Fellow landlord's opinion?

[Aaron Millis]

Hi BP,

I am screening tenants for my college rental that will be available in the fall. I have a 4 bedroom house that I rent by the bedroom. I'm looking into 1 of the 4 potential tenants and see that his income comes up short of my '3x the rent" rule. I told him he could use a guarantor which is common here (typically the parents). He said his parents make plenty of money but they recently filed for bankruptcy and asked if I could still count them as guarantors. 

I asked him how recently this happened and I'm still waiting to hear back. But this is my first time running into something like this so regardless of his answer I'm not sure the kind of weight "recent bankruptcy" has. 

Any advice or opinions are welcome. Thanks.

[Thomas S.]

The parents are not acceptable as guarantors with a bankruptcy. If you require a guarantor you will need to pass on this applicant. You should always have parent guarantors for all students since none have permanent employment.

However what you do is require that each student be fully responsible for the entire rent. You rent the house to the group collectively making all responsible for the entire rent. You would receive one rent check and they deal with collecting the rent and utility costs among themselves.  It becomes their problem if he defaults not yours. Unfortunately if the place is destroyed only the parents of the three good tenants will be held liable.

[Aaron Millis]

@Thomas S.

Thanks for your reply man. If I were to construct my lease that way^ to where they are all on the same lease- what would happen if he stopped paying and I needed to evict him? Wouldn’t that mean I would have to evict the entire group of 4? That was my reason for not wanting to do it that way. It seems easier to get one bad egg out and keep the others in house so you don’t miss out on allll your income.

[Chuck H.]

Originally posted by @Aaron Millis:

@Thomas S.

Thanks for your reply man. If I were to construct my lease that way^ to where they are all on the same lease- what would happen if he stopped paying and I needed to evict him? Wouldn’t that mean I would have to evict the entire group of 4? That was my reason for not wanting to do it that way. It seems easier to get one bad egg out and keep the others in house so you don’t miss out on allll your income.

 That's the beauty of having them all on one lease. If one stopped paying rent, it's not your problem since the other 3 need to come up with the difference. All you care about is if you get the one check (and insist on one check). They will self evict the bad egg and get a new one for you.

If you rent out by room, then you have to deal with roommate drama, common areas, etc.

[Jim K.]

@Aaron Millis

I wouldn't do it for a long-term SFR, where you live by the ironclad rule that unless you're sure, you let it sit and take the hit. For a shared college rental where, as @Thomas S. indicated, you're allowing significant risk into the business model anyway, there would be times when the risk was acceptable.

But in this case, it's the middle of February. You've got plenty of time. You have no idea what the parents' current transitory financial situation is going to be like when September rolls around. If this were the end of August and the semester was breathing down your neck, that would be a different story.

So I would pass now and double down on advertising. Good luck, Aaron, please keep us updated.

[Marc Winter]

A little aside--on the bankruptcy issue, you need to know if the bk has been discharged/terminated, ie, they are done with the process.  If they have completed it, they cannot declare again for many years, and often lenders feel they are !surprise! a good credit risk, all other factors being equal.

@Jim K. is right--February now--plenty of time to get the top applicants.  

[Thomas S.]

@Aaron Millis

Yep, as @Chuck H. points out it is not your problem. No reason to evict, it is the other tenants problem.

I think you should spend a little more time studying the business, you seem a little short on overall knowledge.