Finding reliable renters for your properties can be a challenge, especially in the uncertain financial aftermath of the pandemic. PolicyLink recently estimated that nationwide total rent debt is upwards of $20 billion, 14% of which is accounted for by arrears. 

Despite the struggle many landlords are facing, there are still a handful of smart strategies available to help you secure good residents and make sure they stay current on their payments. In this article, we’ll highlight exactly how you can avoid tenants defaulting on rent and bypass all the struggle that comes with it. 

Step 1: Implement a thorough tenant screening process

Avoiding a rent default starts with putting in the time to find quality, reliable residents. While it will certainly take some initial effort, running your potential renters through a customized screening process can have a profound impact in terms of avoiding evictions, loss of rent payments, property damages, and more. 

What are the warning signs of an unreliable tenant? 

You can’t know everything about the type of renter someone will be in a few short meetings, but there are a handful of “red flags” that can tip you off to a potentially unreliable tenant - and help you avoid defaults.

  • Choppy rental history: Unless they have worked in a career that requires frequent moves, the ideal renter won’t have a history of 2-6 month stays at different properties. Multiple moves can be an indicator that there have been problems in their previous rental situations.

  • Advanced payments: If a renter offers you extra rent up front to bypass steps or “speed up” the application process, that can mean there is another issue with their application, such as bad credit, bad references, or a criminal record. 

How do you qualify good renters?

Having well-established, crystal clear criteria is crucial for building high-quality relationships with renters. Well-defined criteria can help strengthen the landlord-resident relationship and stop the renter from feeling discriminated against for any reason. Here are a few core components you should have on your list when determining whether a renter qualifies for your property:

  • Good credit history: A resident’s credit history can indicate their ability to make payments on time - however, keep in mind that weak credit doesn’t automatically mean an applicant won’t pay their rent. Even a single missed phone bill can damage a credit history, so you’ll want to consider recency and frequency of delinquency and also implement methods to protect your rental income - like a lease guarantee - when working with renters with imperfect credit. Pro tip: If you want to help both your renters and future landlords, consider reporting your residents’ on-time rent payments to credit bureaus. They’re incentivized to pay on time to build credit, and, as this practice gains popularity, it helps landlords get an accurate picture of their potential renters’ payment history.

  • Stable employment: The longer a potential renter has worked with the same company or at least in the same career, the better. This isn’t just a sign that they’ll be able to pay rent on time, but also an indicator that they may renew their lease.

  • Clean background check: (Please note: At least one California county has banned criminal background checks on prospective tenants; read up on the laws in your county and state before proceeding.) If an applicant comes back with a clean background check, that's a good sign - but keep in mind background checks don't give you the full picture of a potential resident's eligibility. A background check is just one part of a process that should include a number of qualifying steps:

What’s the best way to qualify potential renters?

As a property manager, you should have several systems in place that will help in identifying ideal and less-than-ideal potential residents. 

  • Check and double-check: It’s worth it to put in a little extra work upfront to confirm a renter is a good fit. 

  • Call references: Don’t be afraid to actually call renters’ references, including previous landlords and employers. 

  • Use a rent insurance product: TheGuarantors utilizes its own algorithm to evaluate renters to determine default risk with 89% accuracy. 

Step 2: Get covered with a lease guarantee

If you are hoping to qualify tenants who may not meet all of your lease requirements, a lease guarantee is the rent coverage you are looking for. A lease guarantee is a surety bond - paid for by the renter - that protects the landlord in the event that the resident defaults on their lease.

Why would a landlord want a lease guarantee? 

A renter may not meet your lease requirements for any number of reasons, but many of them can still make reliable renters.

  • Self-employed renters: Self-employed individuals often meet income requirements from a purely numbers-based standpoint, but may not have traditional proof of income, such as pay stubs, to prove their financial eligibility.

  • International renters: Students or other international renters may have savings or other income available for rent payments during their stay in the U.S., but their income may be more difficult to verify through the traditional methods, like credit checks.

  • Corporate leases: Lease guarantee coverage can also be obtained for corporate leases, on a case by case basis. Small or new companies without large corporate backing may find it easier to qualify for leases with a lease guarantee.

As a landlord, securing a lease guarantee lowers the risk of accepting applicants whose income is non-traditional, international, out-of-state, or difficult to evaluate. 

What are the benefits of lease guarantee rent coverage?

