Anybody Specialize in Bad Credit Score Tenants?

Question

Is there anybody here who allows tenants with bad credit, but charges extra rent/deposit? The standard advice is simply to not rent to tenants with bad credit. But can you make extra money by taking on the extra risk, just like banks do when charging a higher interest rate on a loan? It seems like there are some tenants out there that have bad credit because of a foreclosure or a bad business deal etc. but that otherwise could be good tenants. These people are going to have a hard time getting approved for a rental, and might be willing to pay an extra 10 or 15% rent, plus extra security deposit. Is this a niche that anybody has tried?

Victor Soni · Answer

Adam,

After doing all my research, I do not believe there is a maximum security deposit in Ohio. The rule states that anything over $50, over rent, needs to be paid 5% interest annually.

Carl Jackson · Answer

A bad credit score is only one facet of the tenant. Also consider their income, debt and savings accounts. Did you ever have a bad credit score? Did it reflect who you really were? Many people were unfairly affected by the recession.

Collect 2 months deposit instead of one.

Check if your county has a rent ceiling. Then charge a rent premium up to $150. Their bad credit is keeping them out of other rentals. You may also think about rebating $50 each month that they pay their rent before the due date.

If you want to know what kind of tenants they might be, take a look inside their car and plan a surprise visit to where they currently reside. How they treat their transportation and where they live now will give you a better picture of how they'll treat your investment.

Catherine German · Answer

Every time I have given someone with really bad credit a chance I have regretted it. I just don't like the drama, the damages and the eventual eviction that takes place at the end of the tenancy. There are people with marginally bad (or bad for a valid reason) that might not be so risky & are sometimes worth a chance. I just don't recommend trying to rent to people with bad credit.  I have been involved in rentals since the late 1980's so have seen it all from people giving fake social security numbers, fake check stubs, fake landlord info, etc. Just rent to qualified people using a set criteria and your property will be in much better condition and you have much less overall expense.

Clayton Sneider · Answer

Bill, Matt, and Carl: Thanks for the info and insight. Next time one of my houses becomes vacant I will think about what I want to do.

I am still wondering though, why rental amount is not generally based on credit score when things like auto loans and mortgages are. What makes rent fundamentally different?

Matt B. · Answer

the additional rent you would get will not exceed the damages, evictions and missed months of rent.

Bill S. · Answer

@Clayton Sneider I like the fact that you are thinking. I like tenants with nicked up credit. They stay longer because they aren't running off to buy a house because they can't qualify. If the rest of their personal life stays fairly stable, then the often stay for years.

@Matt Sicignano please share the section of "fair housing laws" that extends protection to applicants with lousy credit. It is my understanding that if you can screen them out for bad credit (not rent to them), then you can also charge more because they have bad credit.

One of the lessons on my first multi-unit property was that you can charge tenants more for rent if you don't screen. I mistakenly thought if the current owner was getting $500 per month renting to slimballs, I could get $600 by fixing the place up and getting good people in. Turns out market rent to quality tenants was $450 for my units (fixed up).

The saying in the business is that "a vacancy is a blessing compared to a bad tenant" Personally there is no amount of money that can make up for a bad tenant. While you are not wanting to target "bad tenant" per se, what reliable, defendable filter will you use to select the bad tenant you will rent to vs the one you won't? You probably will be making judgement calls vs having criteria that someone else can follow and come up with the same outcome. Your landlord attorney appreciates repeatable outcome criteria when defending you against a fair housing claim.

There are many other ways to increase net rents without increasing your brain damage due to dealing with subpar people. My advise is to pursue those methods and leave the bad tenants to the landlords that don't screen.

Clayton Sneider · Answer

Greg, I think my ideal tenant for this would be somebody who had a bankruptcy from a failed business or something similar, but who now has a good job and does not have a bad rental history. I am not looking to rent to really low income people with bad rental histories (deadbeats). Maybe my ideal tenant just wouldn't be willing to pay enough extra to make it worth it.

Thomas S. · Answer

There are thousands of landlords specialising in poor credit low income tenants. There is a good dollar to be made but the key is to invest nothing in maintenance. These types of tenants are generally very hard on a property and rotate through at a high rate.  It is often referred to as subsidised housing and many if not all are on welfare of some form.

I am aware this is not your specific target, demographics is the same,but not officially section 8.

There are two types of people with bad credit, one time hard luck and habitual.

You probably want to target the one time hard luck as they will continue to try to correct although often are unable to and may remain as solid tenants that will regularly have a hard time paying rent but may catch up. The habitual do not care and simply take advantage of the landlord till they get evicted or close to it and then do a midnight run.

Maria Keating · Answer

I have thought about it.  The way I analyzed it was to determine how much I thought it would cost me to evict someone.  From lawyers/court fees to lost rent.  Then I determined that I'd probably collect rent for a year before shit went sour.  So, if I divide the cost by the number of months, I would want to add that amount to the rent for starters.   I also would have added an additional deposit which could be applied to the last months rent (I don't think security deposit can be used for outstanding rent, but am not sure).  At that point, I knew it was too much of a rent hike to make it worth it for me, but the applicant made it super easy with a load of unpaid judgments and collections.

In my state you can charge a higher rent/deposit due to credit or background check issues, but you do have to disclose that to the tenant in writing.

Clayton Sneider · Answer

Catherine. I totally understand. But, is there some amount of extra rent that would have made it all worth it to you? What if you could have charged 20% extra rent all those years? I know if my rents could go up by 20%, that my cashflow would go up by a multiple of that. Again, using the example of allowing pets: All else being equal it would be better to not allow pets, but all else is not equal, I actually make extra money by allowing them. Wouldn't the same logic apply to people with bad credit?

Anybody Specialize in Bad Credit Score Tenants?

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