Rental Guarantors Are Becoming More Popular in 2023 - When Should You Require Them?
The cost of living in Canada today has grown rapidly over the last few years, edging many Canadians out of their affordable rental options and into more expensive properties that are harder to manage. This has created problems for renters and investors alike as more and more people struggle to qualify for rentals. So, to combat this issue, people are turning to rental guarantors for assistance.
However, before we dive into how rental guarantors are helping to keep the Ontario rental market afloat, its important to know that guarantors can assist with more than just rental properties. Guarantors and co-signers can also help individuals and investors qualify for financing for their real estate purchases.
To learn more about how a guarantor can help you as an investor, click the link below for a free strategy call with our mortgage team at LendCity today.
What is a Rental Guarantor?
In short, a rental guarantor is an individual or party who agrees to take on the responsibility to cover the rent in the event that the tenant is unable to pay. This means that as an investor, a guarantor serves as a great protection for you because it adds another party to guarantee that you receive your rental payments.
These are typically family members or close trusted parties such as a very close friend of the tenant. However, there are a few requirements for a guarantor in Canada that must be met.
This individual must be 18-years-old or older, have known the tenant for at least 2 years and have income capable of supporting the rent. You may also wish for this person to have a strong credit history alongside the income in order to further assure that the rental guarantor will be capable of paying the rent if they are required to do so.
A rental guarantor will need to sign a rent guarantor form that outlines their role and responsibilities so that they can be held legally liable for their position in the event they try to avoid making the payments when called upon to do so.
Why Are More People Relying on Rent Guarantors?
Rental guarantors are becoming more common these days because the cost of living in Canada has not remained consistent with the rate of inflation and the average salary. This means essentially, people are not making the same relative salaries when compared to the cost of living as inflation continues to impact the economy.
This results in people over-leveraging themselves with student debts, car payments and credit card debt that they cannot manage - effectively driving down their credit scores. This understandably raises concerns for
Typically, it is recommended that people do not rent somewhere that costs more than one third of their income. However, for many renters, this is unattainable with an entry-level position. So, while they may be able to budget for the rent regardless, it can be easier to assure a landlord if they have a rent guarantor.
When Should You Require a Rental Guarantor?
While guarantors naturally provide a level of security for your investments, requiring them can be a turn off for tenants who may have a firm financial position where they feel like they should not need to worry about their rent. So, you need to know when you should ask for a rental guarantor, and when you should let it be.
No Credit/Bad Credit
The most common situation where you may need to ask for a rent guarantor is when the tenant has no credit or bad credit. Naturally, during the application process when you run a credit check you will see these issues. However, life happens and many people have less-than-perfect credit for reasons beyond their personal control.
Asking these potential renters for a guarantor can both help them land a place to live and help you find a potentially great tenant - even if they did not look as strong on paper.
New Renter
It is common for young people to apply for rentals with no rent history to back up their qualifications. This can raise concerns about their ability to budget for rent, so many investors opt to ask for a guarantor to ensure the rent gets paid.
Recent Employment Issues/New Job
Especially coming out of the COVID-19 pandemic, many renters may have spotty employment history or may have recently started a new job. On paper, this could be concerning for their ability to pay rent long-term. So, many investors consider asking for a guarantor if the explanation behind their employment record does not soothe their concerns.
Rent Guarantor Alternatives
Sometimes, people do not have someone they can ask to be a guarantor. A common example of this is a renter who recently moved into a city and does not really know anyone they could ask. So, there are a few alternatives it can be helpful to know about which can help secure your rentals.
Third-Party Guarantors
One option you can refer a potential renter to if they need a guarantor is a third-party lease guarantee company. These are companies that act as guarantors and secure your rent up to a certain amount.
Higher Rents / Rent Upfront
Another option you may consider is offering the unit to a riskier tenant at a higher price in exchange for accepting the risk associated with renting to them. Tenants may be less likely to accept this offer, but for the ones that do, you will either earn more income overall, or gain the ability to save money to cover your mortgage if they miss payments later.
If You Are Ready to Invest
If you are ready to invest, we want to help you by helping you connect with the best available lenders with the best available products for you and your specific financial needs.
In order to get started today, all you need to do is click the link below for a free strategy call with our team at LendCity today.