Nov 3 2016
Image Flickr: https://flic.kr/p/oaXTHh
A real estate investor needs to protect their investment. Okay, so that goes for pretty much any type of investor. But a property is a lot different to the more abstract kinds of investments. This is a big, expensive, tangible investment that can be physically harmed. And it’s something that you’re going to want to let people inside if you want to maximize the investment potential.
So when we talk about protecting real estate investments, we have to talk about tenant credit risk. It’s important that you understand the many elements of this type of risk. After all, a lease is only ever as good as the tenant to whom you’re giving it.
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No type of lease is safe from tenant credit risk
No matter what kind of lease you plan to work with, bad credit can pose a risk to it. There are some misconceptions about certain types of lease. Triple net leasing, for example, isn’t immune to the dangers of a tenant who poses a credit risk. The reason that triple net leasing can help protect you from this sort of risk is because of the control it affords you. You can easily modify the terms of a triple net lease. Charging a high-risk tenant more because of their credit history is more feasible with this type of lease. Read more about triple net investing at www.triplenetgateway.com.
Image Wikimedia: https://commons.wikimedia.org/wiki/File:Credit-score-chart.svg
What is a bad credit score?
So you know that you should get a credit report from someone who wants to be a tenant. (It isn’t necessary, but it is advisable if you want to alleviate this sort of risk.) But what “score” results in “bad credit”? Well, the credit scale is ranked between 300 and 850. A lot of people don’t know that it begins at 300. They see three digits and assume that it’s a high and thus “good” score! But if it’s between 300 and 629, the credit can be considered bad. Beyond 690, the credit can be considered good. (In fact, anything above 700 can be considered very good!) Read more about these scores at www.wikihow.com.
Don’t make assumptions
Here’s the annoying thing about credit checks. Depending on the company doing the check, and depending on the purpose of the check, the scores can vary. Where one sees a bad credit score, another may see a fairly good one. So while you should get a credit check done, you shouldn’t jump to conclusions. You should find out the specific reasons for the bad score. Read more about the potential reasons at www.blog.credit.com.
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See if you can speak to the previous landlord
One of the reasons you shouldn’t dismiss someone with a bad credit score is because they could actually be great tenants. There are so many things that could contribute to a bad credit score. It may even be a problem they’re unaware of. But someone with a bad credit score may also have a history of paying their rent on time and in full. If possible, get in touch with their previous landlord. They could have glowing things to say about them!
You must consider tenancy credit risk. But don’t let a bad credit score be the be all and end all of it. Investigate further!