Importance of tenant credit in real estate

It has become challenging to predict whether a tenant will be required to default on their lease commitment or whether they will continue to pay rent for the duration of the lease during these difficult financial circumstances. Tenant default is a risk that property owners should be aware of because terminating a tenant can come with high expenses. Undoubtedly, there will be a disruption to cash flow, potential risk to mortgage covenants, and significant expenses to retrofit the property or find a new tenant.

The real estate industry has been largely unaware of tenant credit scores and history, which is a method widely used in other financial sectors. It is crucial for the industry to learn from these methods and adopt them for its own future. The financial crisis highlighted the importance of understanding tenants’ financial potential, and companies should design and implement methods of tenant credit screening to safeguard their financial health.

To begin this process, companies must obtain the potential tenant’s permission for accessing their credit history, which can be included in the rental application form. This should include complete personal information on the tenant, including current address, date of birth, and social security number. It is essential to keep sensitive personal information locked up to protect it.

Another important factor to consider is the current employment status of the potential tenant. This should be combined with the employment history of the potential tenant. The current employment status provides an idea of the potential income of the person requiring rent. A fluctuating financial situation can lead to default on the rental contract, as the tenant may not be able to pay it anymore. Research on the company or industry the potential tenant works in can also help determine the future prospects. For example, if the potential tenant works in a manufacturing company with plans to cut down its workforce, they have a high probability of being laid off and having a lower probability of rental default.

Incorporating the employment history for the last couple of years can provide a clearer picture of the situation and the income potential of the applicant. While this method is not perfect, it can narrow the prospects of having many default tenants and give the industry a competitive advantage in the future market.