To make a profit from your property investment, you need good tenants. This doesn’t necessarily mean tenants who are nice people. (Although this is always a bonus!) Ultimately, what you are looking for is a tenant who always pays rent on time and in full — and won’t disappear with an unpaid balance.
The best way to find such tenants is to look for those with great credit. However, depending on the rental market you’re in, attracting tenants with perfect credit may not always be an option. The next best thing? Finding tenants who truly care about building healthy credit, even if they’re starting with a less-than-perfect score. These renters will work hard to make sure rent is always paid on time so they can build their score and work toward their financial goals. If they meet reasonable screening requirements and put in the work to build up their credit score over time, there’s a good chance they’ll end up as amazing tenants.
To make sure that you find renters who care about building their credit while also protecting yourself from the risk of lost rental income, as well as from the consequences of violating fair housing laws, be sure to keep these strategies in mind.
Be upfront with your screening process and selection criteria
Let prospective tenants know you’ll be running a credit check after they apply. Ideally, they should know this before they even see your property. Those with minor issues will still apply, but if they care about building their score over time they’ll come prepared with supporting evidence to show you why they’ll be a responsible tenant.
You can even include the minimum score you’re looking for on the rental listing. However, be sure to apply these criteria uniformly to every single renter who applies to avoid trouble with discrimination or fair housing lawsuits.
When screening tenants, always keep in mind that the Federal Fair Housing Act makes it illegal to refuse to rent to a tenant on the basis of race, religion, national origin, gender, age, familial status, physical or mental disability. Some states also have other protected classes that you should be aware of. However, it is perfectly legal to refuse to rent to someone with a poor credit history — as long as that criteria is applied uniformly to every single tenant who applies. For example, it would be illegal to only require a credit check for tenants of a certain age or gender.
The best way to protect yourself from a discrimination lawsuit is to have a consistent plan for tenant screening and selection that you follow for every single applicant. Making this screening process as transparent as possible will also help you attract applicants who are ready to cooperate with your requirements.
Offer credit protection as an amenity
Tenants who care about building healthy credit also want to protect it. Identity theft and fraud are on the rise, especially in the wake of large data breaches. Reporting errors can also cause problems that negatively impact credit score. For example, if a credit card provider erroneously reported a late payment to the bureaus, that consumer’s score would drop although they hadn’t done anything wrong.
However, by actively monitoring their credit, your tenants can prevent the most serious damage to their score from both fraud and errors. For example, getting an instant email notification whenever a late payment is added to their credit report makes it easier to quickly dispute inaccurate information. Instant notifications about new hard credit inquiries can also help them catch fraudsters attempting to open an account in their name.
Offering credit protection with instant alerts is a nice amenity that will attract credit-conscious renters. This benefit can be included with in some online rent payment and reporting platforms. For example, when a tenant has their identity verified and their credit profile linked to their RentTrack account, it doesn’t require more than a few clicks to add credit protection.
Give renters the chance to build credit with their rent payment
Typically, consumers have the chance to improve their score whenever they are extended credit. Whether it’s a new credit card, auto loan, or mortgage, having a new tradeline added to their credit report can increase the amount of positive data about their credit habits that is available for scoring. However, rent payments aren’t usually included on credit reports — unless a tenant is delinquent. It’s not uncommon for property managers or landlords to resort to reporting negative information to credit bureaus when dealing with a problem tenant, but it is still relatively rare for positive information about rentals to be reported.
Although it’s becoming possible for tenants to sign up directly for a service like RentTrack that will report their on-time payments, there are some significant benefits for landlords or property managers who work with a rent reporting company to have that data consistently reported.
When tenants know that their rental payments will be reported to credit bureaus, they are likely to prioritize on-time rent payments. Fear of having negative information reported is an incentive, but so is the reward of having positive information reported each month to build their score. The opportunity to have payments reported is a major perk for tenants who care about building a positive credit history.
By letting prospective tenants know in your rental listings that you report on-time payments to credit bureaus, you’ll attract the attention of those who want to focus on building their score.
Know which red flags to watch out for
Most prospective tenants won’t have perfect credit, but that’s not necessarily a problem. The thing is, you need to know which credit report red flags indicate that an applicant could become a problem tenant — that is, someone who consistently pays late, breaks the lease unexpectedly, or moves out with an unpaid balance.
For example, one late payment on a credit card may be a small warning sign, but not necessarily enough to result in a rejection of their rental application. However, if their credit card account was closed as a charge-off because of chronic nonpayment, that is a bigger concern. A long history of small issues can also speak volumes. Someone who frequently lets very small bills go unpaid is not likely to be a tenant who cares about building healthy credit.
If you do consider approving a tenant who is still working to build their credit, they should have a guarantor or co-signer. You can also consider asking for a higher security deposit or risk fees. Be sure to thoroughly check their references and other screening data to avoid problems down the road.
Always be diligent, but consistent, when reviewing credit reports. Remember, to comply with fair housing laws, it’s important that you evaluate all prospective tenants according to the same criteria. So for example, if you approved an application from a tenant of one race who had an account go to collections, but not a tenant of a different race who had the same issue, you might be in trouble. Having a plan for tenant screening and selection will help you prevent this from happening.
By showing prospective tenants that you’re willing to partner with them on their journey to building a strong credit history, you’ll be more likely to attract tenants who care about establishing healthy credit habits.
Author Bio: About RentTrack
As a pioneer in the rent reporting industry, RentTrack was the first rent reporting agency to build relationships with all three major credit bureaus. RentTrack is paving the way to make rent reporting the norm on every tenant's credit history—empowering them to make their financial goals a reality.
In addition, RentTrack has partnered directly with top property management software providers to offer seamless integrations. RentTrack believes strongly in protecting customers' data, demonstrating a commitment to rigorous compliance, as well as industry-leading security measures.
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