Two Options for Renting to Tenants with Bad Credit

I recently had a positive experience with my two flat rental property in Logan Square that I’d like to share with current or aspiring landlords. If it’s not yet known, the worst time to find tenants in Chicago is during the fall and winter. Moving is already one of the most stressful times for any human being, so why add the element of frigid temperatures into the mix? Most landlords have this figured out, and they set their leases to expire during the warmer months (think April – August each year).

So when I listed my apartment for rent at fair market prices in October, I found that there was significantly less interest in my advertisements than there was when I had rented it in during the warmer months. After about seven days and reducing the price a few times, I finally found someone that needed my apartment. Unfortunately, there was a catch. The credit check showed both tenants had bad credit, were not paying even some of the smallest bills and had recently foreclosed and filed bankruptcy. Now my knee-jerk reaction was to immediately deny the application, but I knew I’d have to then risk going a month without rent coming in. So I decided to dig deeper and thought of ways to make it work for both parties.

Option 1: Reduce lease term and require full payment up front

This is the option that ended up working. I decided that the only way I would take such a risky tenant was if I received payment for the whole lease term up front. If all references checked out, past landlords, friends and family gave good reviews, I would then assume the apartment would be kept well by the tenants. And if they paid up front in cash or bank draft/money order etc., the risk of them not paying would be nullified. As a landlord, you can negotiate the terms of your lease. When someone comes to you with bad credit and financial hardship, you are in a powerful position and should realize this when you are negotiating with prospective tenants. To my surprise, the tenants were willing to pay the full four months up front, and now my lease expires in the beginning of the warmer months next year. It was a win-win-win for me because I can list for lease at a better time of year, I have no risk of not receiving rents and I don’t lose a month of rent.

Option 2: Have an employed family member co-sign

If option number one didn’t work, I was considering having a family member co-sign the lease and run their background/credit as well. If this family member had good credit and income to pay the lease, I may have signed the lease albeit for a shorter term to get me through to the warmer months. Both options probably would have worked, especially because the tenants really like the apartment and needed a place now. Although there is still a risk, it’s no longer a non-payment risk, but upkeep and maintenance risk which always exists with tenants.

The lesson is to realize when you have the upper-hand in a situation and use this to your advantage when you are negotiating your lease terms.

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