Investor · Sandy, UT · Member since 2012 · 71 posts · 29 votes
I'm considering renting a spot to an applicant with very poor credit. To offset the risk of the tenant potentially not paying rent I am considering a deposit that is more than 2X their monthly rent and only offering a month to month lease. In my state the eviction process is pretty quick should I need to use it. What else would you consider in a situation like this?
@Chris Bingham The security deposit increase does nothing. You are safer by analyzing the equity they have moving in the property. For example, I had a tenant by new furniture and move in an entire family. His furniture and the kids were the equity that makes them feel accountable for paying rent and maintaining the property well.
Imagine, renting to a 24 year old who has no credit history, no kids and no belongings or equity. But you increase the deposit by 2X the rent to make you feel confident. that does nothing.
Credit scores need to be drilled down into to make a proper evaluation. If the applicant had large hospital bills that went into collection or if they had a messy divorce (depending on the amount of time passed from that type of issue) it might not be so bad.
However, if they are being dunned by electric, water, gas, phone or other utility or if they are late on their car payment or credit cards, and it's all recent, well, just say 'no.'
With any tenant, good credit or no, make sure to inspect the unit on a regular basis. Letting them know you care will go a long way to keeping their tenant act together.
The tenant I have in place now had poor credit and looked terrible on paper.
She went through a divorce where the ex messed up her credit, and she also had a public intoxication charge; as you can imagine the red flags were there. My realtor (who has property himself) said she seemed like she was trying hard to turn her life around.
almost 2 years later, I have never had to chase her for the rent, and most of the time she pays early. She also treats the place as if were her own. Poor credit score can be used to leverage your lease, but it shouldn't be the only reason to deny. People need you to take a risk on them sometimes and luckily it worked out in my experience
If you are considering renting to someone with poor credit you either have a C/D property or are very desperate. If it is a case of being desperate you will be sorry. A vacancy is less expensive than a eviction. You need to tighten up your screening standards.
Many times if renters had good credit they’d buy. Most people will pay rent before the credit cards, student loans, or cars.
I look at length of employment, income relative to rent, length of last rental ect.
I also charge a larger deposit and do month to month. Month to month doesn’t require eviction for nonpay and if you have two months deposit you’re generally in a decent position.
This is only 1 factor but in my experience, poor credit due to bankruptcy actually helps me because now that the potential tenants debts are gone they can afford to rent.
Their credit is shot for a variety of reasons. BK 2 yrs ago, massive student loans, a serious history of not paying their creditors including several that went to collection pre BK, recent divorce, and no long term employment history. Tons of red flags! I wasn't looking for a tenant for this unit, but had someone approach me about this potential tenants situation. They are getting help for their rent and I will have 2X the monthly rent in deposit. As @Derek Carroll mentioned, going M2M w/ 2X monthly rent on deposit leaves you in a decent spot and I charge more for M2M than a 1yr lease. That's kinda how I'm looking at the situation. I don't let tenants get behind on rent AT ALL, so I'm feeling decently secure although their credit report and situation look pretty bad. They are just trying to get back on their feet.
@Michael Noto Good thought! However, UT doesn't have a max allowable security deposit.
@Marc Winter Regular inspections are a great way to show you care about the unit and expect it to be maintained in a decent shape and training the tenant.
Thanks for all the input, if you care to follow up in the future I'll let you know how it went.
@Chris Bingham. I would don’t rent to this tenant since they do not have reliable employment and they do not pay their obligations. If the tenant had reliable employment and a good landlord reference I may consider the circumstances of the bad credit. If t is due to medical debt or if the debts were were from a long time ago and the past few years the tenant has been paying on time I would consider them. The circumstances you mentioned would not merit any consideration though if you don’t want to have to do an eviction.
It is better to let your property sit empty until you find someone whom is likely to be a good tenant.
One of the few leverages a Landlord has that a tenant will not thrash a place is the hit to the credit. If they have a credit score that is already low that leverage is nonexistent.
We do not rent to low credit scores and our RE is mostly in C areas. I do not care if it is because of divorce, medical bills, or whatever. This is because regardless of how it got low, the fact that it is low takes away my protection that come from knowing I can hurt their credit if justified.
We would not rent to your potential tenant. We are not desperate for tenants. Our units usually rent in the first one hour open house and we have little turn over.
Good luck
One of the few leverages a Landlord has that a tenant will not thrash a place is the hit to the credit. If they have a credit score that is already low that leverage is nonexistent.