Here are a few of the most commonly acknowledged benefits of lease guarantee rent coverage: 

  • More potential renters: With lease guarantee rent coverage, landlords have a larger pool of applicants. Landlords report being able to approve more candidates at top rents. Most importantly, they are able to do it with confidence. 

  • Fewer vacancies: Having more applicants means having an easier time filling vacancies. Lease guarantees allow many landlords to close leases that they otherwise would have never been able to close. 

  • Faster leasing: Lease guarantee insurance products help move qualified residents into units faster, speeding up the entire process. 

  • Lower risk: Lease guarantee insurance products help many renters achieve higher and more predictable CAP rates. They are able to achieve the highest possible returns, execute top rent prices, and do it all at zero risk of defaulting. 

  • Zero cost: Best of all, this comes at no cost to the landlord. Unlike other rental income insurance, a lease guarantee policy is paid by the prospective renter and covers tenant default during the whole length of the lease.

Step 3: Practice great communication with residents

Regular communication between landlord and resident can greatly help mitigate the risk of residents defaulting on their lease. Many landlords make the mistake of only prioritizing the technical (background checks, credit history, etc.), while failing to build strong relationships with their residents, but better communication and connection means renters will be more likely to talk to you if they’re struggling to make a payment, rather than avoiding your calls. 

Best ways to communicate with renters 

  • Multiple communication lines: Don’t be afraid to utilize text, phone, email, and even your property’s social media accounts for communication with renters. And don’t just communicate about rent!

  • Community-building messages: The more consistent you can make your communication, the better. Create a sense of resident community by letting your renters know about local events and opportunities, special deals for lease extensions, or anything else that can help establish trust and quality communication. 

  • Regular payment reminders: A kind reminder can go a long way in avoiding trouble with forgetful renters. 

  • Follow up messages: Don’t be afraid to send a reminder right away when a renter is late on rent. 

Still need help communicating with renters? 

If you have a lease guarantee company, they may be able to help mediate or smooth the communication processes between you and your residents, especially in cases where a resident has fallen behind on their payments.

Step 4: Incentivize on-time payments 

Receiving payments when you plan on receiving them is crucial from an operational standpoint, and sometimes, a small incentive goes a long way toward receiving on-time payments from residents. In pure psychological terms, behavior that’s rewarded is repeated, and incentives for on-time payments may be even more effective than late fees in encouraging residents to pay on time.

Incentives to get your renters to pay rent on time:

  • Regular vouchers and gift cards 

  • Cleaning and maintenance services 

  • Valet trash

  • Rent discounts

  • Discounts with affiliate programs 

Offering an incentive to your renters can certainly help keep communication lines strong. Check with your accountant or financial advisor to determine the best way to implement rent payment incentives, simply, without breaking the bank, and enjoy happier residents and more on-time payments.

Step 5: Offer a security deposit replacement or insurance 

In addition to offering quality incentives, you can strengthen communication with your renters by giving them an abundance of options when it comes to insurance and security deposit replacement. Giving your renters these options allows them more control over their own money and shows them that you have their best interests in mind. 

Why offer security deposit replacement options? 

While cash deposits may have been standard in the past, for many renters and landlords, they are no longer enough. Security deposit replacement serves as a hedge for landlords looking to cover their assets in case of default. 

  • Free up renters’ available capital: Security deposits are a big investment for renters. Many renters who would otherwise qualify based on monthly income may not have the liquid cash available for a large deposit, especially in today’s declining credit environment.

  • Mitigate risk: TheGuarantors’ Deposit Coverage is a security deposit replacement that allows residents to pay a small monthly fee - and covers landlords if the resident causes damage to the property.

  • Protect your property: Security deposit replacement insurance covers everything that a normal cash security deposit would cover, such as missed rent, legal fees, unpaid utilities, and more. Coverage limits can be set accordingly, with claims capped at those requested limits. 

Security deposit replacement insurance makes more properties available to more renters, and greatly reduces risk to both the renter and landlord.

Avoid renter default

As a result of rent increases, it's more difficult to find reliable, qualified applicants who easily meet standar rent-to-income ratios. However, lease guarantees, better communication, clearer criteria, payment incentives, and security deposit replacements are just a few of the ways landlords are mitigating their downside risk - and securing and keeping reliable renters, even in uncertain economic times. 

If you are looking for more information on how to mitigate your risk as a property owner, feel free to reach out to us at TheGuarantors. We are more than happy to answer any of your questions.