Posted 10 months ago

A Landlord’s Guide: What it Means to Have Cosigners in a Rental

A landlord discussing with a young prospective tenantPhoto by LinkedIn Sales Solutions on Unsplash

Every landlord wants to find good quality tenants—but not every landlord has the benefit of a large tenant pool to choose from. Often, you have to work with what you have, which can mean being more flexible with the tenants that you accept.

Now, this doesn’t mean you should lower your standards when accepting renters. But there is a trick to use when you find yourself having to accept tenants that don’t meet your requirements. To make sure they are committed to paying rent on time and in full, you can require a cosigner in the lease agreement.

Doing this reduces the risk of signing a lease with a renter that can’t keep up with the rent payments, while simultaneously increasing the occupancy of your rental property. But what exactly is a cosigner and what does that entail?

What are Cosigners?

When it comes to cosigners, also called guarantors, they are your backup plan if the tenant doesn’t pay rent on time or they fail to pay for property damages. Cosigners/guarantors can be anyone willing to take on the responsibility, including family members, significant others, or close friends of the tenant.

The lease agreement will then include the following circumstances where either a guarantor/cosigner might need to step in:

1. Late fees that the tenant occurs

2. Non-payment of rent by the primary tenant

3. Maintenance fees and other damage-related costs that the tenant caused

    Reasons for Requiring a Guarantor or Cosigner

    If the primary applicant doesn’t meet your criteria, you can request a guarantor/co-signer. Just make sure that you screen them thoroughly (like you would with any tenant) to reduce vacancy without increasing risk.

    Both options help you mitigate risks when you have a smaller tenant pool to choose from. It also allows you to accept tenants who you might not otherwise because of the following:

    1. Low or bad credit score

    2. Low or unstable income (lower than 3x the rent)

    3. Lacks good rental history

    4. Lacks landlord or employment references

      Beyond that, you also have other options like requiring a higher security deposit or requesting payments in advance. However, having a cosigner is a surefire way to ensure that someone else is also responsible if the primary tents fail to pay the monthly rent.

      Simply include the requirement as a clause in the lease agreement and have the cosigner sign it. You should also check with a local real estate lawyer or property management company to see if you need a short amendment or secondary contract.

      In the agreement, you’ll want to include all the specifics that the cosigner needs to meet. For example, when are they responsible for paying rent? How will they pay for it? How will they be contacted about missing payments? Additionally, a cosigner should receive a full copy of the lease, as they are responsible for its conditions, just like the primary tenant.

      Downsides to Having Cosigners

      Now, while cosigners offer increased financial protection—there’s more to it than just collecting missed rent. Despite the advantages, there are a few downsides to consider, such as:

      1. As the landlord, you need to run additional background checks and credit reports for a cosigner. You can charge a fee for these reports, but it does add another layer of work and research to fill the unit.

      2. You’ll also have to contact the cosigner if the tenant fails to meet their financial obligations. They are legally bound to pay according to the lease agreement, but that doesn’t mean there won’t be any issues with collecting rent through a third party.

      3. Cosigners ensure that the tenant pays their rent, but they can’t guarantee that the tenant will be respectful to your property. There’s always a chance that the tenant could damage the unit—decreasing your property value.

        If you ask us, however, these downsides are pretty minor. Accepting guarantors or cosigners will still decrease both vacancy and risks—especially in areas like the University District, where the majority of your tenant pool are students without low income or a lack of credit history.

        Worthy Applicants vs. Applicants with a Cosigner

        So, the question is this: Should you prioritize applicants that don’t require a cosigner? Even with our decades of experience as a property management company in Metro Detroit, our answer is still “it depends on the situation.”

        When to Accept Cosigners: If your property is in an area with a limited tenant pool (e.g., in a neighborhood of university students or low-income renters), then accepting cosigners is a wise way to increase occupancy without jeopardizing cash flow.

          Another situation to accept cosigners is if you want to charge above-average rental prices in a neighborhood that’s in-demand by quality tenants. You can comfortably charge a premium without worrying if the heightened rent will be paid.

          When to Accept Applicants Without Cosigners: If your property is in an area that attracts quality tenants, then we advise that you accept those that don’t need a cosigner to pay their dues. This way, you save time spent doing more paperwork and background checks.

            Remember that you always have the legal right to accept the most qualified applicant—you can decline an application if you don’t want to accept a tenant that requires a guarantor or cosigner.

            However, you’ll need to ensure that your decision has legitimate reasoning and is compliant with fair housing laws. You can’t, for instance, reject a tenant due to their race or gender. But you can deny an application if the tenant (or cosigner) fails to meet your financial requirements.

            The Difference is in the Stable Cash Flow

            While having a co-signer adds an additional layer of administrative work, they offer you peace of mind when they are necessary. Plus, it allows you to accept less-than-qualified tenants without the usual risks of taking in financially inadequate applicants.

            At the end of the day, our advice is for you to weigh your investment priorities and choose the best route that stabilizes your cash flow and protects your rental property. Whether that’s only to accept qualified tenants or accept tenants with cosigners.

            Is it your first time requiring a cosigner? Our team of property managers can guide you in the process. We are more than willing to help you choose and implement the best investment route for your business. Get in touch today!