We do not rent to low credit scores and our RE is mostly in C areas. I do not care if it is because of divorce, medical bills, or whatever. This is because regardless of how it got low, the fact that it is low takes away my protection that come from knowing I can hurt their credit if justified.
We would not rent to your potential tenant. We are not desperate for tenants. Our units usually rent in the first one hour open house and we have little turn over.
Good luck
Curious what is your minimum credit score? I’ve always done whole person screening. If you looked at my credit I wonder if I’d pass screening sometimes. ;)
I'm considering renting a spot to an applicant with very poor credit. To offset the risk of the tenant potentially not paying rent I am considering a deposit that is more than 2X their monthly rent and only offering a month to month lease. In my state the eviction process is pretty quick should I need to use it. What else would you consider in a situation like this?
What is very low credit? 400? 500? 600?
Also I’d ANY if the credit issues due to anything regarding rent or living accommodations? That’s a red flag for me. I don’t care as much of a credit card or medicial bill from 5 years ago is charged off. I do care if they have a judgment in their credit for something about renting.
I don’t care how many good stories and reclamation projects that turned out great. Do not rent to somebody with bad credit. They didn’t get that bad credit because of bad luck. Don’t forget the #1 rule: Tenants Lie. Are you a business or a social worker? Time to decide.
I’m very curious to know why you’re trying to talk yourself into renting to this person. Almost every time somebody comes on BP to ask if they should rent to this person, they already know the answer is NO. But you’re already preparing for the eviction before they sign a lease. Good luck. Come back in a few months and let us know if it worked out.
One of the few leverages a Landlord has that a tenant will not thrash a place is the hit to the credit. If they have a credit score that is already low that leverage is nonexistent.
We do not rent to low credit scores and our RE is mostly in C areas. I do not care if it is because of divorce, medical bills, or whatever. This is because regardless of how it got low, the fact that it is low takes away my protection that come from knowing I can hurt their credit if justified.
We would not rent to your potential tenant. We are not desperate for tenants. Our units usually rent in the first one hour open house and we have little turn over.
Good luck
Curious what is your minimum credit score? I’ve always done whole person screening. If you looked at my credit I wonder if I’d pass screening sometimes. ;)
Most of our units is in a B- to C area. Those units have a lower required credit score than the better location units. Also in the C area we may bend our lower number if for example there are multiple tenants that are close to the score that is a minimum. For the B- to C class it a single tenant we expect 650. In our Pt Loma units (B area but expensive) we expect 675. The 675 has not been a problem (It would be real easy for us to make this a required minimum), that is the type of tenant that looks at units with rents at those prices (starting a little above $3K). The 650 usually is not a problem, I suspect because we are upfront about running credit and criminal checks and charge for applying so those with poor credit do not apply. We have rented to multiple adults in the C area that did not have 650 credit score when a couple of the adults were fairly close. These units start at ~$1600 (2 BR, but nice for the area). I think if we tried to make 650 a requirement. we would have some units that would take longer to find tenants than what we desire so this truly is not required as long as we still feel the combined credit scores provide us the protection/leverage that we desire.
Their credit is shot for a variety of reasons. BK 2 yrs ago, massive student loans, a serious history of not paying their creditors including several that went to collection pre BK, recent divorce, and no long term employment history. Tons of red flags! I wasn't looking for a tenant for this unit, but had someone approach me about this potential tenants situation. They are getting help for their rent and I will have 2X the monthly rent in deposit. As @Derek Carroll mentioned, going M2M w/ 2X monthly rent on deposit leaves you in a decent spot and I charge more for M2M than a 1yr lease. That's kinda how I'm looking at the situation. I don't let tenants get behind on rent AT ALL, so I'm feeling decently secure although their credit report and situation look pretty bad. They are just trying to get back on their feet.
@Michael Noto Good thought! However, UT doesn't have a max allowable security deposit.
@Marc Winter Regular inspections are a great way to show you care about the unit and expect it to be maintained in a decent shape and training the tenant.
Thanks for all the input, if you care to follow up in the future I'll let you know how it went.
Sounds like they have nothing to lose at this point. They can't pay their bills, can't pay rent without someone helping, can't hold a relationship together and can't hold a job.
In my experience these red flags are also an indicator of how they will treat your property and how much they will respect you. So on top of not paying rent, they could trash your property and disrespect you. You know there is a good chance you will need to evict them, so given all this risk is it a good idea to rent to them?
Is there something wrong with the property or some other reason you are getting desperate on this one?