“Everyone has a plan
until they get punched in the mouth.”
“Iron” Mike Tyson
The “sleep industry” (from bedding, sound control, “sleep
consultants”, prescription pills, etc.) is estimated to be a $30B-$40B annual
business growing by 8% year. That’s a
lot of money going to something that should naturally be free; and,
unfortunately, the inability to sleep seems to be an issue that keeps growing.
My father told me that a solution that always worked for him
was to read textbooks. It made sense,
but most adults (thankfully!) don’t have many lying around. However, if you’re in the property management
arena, you do have a lot of credit reports you can read through that will have
the same effect.
On a single rental application, it is possible to have 20+
pages per person. Every open and closed
line of credit they’ve ever had in their lives is listed. It can be painful reading and sorting through
them as the pages can begin to just run together…
Many property
management companies outsource the application process. I get it!
No one wants to read through the reports and try to put together how
someone’s finances link to whether they’ll be a good tenant, especially when
10-20 applications are coming in per property.
It’s arduous. That’s why it’s
common for property management companies to have credit score minimums- for
example, if you don’t have a minimum 600 credit score, your application will
automatically denied.
There are a couple problems with that approach, in my
opinion. The first is that if every
landlord did that, there would be a lot of people in the streets who weren’t
eligible to rent a house. That seems
harsh, unfair, and inhumane.
The second is that a credit score alone is insufficient to
gauge an applicant’s true financial strength.
I think the level of debt to how much available credit they have is a
huge indicator. A credit score rewards taking
on debt to a certain extent as it measures whether debt payments are being made
in a timely fashion; people with no debt (or utilized available credit) seem to
have lower credit scores because there is less of a payment track record to go
off of. Should people be penalized for
that? I guess I have an “old-school”
mindset where I think not having debt is preferable to the alternative.
Thirdly, I like to see cash flow and where it is going. I’ve had 700+ credit score applicants who
have so much debt to pay off that after their monthly debt obligations (aka
credit cards, financed cars, etc.) there is little room to pay rent and other niceties
of life (like food).
This is where COVID and tenant placement comes in. How strong is the applicant? Can they pay when times are good and bad? Can applicants take a financial punch? COVID is a huge punch to almost
everyone. But even putting COVID aside,
a punch could be an unexpected job loss, big car repair, or some other major
expense that life throws at everyone at some point. Can it be weathered?
That’s where I find the credit report to be an invaluable
tool and a “must-read”. I always felt
that the #1 responsibility of property managers is to keep the rents flowing to
the owners. And property managers are
only as good as the bench of good-paying tenants they have in their properties. How strong is the bench? Can it handle adversity?
COVID has and will continue to put things to the test. I think the practice of pouring that extra
cup of coffee while poring over the credit reports will prove to be time well
spent.
Happy Landlording!
And Stay Safe!
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