With the rush to get into the buy-to-let market during the last property boom, many landlords have bonds to pay as well as levies and other expenses. Defaulting tenants are the last thing they need, yet in the current economic climate the risk of defaults has increased. Managing tenant risk has therefore become crucial.
As with all risks, tenant risk is best managed up-front. It starts with doing a thorough credit check on prospective tenants and a reference check with their previous landlord. A credit check gives you insight into how they manage their financial affairs and a reference check with their previous landlord helps you find out if they paid their rent on time and kept the property in good condition.
The next step is an income reference check with their current employer. It is vital to confirm a prospective tenant’s employment status as well as their income, as a general rule is that the rental amount should be more or less 30% of the tenant’s gross income.
Due to the current economic environment, many people have wound up with black marks on their credit records, sometimes through no real fault of their own. When people lose their jobs, it’s difficult to pay the bills. So finding tenants with perfect credit records may not always be that easy. But there are ways to limit your risk if you find you need to accept a tenant with a questionable credit history.
Firstly, take a larger deposit if the tenant has any marks against his name on his credit record. Secondly, ask for more than one month’s rent in advance and, thirdly, negotiate a shorter term lease, with an option to extend, preferably an initial period of six months. That way, over the life of a six month lease you have a higher guarantee in the event of a non-paying tenant or a tenant that has absconded.
Of course, not everyone can afford a larger deposit and more rent up front. But holding out for a tenant whose references check out is often the right strategy. When it comes time to extend the lease for a further period, do another credit and employment check. The tenant’s financial/credit and employment situation could well have changed since the original lease was agreed, and yesterday’s stable tenant can easily become today’s defaulter.