investment property loan with bad credit
 Should landlords ever accept tenants with bad credit? It can be tricky, but there are situations where it can be an option.
How can landlords protect themselves if they take a risk on a low-credit applicant? We’ll go through a few security measures in that case.
Deni & Brian talk tenant credit, screening, and what landlords need to know about finding high-ROI renters.

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What short-term fix-and-flip loan options are available nowadays?

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We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

live off rents podcast transcript

Brian Davis: Good afternoon, everyone, and happy Tuesday.

Brian Davis: Yeah, Tuesdays before the holiday. That’s right. Yeah, this has been a holiday unlike any other I have ever lived through. But, you know, we’re all hanging in there.

Brian Davis: I hope you guys are hanging in there, too. So last week, we talked all about end of year money moves, but particularly for real estate investors and with an emphasis on on tax moves to help lower your your tax bill for 2020. This week, we’re going to jump into how to safely rent to tenants with bad credit, particularly for having a hard time renting out a vacant property. You know, this is a difficult time of year to go vacancies. Not that many people want to move during the holidays.It’s a hectic enough time of year

Deni Supplee: especially in the cities.

Brian Davis: Yeah, yeah. Very difficult time to to fill urban vacancies right now between covid and know just it being the holidays.

Brian Davis: So if you’re having a hard time renting out your vacant unit, often landlords will turn to tenants with weaker credit. They’ll loosen up their tenant screening standards. So as you guys don’t know where you are tuning in from and what kind of trouble you’re having with vacancies, if any, or maybe you’re having a perfectly pleasant experience with your rental properties right now. But let us know what’s going on with you and Danny. So what are some of the things that landlords can do to protect themselves against rent defaults or other tenant problems if they are loosening their tenant screening standards, maybe accepting applicants with a lower credit score?

Deni Supplee: Well, I think that’s one of the first things is you can’t have both.

Deni Supplee: So you don’t want a lower credit score and not great income. That’s just bad right there. As much as you might want to help somebody or whatever, you got to make sure your rent is covered. So if it’s somebody who has really good income and maybe some credit issues, maybe check their credit issues and make sure that, you know, none of the big red flags are up. Some of the things like if a cell phone bill shows up on a credit report, more often than not, that indicates somebody that probably is going to let rent go if the going gets tough. And, you know, if it’s if it’s a credit report that just has issues with like maybe there’s health bills on there, but everything else is on time and everything else. They might be somebody to consider. Definitely don’t just look at a score, you know, because there’s so much behind the score and that that’s helpful.

Brian Davis: Yeah. And I want to dive a little bit deeper into one thing that you said you were talking about, like health, health bills, medical bills on someone’s credit versus ongoing recurring payments like cell phone bills. So that is one thing that I look at as a landlord when reviewing its credit reports and credit reports is, is there an isolated incident, a one time incident where the something out of the ordinary happened to throw off this person’s finances, such as a divorce or a medical crisis? Or is there a pattern of not paying their bills on time? So, I mean, that’s a huge distinction, because there are I mean, I’m of the opinion that there are basically two types of people in this world. There are people who pay every bill on time, come hell or high water, who are fundamentally responsible with money and who are mortified at the very thought of missing a payment. And then there are people who never saw a bill they wanted to pay on time in their life. So you have to read between the lines a little bit when you were looking at these credit reports and look at it.

Deni Supplee: I disagree with you a little bit. I do think there’s middle ground there. I think there are people that have been hit by whether it’s a health issue or like covid, and they are somebody who has paid on time all the time.

Deni Supplee: And then unfortunately, stuff happens. But as landlords, we have to really look at we can’t look at it emotionally.

Brian Davis: Well, that’s that’s my point, is that, you know, is it someone with a sustained pattern of not paying their bills on time or is it someone who got completely thrown off by a once in a lifetime incident like a divorce that threw off their finances? But they otherwise have a clean pattern of paying their bills on time. So you have to read credit reports with little bit of nuance and not just look at the score to your point.

