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As a landlord, you only get a return on your investment when you rent your property out. It should ideally also be filled with a good tenant that pays on time and keeps your place in mint condition, believe those at UMoveFree listing experts.
In more challenging economic times, you may not always find such an occupant. We've made the following recommendations to help decide if you should rent to someone with a bad credit rating.
A credit rating is an excellent way to understand how a person ranks in terms of financial obligations like debt and if they're likely to pay on time. When it dips below 580 points, it's very poor, and they won't get future credit approval.
If you come across someone with a bad record, you could ask why or how they’re currently managing it. Some may even be forthcoming and tell you of their position. The past is a good indicator of future behavior, but it could be identity theft, causing an unsatisfactory reflection.
Your best bet is an occupant with a reliable source of income. You can ask them for a variety of ways to prove their earnings.
The first would be a payslip to show they receive a regular salary. You could also ask for confirmation of a bank account to ensure that you can receive rent via a direct deposit every month.
Consider asking them to supply you with bank statements that list other monthly expenses too. It'll help determine if there's enough disposable income to afford the rent.
Another way to get verification would be to ask for references from previous landlords to see if they paid well. You could also ask about the condition they left the place in when they moved and why they left or if they were evicted.
There are several ways to create a safety net in case the tenant defaults. The first would be to ask that someone else steps in and co-signs to offer security.
This doesn't mean they'll pay the rent every month. However, it does offer another way to collect it in case things go wrong, and you’ll have some guarantees in place.
It's often done for younger people who ask their parents to back them up. Best practice would also be to check the credit score of the person standing in for the rental payments.
If you're feeling unsure about the agreement, you can adjust the lease period. A shorter contract isn’t ideal, but it does give you a way out.
You can start with a three to a six-month arrangement as a trial and then opt-out. After that, you can either walk away without long term damage or renew for longer if the situation improves.
An alternative would be to continue on a month-to-month basis, which gives you the freedom to end it sooner. It's more to manage in the short term but could serve you well if your tenant falls behind on payments.
You can also consider asking for a bigger security deposit to safeguard the place and help you cover any losses. Be mindful that there are regulations about the premium you can charge, and it's usually not higher than one months' rent. These may also differ depending on the location, jurisdiction, and the type of property.
Open communication is a great way to ensure you’re aware of your tenant's circumstances. Discuss any red flags directly with your potential renter to build up a trusting relationship to help you navigate the process.
You may find valid reasons for their situation and end up with an excellent prospect only in an unfortunate position at the time. Talking about it upfront helps clear up misunderstanding and presumptions and gives both sides a chance to evaluate the risks and decide if it's worth it.
A person with a bad credit score doesn't always make a poor tenant. Consider your options by understanding what a good rating entails.
Then create a safety net by asking for guarantees, proof of income, and do reference checks. Adjust the period and price to protect your property once you fully understand the risks.
Transparency and clear communication go a long way to grasp the tenant's circumstances. It also helps to navigate the application process to seal the deal and sets the tone for your future relationship.