k, but had 5 bedrooms and they each rented between $250-$300. $1300/mo on a $35k house isn't bad...again more risk but worth the reward if you can make it work.
@James Fowler Another suggestion - You could always rent rooms instead of the entire house. Maybe your house would rent for say $700 (totally arbitrary number), but if you rented rooms you may be able to get $300-$350 per tenant and make a little more cash (really nice for students). It's probably more risk, but the extra money is worth the risk to some. When I was in school I rented a house in a shady neighborhood but it was right next to the university. The house was probably worth $35k, but had 5 bedrooms and they each rented between $250-$300. $1300/mo on a $35k house isn't bad...again more risk but worth the reward if you can make it work.
That's a great thought! I'll have to consider this going forward. Thank you! When shopping for deals I'll definitely have this filter of criteria in mind.
James,
reading @Jonathan Kelly response, some times it is tougher to find individual students and a lot more paperwork, most of the times it's a group of students that rent together. Also depending on what the supply and demand is will determine if you can charge more individually. One other word of caution, If you deal with a PM and pay by the lease signing ( say $300 per lease) a group of 4 is one lease, 4 individuals is 4 leases, guess what happens to your numbers ? your either paying $300 or $1200 that's a big difference and can change your profit and only benefits your PM to rent to single student. try to negotiate this, i have on mine that its 300 for a lease signing ( group) and 100 for lease signing individual, so They make 100 more for individual leases ( figuring 4 people).