Deni Supplee: Listen to your applicants. When you’re talking to them on the phone, though, just like I mean, really. Pardon me. I have. Dogs in the background. But anyway, your applicants will tell a story and be very, very mindful of what they’re saying because you’ll see lies creep up in their credit report.

Deni Supplee: I’ve seen that before. And, you know, they’ll say, oh, I’ve never been late. And then you’ll say, oh, they’re always late. So, I mean, there’s it’s good to just listen to all of the little keys and whatnot. We do have a question from Calvin Tigrasse. Say, I hope I said that OK, ”what if it’s Section eight? So the rent is mostly guaranteed.”

Deni Supplee: Go ahead Deni

Deni Supplee: Section eight can be very good, but it’s something that’s not going to help you in the midst of like covid, where we’re having some situations where we have more people that are having trouble with rent. It’s a long term solution because you go through inspections and a lot of paperwork.There’s a lot of red tape

Brian Davis: Initially to put someone in.

Deni Supplee: And once you’re in there, it’s good. But if you do get a tough tenant in there, it’s really, really hard to get them out or to get damages covered. So there are good. And the good in Section eight is yes, the rent is mostly guaranteed. The negatives are you can end up with a rough tenant or somebody who has made some damages to your unit and that becomes very hard to to recoup.

Brian Davis: Yeah, my experience with Section eight tenants has been that they don’t treat your property nearly as well because they’re not on the hook for most of the run. And we value what cost something from us. Right. And that’s why we always want people to have skin in the game. And Section eight tenants don’t have that much skin in the game, so they don’t put that much value in the house that they’re living in your property. Right. That’s a generalization. Of course. You know, we I did an interview a few months back with a guy who specializes in buying six and eight properties in D.C. and he basically said that, you know, in his experience, there’s there’s two types of Section eight renters. There are people who are very grateful to have that, to participate in that program and have those benefits and who, you know, want to do everything they can to to keep those benefits. And, you know, they have an attitude of gratitude about it. And then there are people who are entitled and have that entitlement mindset and think that, you know, they deserve this and that they are entitled to whatever they want. Right. So some of that some of that tenant screening process when you’re dealing with Section eight tenants, is trying to get to the root of what kind of person are you are you renting to? And I also like to go and look at their their current residence and see how they treat it to get a little bit of insight into that as well. And you still want to do the other tenant screening as well, checking their income tax credit because they are they’re on the hook for some of the money. And if they don’t pay their portion, you still have to evict them. And it takes longer to evict a Section eight tenant than a market tenant.

Deni Supplee: So and I remember when I, way back, when I when I got involved in property management and we had a few Section eight tenants and a lot of them were young single moms who were going to school to try to better themselves.

Deni Supplee: And you can get all like you can see if it’s that you can see if somebody is working on themselves. And generally they will make a better renter for you on Section eight than somebody who clearly is just kind of riding on the system.

Brian Davis: Right. Right. Now, Deni what about things on the credit report like bankruptcies, evictions, judgments, some of these public records? What are your thoughts on those as a landlord reading these rental applications and credit reports?

Deni Supplee: Bankruptcies? I think it’s a case by case basis, to be honest with you.

Deni Supplee: I’d rather have a bankruptcy on somebody’s credit now than have them go through a bankruptcy when they’re running from me, because that’s a whole other ball

Brian Davis: and you can’t their bankruptcy back to back with a many years long waiting period. I think it’s seven years. Could be 10 years.

Deni Supplee: I just remember trying to evict somebody who had a bankruptcy while they were in the apartment. And it was a nightmare, nightmare to try to get them out. So I don’t think a bankruptcy anyway is as bad as long, you know, you want to obviously have all the other.

