Screening prospective tenants can involve so many different checks and balances. Interviewing, references, criminal court record search, and really anything you can do to get an idea of what sort of tenant a person is going to be. And of course, you have to be certain that you are not discriminating on race, religion, marital status, or sexual orientation to name a few.
So with that in mind, the absolute best tool you have as an indicator of what sort of tenant you are looking at is their Credit Score. It is quite possibly your best tool in making sure you have a person that will reliably pay their commitments. No matter what sort glowing review their previous landlord gives them, you can be sure their Credit Score has no bias or desire to move them out of their current digs.
What’s funny, is that often times it is landlords who have been in the game for a while that think they can trust their gut feeling over a computer calculated score when it comes to selecting ideal tenants. Of course, when it is a newer income property owner it’s usually their apprehension with regard to the added expense of running Credit Reports that causes them think twice about doing it.
With regard to the cost issue, as a landlord or owner of an income property, you can join an association that amongst other things, such as customizable lease documents and helpful tips, will provide you with a discounted rate for doing credit checks. With regard to your gut feeling, you are always allowed to decide to rent to them anyway, but do yourself the favor of at least seeing how these folks have treated their affairs in the past before you do.
No matter what secret formula you’ve developed over the years, the Credit Score is the absolute best indicator of tenant success. Ignore it at your own peril. Not only will it tell you if the person can afford the rental price, it quickly selects out anyone who has been less than upfront with their past obligations.
The credit score becomes your de facto do not pass go indicator. Of course, you will want to make sure you take into account character issues, criminal past, &c., but the credit score is something that as a property owner you can use as a fair point of discrimination.
In Canada, your Credit Score is a three-digit number ranging from 300 to the best score of 900 and it’s generated using a mathematical formula that takes into account all the various details of your Credit Report. Very simply, you get points for anything that demonstrates you can use credit responsibly and you lose points for anything that suggests otherwise.
And, every account attached to a given Social Insurance Number is going to find it’s way onto the Credit Report and thus be tabulated as part of the Credit Score.
The other points you will want to pay close attention to when you’re reviewing the Credit Report, besides just the Credit Score, include the Past Addresses section, Collections, Other Credit Inquiries, Debt to Income, Accounts, and Credit History.
When looking at the Past Address section, you will want to pay attention to how many addresses they have had in the last five years. Too many moves indicate some sort of problem, or at the very least someone who doesn’t much like to stick around, meaning you are going to likely be doing this all again in another year.
You also want to see that the addresses on the credit report reflect the addresses on the application. It’s a really quick honesty test. If there are addresses missing that may be all you need to know if it’s come to a tight decision between two applicants.
When you get to the Collections section, if there are notes in the report you will want to proceed with caution. It’s entirely possible that there was a disputed payment and the company jumped right to collections. However, if the collection note is for a property company or an apartment complex that is a serious red flag. Make sure you know the larger rental companies in your area by name so you can use this information to save yourself a potential major annoyance.
Other Credit Inquiries is where you will see who else has been pulling this particular Credit Report. If you happen to notice other rental companies listed, know that you need to proceed with caution. They may simply be putting in a few applications, but they may also be getting declined on something you’re not seeing. Be sure to relook over everything on the report to ensure you haven’t missed something on your first pass. If there are a number of car loan companies or cellular providers this could also be another red flag and reason enough to recheck the other details.
When it comes to Debt to Income you want to pay particular attention to how much credit this applicant has available. If the balances are quite high and there is little room to operate it could very well mean that any financial emergency will mean you have a good chance of not getting paid. Available credit is best used and paid off quickly. If this is not happening it usually means the person is living in service of debts that are beyond their ability to pay, at least in a timely fashion. Be very careful with these people.
The account status will tell you if they ‘good’ accounts or ‘bad’ accounts and how many of each. Most people you want to rent to should not have any bad accounts. It begins as soon as you have any bank accounts or credit products, and for a young person with only a small amount it should be pretty easy to keep them paid and keep your score in the excellent range. If an applicant has very few accounts and any of them are ‘bad’ remove them from your list. The older a person is, generally, the more accounts they tend to acquire. Someone with many accounts in good standing will tell you that they have managed their debts well. If there are 20 plus accounts in good standing you are getting a good idea that they always pay their bills.
And of course, you need to have a look through the Credit History. This section will show you all the accounts, payments, and balances. This way you will know how much this person is paying out on a monthly basis, and if any are marked with a 30 60 or 90-day delinquent tag. You will also see student loans, car loans, mortgages, and any other areas where there is a digital trail.
Of course, all of this adds up to a Credit Score which is why it will give you a good idea if you need to read any further and why we say the Credit Score is the absolute best indicator of tenant quality. And, when you look at that score, I wouldn’t be interested in anyone with a score lower than 660, the line where a ‘Good’ score passes into ‘Fair’ territory. However, what you should ideally be looking for is someone in the 725 and above area (Very Good Zone) and if you need to choose between two and one is above 760 (the Excellent Zone) there is no harm in letting that be your deciding factor.
Of course, use the interviews, references, gut feelings, and all the tools at your disposal but never let those things override the Credit Score. A low credit score rarely proves to be a sign of good things to come and you are not operating your income property for the benefit of others. This is a business, an investment, and something to build the long-term wealth of your family. So trust your gut, but don’t ignore the score.
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