Owning rental properties doesn’t require managing them, yet 42.3% of rental property owners choose to handle the management duties for their properties.
The reason for this is to save money. After all, you’ll have one less expense to pay if you don’t hire a property management firm. In other cases, though, property owners do it because they enjoy it.
The downside is that you’ll be responsible for all the work – including running tenant credit checks. If you don’t run these yet, you should. Tenant credit checks help you choose the right tenants for your properties.
This guide will explain why you should always check a person’s credit before approving their application and how to run these.
The Effects of Your Tenants
If you’re new to owning rental properties, you might not realize how vital your tenants are for your business. Your tenants significantly impact the amount of work you must do and your business’s profitability.
Here are some of the effects your tenants have on your properties:
Tenant Turnover Rate
Landlords use several ratios to evaluate their properties, and one is the tenant turnover rate. This rate shows you how often tenants move in and out of properties.
The goal is to decrease this rate, as reducing it results in less work. In addition, reducing this rate increases your rental revenues, as you have fewer periods of vacancies.
Your tenants also affect your business’s cash flow. The cash flow tells you how much money is coming and going. Therefore, having a positive cash flow is vital for a rental property business.
Good tenants tend to pay their rent on time every month, while poor tenants might pay late or not pay at all.
The quality of your tenants also affects the repairs your units need. High-quality tenants care for their properties, resulting in less damage.
Poor tenants might leave their units messy and dirty when vacating them, and they might cause more damage to them.
Your tenants also play a role in the problems you must address each week. If you want tenants that mind their business and don’t bother other people, you must choose good tenants.
As you can see, the quality of your tenants affects everything with your business. Therefore, performing tenant screenings is a must to reduce your workload and increase profitability.
What Tenant Credit Checks Tell You
As you can see, choosing great tenants is vital for your business, and you can choose the right ones by performing the proper screening procedures. A tenant background check is one option, and a credit check is another.
What does a credit check tell you, though? When you check someone’s credit, you’ll leave several vital things about the person. Here are a few:
- Loans and balances
- Credit card balances
- Current address
- Spending habits
- Unpaid debts
- Recent loan and credit applications
- Credit score
- Rental history problems
If you want to know if someone is creditworthy, you can find out through a credit check.
Reasons to Perform Tenant Credit Checks
So, why do you need to know a person’s credit before approving their application? Here are some of the top reasons:
To Rate Their Creditworthiness
Creditworthiness reveals how likely a person is to pay their bills on time. Developing a good credit score requires years of hard work. It requires paying bills on time and keeping debt in check.
A creditworthy person has a good credit score, and they pay their bills. If you want good tenants, you’ll want to choose creditworthy individuals.
To See Their Spending Habits
A person’s credit report tells you more about their spending habits. You can learn if they manage their money well or tend to have problems with money management.
To Avoid Renting to Problematic Tenants
You can reduce the stress of being a landlord by selecting high-quality tenants. Checking someone’s credit helps you determine if they will be a good tenant or a problematic one.
If you can avoid renting to problematic tenants, you’ll have less work to do for your business.
To Detect Fraud
A credit check also shows if a person is honest on their application, as it shows their current address and information. If this information doesn’t match the details on their application, it can signify fraud.
Ultimately, checking a person’s credit helps you decrease the turnover rate and increase your cash flow. If you want a successful business, you need excellent tenants.
The Legal Requirements to Run Credit Checks
You must acquire the applicant’s consent before running a credit check to avoid legal problems. While asking the tenant verbally for their permission might hold up in some states, getting it in writing is the better option.
You can include a clause on the rental application that states that you will run a credit check. If you do this, the clause should inform the applicant that signing the application permits you to run the credit check.
Many landlords include a consent form with the application. This consent form tells the applicant that you will perform a credit check for renters. The applicant can’t submit their application without signing this consent form.
You might also want to require a fee to cover the costs of the credit check. You can let your applicants know that it’s a non-refundable fee but that you will credit it toward their first month’s rent if you approve them.
You may want to keep all the consent forms you receive from applicants as evidence if anyone questions the credit checks you performed.
How to Check a Person’s Credit
Finally, you’ll need to learn how to run a rental credit report check. The process isn’t difficult, but it requires a few steps. Here are the primary steps needed to check someone’s credit when they apply for a rental property:
Make Sure You Have Consent
Before you go any further, you must make sure you have the person’s consent as described in the previous section. You can’t run a credit report without it.
Sign Up for Landlord Credit Check Services
Next, you must sign up for landlord credit check services. You can do this online, and you’ll find that many companies offer these. As you look for a company to use, you can compare the following things:
- Limit on searches
- Information the reports show
- Credit reporting agencies they use
Most firms that offer credit check services require an account. You may have to pay a fee to start an account, but this isn’t always the case. Many companies let you create an account for free.
You will have to pay a fee per report, though, and you can compare these costs to determine how much is fair.
When creating an account, the company may ask you for proof that you’re a landlord. They do this to protect confidential information.
Gather the Right Information
Once you choose a firm to use for your credit reports, you must gather the necessary information and input it into the site. You’ll need only a few details to check someone’s credit:
- Legal name
- Social security number
- Previous address
- Current employer
Asking an applicant for a copy of their driver’s license is a great safety measure you can take to ensure that the applicant is who they claim to be.
Receive and Analyze the Results
The final step is analyzing the results and deciding if you want to approve the person’s rental application.
Keep in mind that a bad credit score doesn’t always mean that a person is not creditworthy. As you look at the credit report you receive, you might notice that they have a low score for a sensible reason.
For example, maybe they pay all their bills on time but have medical bills from a car accident they can’t pay.
In this situation, the person might actually be creditworthy but went through an unfortunate situation that caused a significant decrease in their score.
That’s why you shouldn’t solely base your decision on a person’s credit score. Instead, you can factor in other things and examine the person’s entire situation. You can even ask them for an explanation if you’d like.
For example, you can factor in the person’s job and income. After all, a person needs income to pay their rental payments each month. You can also consider the opinions of the applicant’s previous landlords.
Credit Checks Help You Choose the Right Tenants
As you can see from reading this guide, a person’s credit score reveals a lot about the person. As a result, you can select better occupants for your rental units by performing tenant credit checks.
You can start running credit checks on everyone that applies for your rental units now that you understand why and how to do it.
If you enjoyed reading this, you might also like other articles on our blog. So feel free to browse through the rest of our site for more articles geared toward landlords.