Deni Supplee: Everything lining up, you know, check their credit report. I mean, you can still tell if somebody is claiming a bankruptcy, but they still have some credit and they’re still paying some of their bills on time

Deni Supplee: Evictions. I’m not a fan, and I’ve heard so many different excuses.

Deni Supplee: You know, my boyfriend did or my my girlfriend ruined the apartment or a whole bunch.

Deni Supplee: And they could be true or not. But more often than not, you know, again, I’m going to go back to when I was young and very naive in this business and listen to the stories because I was all about the emotions and I I got screwed, basically.

Deni Supplee: So, you know. If they’ve had an eviction once, they could have an eviction again, and the last thing you want to deal with as a professional tenant that knows the ins and outs of a system.

Brian Davis: Oh, yeah. I mean, I’ve had personal tenants and it’s taken me a year to get them up. I know they know every loophole in the book to stay on their property. So to me, evictions get to the root of what you’re looking for with tenant screening instead of screening. You’re trying to discover is this person someone who is going to break my lease or not? And if they have been evicted before, it means that they broke someone else’s lease, in which case they are more likely to break your lease. So I do not rent to anyone who has an eviction on their record, period. Now, bankruptcy and judgments, like you said, Danny, there’s more room for interpretation there. More and more wiggle room for someone going through a one time hardship like we were talking about earlier with their credit report

Brian Davis: So you want to you want to look at was it was there a one time hardship, like a divorce, like a medical emergency or a much, much lighter on medical judgments than I am on judgments from unpaid bills? If someone had unpaid bills that went to debt collection and went to a judgment, that is a sign of an ongoing problem, whereas a medical judgment, I mean, that could be a one time incident, one time hardship. So

Deni Supplee: absolutely.

Brian Davis: Right now, what about bringing in someone else to co-sign on behalf of someone with bad credit? What are your thoughts on that? Is that effective? You know, what are the risks?

Deni Supplee: It’s effective if you take it all the way, like some people will get a cosigner or have them sign a lease and that’s it.

Deni Supplee: And you don’t really have any guidelines on what is that person responsible for and whatnot. So I again, I’m sorry about this. You want to make sure that you have an agreement with the cosigner and the cosigner knows that they are on the hook, not even just for unpaid rent, but they are also on the hook for damage to the apartment and everything else, because if they’re going to vouch for this person, you want to make sure they are vouching for this person like they’re putting themselves on the line. If somebody co-sign for a car and they ruin the car, that person still is liable for that car. The same would be for an apartment and or a rental.

Brian Davis: Yeah, and one other point to add in there is that with cosigners, they are there just as legally liable as the tenant. So you need to screen them just like you would screen any tenant who’s going to move into the property, because if the cosigner has no income and bad credit, then what’s the point? You want to go to court either. So you have to you have to screen tenants or sorry, screen cosigners as if they’re tenants moving into the property. And like Danny mentioned in passing, they need to sign on the lease as well as fully legally liable for determining that you’re cosigners.

Deni Supplee: Not only are they going to be responsible for the rent on this rental, but chances are they either have a mortgage or another rental. So you want to make sure that their their whole picture, they can take care of it all because potentially it could come down to that right now.

Brian Davis: What about collecting extra money in the form of a security deposit? Does that work? I mean, what are the limits on that and what are your thoughts on that?

Deni Supplee: Well, you can collect a lot of people do it. It’s very common, a lot of, say, sunlamp. And I see people still doing it, which is the last month’s rent in advance.

Deni Supplee: And let’s face it, one of your favorite terms is if you have more money in the game, you’re going to. Isn’t that what you say all the time?

Brian Davis: Well, more skin in the game make people accountable.

Deni Supplee: And that’s true. If people have more money on the line, they’re going to be less apt to you know, they’re going to listen and follow the rules and whatnot because they’re not going to want to lose that money. But there’s some caveats with that. I mean, if you take somebody who pays you six months rent in advance, it can be a little bit harder depending on your state and locality to get them out of there.

