A fellow landlord called me up the other day to ask about a prospective tenant. It led to a few different questions. The one that prompted the longest-winded answer from me was this: Would you rent to someone with bad credit?
Maybe. I’m not the type who lets credit be the deciding factor, necessarily. But if there are other red flags, bad credit certainly doesn’t help. I’ve given advice to would-be renters with bad credit, after all.
Bad credit can be profitable
Some landlords thrive on applicants with bad credit. Do what the credit card companies would do, they say. Raise the rent. And I can see how that can be effective. If you have a $1,000 house and the person with bad credit makes at least $1,150 a week, then sure, you can slap an extra $150 onto the rent, make more money, and probably have a happy tenant because many other landlords won’t rent to them.
The problem with this is that the applicant has to make enough to be able to afford the extra rent. If they make $900 a week, they can’t afford $1,000, let alone $1,150.
I’m far more interested in income than I am in credit. If you can’t afford the house, your credit doesn’t matter. If you can barely afford the house, then your credit might matter. Someone who has a good track record of paying their bills will probably pay me. So a good credit score works when someone needs a benefit of the doubt.
But let’s talk about bad credit
I’ve only rented to two tenants who had really bad credit. One had several other reasons to decline her. I wanted to help her and her family out though, so I said yes. She made me regret it. One month she just stopped paying rent, but she didn’t stop calling me and telling me stuff was broken. It took a court order and a visit from the sheriff to get her out of my house, and she left it a disaster.
The other had a job, and so did her boyfriend. Their credit was brutal. And some of the names I saw on their creditors list made me question their priorities. I’ll leave it at that. But they made enough money to afford the house. Then one month she missed some work, and they never recovered. In their case, had I raised the rent on them, I would have had a bit more financial buffer to let them coast. They came to the same conclusion I did: they couldn’t afford that house. I let them out of the lease early because it was summertime and I knew I could get someone else in there quickly. Letting them out and getting someone in there who could afford to be there was the better situation for both of us.
Applicants I didn’t allow
I’ve had a few people who I declined. One recited a monthly budget to me. The numbers worked. But her results showed she wasn’t following that budget. She knew what she had to do, but there’s a difference between saying it and doing it. But again, the problem was she didn’t make enough money. Her credit score just proved to me that she wasn’t making it work.
Sometimes I decline tenants without even running a report or ever seeing their credit. In both cases, the breadwinner had a low-wage job, below $15 an hour, and the other adult was unemployed and had been for a while. At the level of income they had, they weren’t making the $900-something a week they needed to be able to afford the house they were looking at. I didn’t like telling them this, but both families had two options. Either find something a lot less expensive than my house, or get better jobs.
It stinks. I remember when I couldn’t afford to live in my cheapest rental. Obviously, I was capable of figuring it out, because I did. But when I’ve given marginal tenants a chance, it hasn’t worked out all that well. And there’s a difference between me and the people I’ve given a chance. Back when my weekly income was in the 800s, so was my credit score. That’s where credit score makes a difference. If you’re $100 short of what conventional wisdom says you can afford, good credit indicates you’re the type who will make sacrifices to come up with that $100 a month. Bad credit indicates you’re less likely to make sacrifices to come up with the $100.
That sums up what credit means to me as a landlord.
What if they offer you more money?
My buddy’s applicants offered to give him several months’ rent in advance, because they had savings. My immediate question was why they have credit scores in the 500s if they have savings. After all, I have a bad month from time to time. Maybe something happens and I don’t make what I normally make. Or I have an unexpected expense or three. When that happens, I pull money out of savings to pay the bills. It’s what the savings is there for. We call it “saving for a rainy day” for a reason.
The conventional wisdom about this situation is that when you collect several months’ rent in advance, the tenant gets used to not paying rent and never gets used to paying it again. It sounds like a nice idea, but human nature keeps it from working more often than not.
A better option is to raise the monthly rent. The problem with this option is that if your inflated monthly rent exceeds your tenant’s weekly income, you can still throw the tenant’s budget out of whack.
The last resort option
My landlord buddy asked me if there was anything I could do for someone who didn’t have enough money or good enough credit. I said yes. Get a co-signer on the lease. The cosigner needs to be someone who makes double the rent every week and has a good credit score. In other words, a financial superstar. Why? Because there’s a chance they’ll end up paying two families’ housing expenses.
I’ve always been a bit surprised just how many people can come up with a financial superstar to co-sign for them. Not everyone can, but more than I thought. I always prefer someone who can pay their own way. But when you need to make something work, a cosigner is a way to do that.
But given a choice between someone who can pay their own way or who needs a cosigner, I’d prefer someone who can pay their own way. In my experience, people who pay for things with their own money take better care of them.