The fact is, about 85% of America has a credit score above 600. At 600, you start to get below a 50% default rate on mortgages, and an even higher default on rents. Remember, you are not looking for an average renter for your quality unit; you want a quality renter for your quality unit.
If you are running a bare-bones, slumlord operation, you need to specialize on the sub-600 renters, not avoid them. Some landlords would say avoid anyone with a sub-700 credit score. Every person can be a good renter, in the right residence. Know why you have tenant selection criteria, in addition to having the criteria in the first place.
Remember, land lording is a game of probabilities and statistics. There are good tenants in every category, but you are looking for the highest probability of success, not the needle in a haystack. Success is defined a tenant that pays rent, leaves the unit in good order, and you make money. Making money (or not losing more than planned) is a key factor.
So a tenant with a sub-600 score can be great, but you MUST mitigate your risk with a higher deposit and a stronger criminal, rental history and employment background, including rent to income ratio.
Sure, and 800 credit score can have problems too, but statistically they are less likely.
A foreclosure will ding a credit score 100-150 points, leaving many people with a 600+ credit score. It takes work to get below 600.
So do yourself a favor. Do what it takes to get a higher credit score person. Even a Section 8 tenant can have a 800+ credit score. Credit score is a responsibility indicator, not a income indicator or public assistance indicator.
Be sure to look at my “Coming Attractions” page and see what I have in store for upcoming articles.
What is your tenant selection criteria?
Great tip and great quote -> ” Success is defined a tenant that pays rent, leaves the unit in good order, and you make money.”
Thanks again DC. Your site has a lot of great information too!
If you can’t make money on a tenant, by definition, they are not good.
I have one renter who has lived in my property for five years and he has AWFUL credit. Not sure on his actual score, but it’s bad. Anyway, he’s basically the ideal tenant. He even edges and lawn and fertilizes! He has only been late once since he moved in.
I took a chance on him because I got good vibes and I’m glad I did, but not sure I would do it again! I’ve learned a lot since I let him move in 5 years ago. =)
600 is an awful score, and I have had former 800 score renters that say their scores are awful and they are 675 or so. Sometimes, lower scores can be good, but you have to put the odds in your favor. If you continue to rent to sub-600 credit score people, you will have many bad experiences. It doesn’t take too many bad experiences to wipe out many years worth of gains.
When an average renter credit score is ~658, anything less than that is below average. I prefer 650+ scores and 5x+ the rent in income. It makes my life easier.
I don’t think that someone having a credit score of under 600 necessarily would make them a poor choice for the tenant without being able to see what caused their score to drop so low but I definitely agree that they should be required to pay a much higher deposit.
A higher deposit helps, as well as making sure the income is at least higher than 3.5x the rent. Low score and an average income is a recipe for disaster. Income is the tenants ability to pay rent, credit score indicates their desire to pay rent.
Behavioral issues often come with low credit scores. It often depends on where your rental is located. I can tell you from experience, low credit score tenants are often higher maintenance too. Low credit score people have higher insurance claims.
Not everyone with a low score is bad. I have had some great tenants with a low score too. But why make life more difficult? I do not have time for sob stories. I am not running a shelter.
In the end, horror stories abound when a landlord takes a low score person, with a low income. And it is the landlord’s fault.
I had one person that told me they had never been evicted. It turns out that she had been evicted 9 times, in 7 years. Her finance, who “did not have a criminal record”, was recently released from prison for second degree murder. Nice folks, who would have fooled some landlords, and eventually did. I wrote her name down, and she was evicted shortly after she applied to my place.
UPDATE: She is up to 13 evictions now.
I agree that as a landlord we don’t want tenants who don’t pay the rent, but I don’t think we should accept tenants solely based on their credit score. Yes, it does matter, but as a commenter above said, sometimes your personal judgment on the prospective tenant to help you make decision isn’t always a bad thing…
Good point, so would you have rented to a Ted Bundy? The BTK Killer? How would you tell a judge, in a Fair Housing lawsuit, you didn’t like the person that applied previously? No reason, just didn’t feel right.
It just so happens that we ‘like’ people, like ourselves. It’s human nature. Credit score is the summary of how people pay their bills. If people do not pay bills, will they pay your rent? Maybe, but it is risky. In some states you cannot charge more than a month’s rent for a deposit.
Con artists, are the best manipulators. You will NEVER pick them off, without using an objective criteria, like a credit score. Past landlord references? Don’t count on it. I have given GLOWING written references to get rid of bad tenants that were decent people.
So, people that use their own judgment will eventually get burned, 100% of the time, if they go through enough tenants. If you only have one or two rentals, and long term tenants, you can be lucky for a long time.
“Income is the tenants ability to pay rent, credit score indicates their desire to pay rent.” Loved that. While I don’t think a credit score is an indicator of whether or not someone is a good person, if you’re running a business like a rental, you have to play to the odds.
Thanks for posting Ryan!
Low credit score people can be great people, they just do not pay their bills, or have too high of a debt utilization ratio. The low score also indicates a possible insurance risk, and potentially behavioral issues. It depends on how much work you want to put into managing the building. Low scores will necessitate a more hands-on approach to tenant management. Low score are higher risk, and potentially more return. One bad tenant and your returns are wiped out for a long time.
Never ‘hit’ on a 20, unless you like higher risk at the black jack table. Never take a sub-600 tenant unless you like the extra risk, or are able to mitigate the risk.
Is it legal to charge additional rent for tenants with bad credit? When you go to get a home or car loan, the interest rate is higher if you have bad credit. It seems like you could simply charge higher rent for the additional risk of renting to people with bad credit. You would still want to make sure that they have enough income though. I mean, there are businesses set up specifically to take advantage of people with poor credit (some auto loan companies, payday loans etc…) so it seems like a landlord could take advantage of the bad credit niche by charging higher rent/deposit for poor credit scores.
I guess what I am getting at, is that just about every risk has a price at which it is worth taking. For instance, I allow my renters to have dogs, but I charge extra rent and deposit for them. For me, the extra money that I get in rent is worth the occasional ruined carpet, or scratched door. If I could get an extra X dollars a month plus extra security deposit, I might accept people with low credit score, assuming that they still make enough money and otherwise seem like they would be a good tenant. But is that legal? I am in CO.
You would need enough deposit for an extra 2 months rent, the eviction costs, legal expenses, and the fix up costs. Perhaps an extra $5K for a low scoring tenant.
No low quality tenant has that kind of money, and they are not going to give it to you if they did,. They do not want to risk losing it.
Thank you for reading!
I tried to have risk-based pricing in my rentals a while ago. A bunch of people told me that I should not do it. I am not sure why. Getting a larger deposit makes sense, but tenants with a lower score are a lot more work. It seems that people with a low credit score are just not a civilized person. That is, they have not figured out how to live in a civilized society, and it is shown by their propensity to lie, cheat and steal as evidenced by their credit score.