Deni Supplee: So just you got away, weigh all that out. I don’t think I would take much more than two months rent in advance,

Brian Davis: even if they offer.

Brian Davis: OK.

Brian Davis: All right, now, one other option that has emerged in the last couple of years is rent default insurance. So tell us a little bit about that, how it works, you know, where people can learn more about that?

Deni Supplee: Well, we work we have work with study and some other ones. And it’s a great program. I wish it was out, you know, back when I was managing big, large apartment complexes. It sure would have saved my butt several times. But it protects the landlord because you can have the best tenant and that looks great on paper and you meet them and.

Deni Supplee: They’re wonderful people and just takes them down, it could be a break up in a relationship and somebody just forgets that they just get depressed. They don’t want to do anything. They don’t pay the rent, they don’t pay their bills, and then you’re stuck. But you’re not with this default insurance. It pays basically forget it pays.

Deni Supplee: Is it 75 or 80 percent ?

Brian Davis: they pay the entire rent until the until you have the tenant out of the unit and replace them with a paying tenant. So if the tenant stops paying the rent, the insurance kicks in and starts making their payments to you until you’ve replaced them with a tenant.

Deni Supplee: A win win, really?

Brian Davis: Oh, absolutely. So, you know, the average policy costs a few hundred dollars a year somewhere in the three fifty to four or fifty dollars year range. And once you sleep, is not sleep at night as a landlord.

Deni Supplee: Yes. And especially when you all see this now, like with covid, again, perfectly great tenants have gone through some really tough times. If you were in the entertainment industry, you really are…

Brian Davis: Sure, hospitality….

Deni Supplee: Yeah, so it protects the landlord in those circumstances, especially with eviction moratoriums and all this stuff.

Brian Davis: Yeah. So I put a link in the comments to where you can learn more about study default insurance and also put a link here to where you can run some kind of screening reports, including full credit report, nationwide criminal background check and a nationwide eviction history report. Deni, is there anything else that you want to cover before we call this episode complete?

Deni Supplee: Well, I know that you mentioned going by and looking at their current residents, because that’s going to at least tell you whether they’re going to ruin yours or not or take care of it or not. But I would definitely look back and check on prior landlord references and not just the one that they’re in now.

Brian Davis: I would go back and check it out because their current landlord might tell you whatever it takes just to get them out of their hair. Right. They’re a nightmare tenant, whereas the previous landlords who have already gotten rid of them, they’ll tell you straight. Right.

Deni Supplee: And one of our social media accounts.

Brian Davis: Yeah. Yeah, absolutely. You can learn a lot about someone nowadays online. And I also like to speak not just with the H.R. department for their employer to just to verify their their their income and how long they worked there. But I also like to speak with their direct supervisor because they can tell you about their character. You know, what kind of person are they? Do they show up on work to work on time every single day with a good attitude? Do they work hard or do they always show up late reeking of booze? I mean, you can tell and they are not legally obligated to talk to you, but many will be. Many, many people are happy to talk to you. So try to speak with our direct supervisor and just ask open ended questions and get a sense of what kind of person you’re dealing with.

Deni Supplee: And again, remember, this is for the I mean, you want to really keep your standards high if you’re in an area where apartments are just rentals are just going for renting and that they haven’t really been affected and things are are rolling even in this holiday season. But when you get into some locations and urban has been really hit bad lately, you want to you probably will have to rest some of your specifications and maybe credit may have to be lowered a little bit, maybe income, even a little bit, not so much that you are going to stretch them so thin that they won’t be able to afford it. And then that’s just on you. But credit sometimes. But look at the whole picture.

Brian Davis: Yeah. And worst case scenario, you can always turn to me. All right, guys. Well, on that note, we will see you next Tuesday at two o’clock Eastern, 11:00 a.m. Pacific. Send us your questions and comments for what you want to hear about next week. And we will see you then.

Deni Supplee: Have a great week.


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