The screening process is a very important in considering a prospective tenant application. We do pull credit reports for all applicants. However, a credit report is just one metric we use when screening a tenant application. We obtain recent paystubs, pull a criminal background check, and verify rental history. A low fico score does not tell me if a tenant will take care of a property or lose his or her job in the future. So, what is the most desirable or profitable tenant?
The most profitable tenants have good jobs, work hard to provide for their families, take care of the property, and stay in the property a long time. One of the advantages of a single family residence property versus a multi-family unit is many tenants stay in a home much longer. Because it is cheaper to rent than purchase in most situations, tenants can live in an expensive neighborhood that they otherwise could not afford. Renting in a nicer neighborhood provides a high quality of life for their family. Hence, many tenants will stay in a home for years.
High fico score tenants can actually cost owners the most. Most high fico score tenants pay their rent on time but are not immune from job losses and layoffs. We rarely have a 680 plus fico score tenant occupy a property for more than 1-2 years. This results in frequent turnover costs. Anytime we turn a property, most landlords will lose a month of rent just in paying leasing, rekey, and make ready costs. This assumes there is no extended vacancy period or damages. Vacancy and turnover costs are usually the most costly expenses in leasing and managing rental properties. It is cheaper to replace carpet and paint interior walls for a property occupied by a tenant for four years than to turn property yearly and pay turnover and vacancy costs.
We have some tenants who have occupied and rented the same homes for six or more years. They have no plans to purchase a home, have poor credit, and cannot qualify for a mortgage. Sometimes we do have a problem if their car breaks down or they have a medical bill, but most of the time we are able to work things out.
The current housing crisis is a reminder that home ownership is not for everyone. Millions of owners are upside down because they put little money down, lost their job, or could qualify only with an interest only or adjustable rate mortgage. It is much easier and less costly for a tenant to pay a reletting fee and breach a lease than sell a home with negative equity in a poor market. Home ownership resulting in foreclosure has damaged many home owners’ credit. Renting may have been a better alternative for these homeowners.
The good news is that the current housing crisis could be very profitable for long term professional landlords. Interest rates most likely will likely increase in near future, and inflation may also increase as our government increases its debt and deficit. Rental property could be a great hedge against inflation. I am hoping rents increase as the pool of renters increase and the percentage of home owners decrease. Maybe the mortgage crisis will result in higher rents and profits for landlords.
In summary, I advise landlords to look more closely at each application. A 550 fico score tenant with long term steady employment and good rental history may be less costly than a high fico score tenant. A landlord can also ask for a higher security deposit for tenants with a low credit score. We manage over 300 properties and have a very low percentage eviction rate. Less than 2% of our leases agreements resulted in eviction proceedings last year, and most of the tenants lost their job and income stream.
If you have any questions, please call us at 512-257-9836. Our office provides sales, leasing, property management, and mortgage services.