If you’re planning to rent out a residential property, it’s of utmost importance you identify a trusted tenant. The wrong tenant may cause property damage, create nuisances for other residents, leave the property in an unattractive state or even miss or defer rent payments.
Landlords use a series of background checks to examine the credit scores, employment records, criminal histories and rental histories of prospective tenants. The more comprehensive your background check, the more likely you are to settle on a qualified, trustworthy tenant.
Using data gathered during the application process, you should be able to determine whether your prospective tenant will make for a good long-term resident. Major red flags include past evictions, troubled credit histories, frequent job changes or an extensive criminal record.
Sometimes, you’ll run into something of an anomaly. Some prospective tenants show promise but lack the established histories necessary to make a definitive decision one way or the other. For instance, you may be working with an applicant that boasts a favorable credit score and no criminal history, but a relatively low income or a lack of documented rental history.
In these cases, you don’t have to deny or approve people outright. Instead, ask them to provide you with a guarantor. A rent guarantor is a third-party who will not live at the property, but will assume legal and financial responsibility for any missed rent or damage caused during the tenants’ stay. It’s a safeguard against the unknown.
In most cases, guarantors are the parents or direct relatives of applicants. Because young people and students usually lack adequate rental, employment or credit history, securing a rent guarantor can allow you to give them a chance at your investment property, while still protecting your interests.
Because renters usually have a close, familial relationship with their guarantors, they’re likely to stay on their best behavior. After all, no one wants to end up in trouble with their parents! Bringing another party into the lease agreement can help keep tenant accountable and respectful of your property.
Rent guarantors assume legal responsibility for missed rental payments and fees, as well as any damage incurred during the applicant’s tenancy. The guarantor assumes a high degree of risk when agreeing to act as guarantor. If your tenant can’t come up with a guarantor, it’s a bad sign.
In a way, requiring a guarantor is another type of screening, not just of the guarantor themselves, but of the degree to which the prospective tenants’ closest friends and family trust their ability to keep up with rent and not inflict damage to the property.
When to ask for a guarantor
Knowing when to deny an application outright versus when to ask for a guarantor can be a true challenge. Here’s what to keep in mind when deciding whether to deny or approve an application, or ask for a guarantor:
•Low income: Renters should never spend more than 30 percent of their income on their rent. If the rent of your unit exceeds more than one-third of the income of your prospective renter, you’ll have a challenging decision to make. Consider the degree of the income disparity when making this decision.
•Lack of rental history: This is particularly common with young people and other first-time renters. If a prospective tenant is fresh out of college or is still a tenant, they aren’t likely to have an established rental history. This means you don’t have any way to expect how they’ll behave once they move into your rental unit. A guarantor can help you protect your interests.
•Bad credit: It’s important to note the difference between little credit and bad credit. If a prospective tenant has little credit, it’s likely because they haven’t had time to build up a credit history. Bad credit could indicate they’re unable to keep up with debts and expenses. Bankruptcies or defaulted debts are a major red flag.
What to look for in a guarantor
At the end of the day, the same traits that would qualify a good tenant are the traits you should be looking for in a guarantor. You want to be able to depend on them to generate enough income to pay the rent and fees associated with the lease terms, as well as cover any damages incurred by the tenant. Additionally, make sure they have an adequate credit history and don’t have any outstanding criminal convictions. Here are a few traits of a good guarantor:
•Good credit: This is even more essential for a guarantor than it is for a tenant. Guarantors need to be able to cover their own expenses as well as potentially covering the expenses of the tenant, which means they might need to access loans or other types of credit. Make sure their credit report is clean and free of red flags.
•High income: Because guarantors are responsible both for their own living expenses and the expenses of the tenant, they’ll need to have a high income and access to capital. Be sure to ask about the guarantor’s outstanding expenses and debts before qualifying them to sign onto the lease. While the one-third rule doesn’t directly apply to guarantors, make sure they have the ability to cover 50-75% of the rent during any given month if your tenant can’t.
•Stable employment: There should be a consistent source of income from a long-time employer flowing into your guarantor’s account. If it looks like they change jobs frequently, they may not be able to keep up with the costs of maintaining the tenant’s unit. The only real exception to this is if the guarantor has started a new, higher-paying job.
Different provinces and municipalities have different rules surrounding rent guarantors. Make sure your lease and guarantor agreement are in-line with local laws.
It’s best to have a trusted real estate attorney assist you with drawing up your lease agreement and the guarantor terms. If you encounter any trouble collecting fees from the guarantor, there’s a strong likelihood you’ll end up in court. Hopefully it doesn’t come to that!