How to Assess a Potential Tenant’s Credit-Worthiness
Can your potential tenant pay the rent, and can he pay it on time?
The importance of this question cannot be overemphasised. To avoid any ugly situations with tenants, it is critical to assess their credit record.
Freelance individuals will always cause sweat beads and caution in home loan providers, as the security of a month-to-month pay cheque isn’t there. However, if the right questions are asked, this could be a simple, stress-free, and sweat-free, process.
The Right Questions
- What legal entity do you operate your business in?
- Do you have audited financials?
- Can you supply at least six months business bank statements which show business turnover in the account?
- Do you have personal bank statements reflecting income?
- Are you able to supply a copy of your latest tax assessment?
- What qualifications do you have?
- How long has your business been in operation?
- Are there any partners in the business?
Something to Remember
Credit is not an exact science; there is something to be said of pure intuition
Don’t be afraid to ask potential tenants for information upfront – it alleviates delays and frustrations later on. Also remember to refrain from withholding any important information from the application – the more information, the better!
The 7 C’s of credit
1. Character:
- The potential tenant’s character should display a willingness to pay, as well as honesty and integrity
- Current employment, occupational marital status
- How does the potential tenant pay retail accounts, credit cards?
2. Capacity:
- Potential tenant’s ability to pay rent
- All of the potential tenant’s obligations should be taken into account when determining payment ability
3. Capital:
- What is the net worth of the potential tenant when assets and liabilities are taken into account?
- This is important as the net worth may enable the tenant to continue paying should a financial crisis occur
4. Collateral:
- Is there sufficient security should the tenant be unable to pay?
5. Conditions:
- Things such as interest rates and employment prospects can impact negatively
6. Credit history:
- Post management of credit is a strong indicator of future management of credit
7. Common sense:
- Credit is not an exact science; there is something to be said of pure intuition!
Resources
FNB www.fnb.co.za
Text by Candice Reichlin. This article features courtesy of the July/August 2010 edition of SA Real Estate Investor magazine.
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