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I came across an interesting blog posting on entitled Credit Based Rent Pricing that proposes the idea of basing a residents rent on their credit score.It's argued that if banks determine a borrowers interest rate based on their credit to offset their credit risk, why shouldn't the same rules apply to residents in your rental properties?
The Fair Credit Reporting Act (FCRA) which regulates the collection, dissemination, and use of consumer credit information, allows us landlords to run credit on prospective residents with their permission.
The question remains, however, what can you do with this information, and can, or more importantly, SHOULD you base their rental rate on their credit?
The Equal Credit Opportunity Act ("ECOA") prohibits granters of credit from discriminating against borrowers based on factors that don't have to do with their credit worthiness. This covers race, color, religion, national origin, gender, marital status or age, together referred to as "Prohibited Basis" by the ECOA
This means that us landlords CAN discriminate against prospective residents based on their credit report, with the only limitation being that one often can not use credit worthiness to discriminate against the poor or recipients of federal / local housing assistance.
Many landlords offer a rent "discount" for residents who pay on time, effectively turning the "stick" of a late payment penalty into a "carrot" of a pay-on-time discount with excellent results.
This bypasses the credit issue, effectively avoiding the credit risk penalty by incentivising everyone, regardless of history, to pay on time and rewarding those who do.
As a landlord, if you do decide that you want to charge poor-credit residents a higher rent, check your local and state laws, as it may be outright illegal to do in your market.
Are you charging more for your lower-credit prospective residents? Do you know anyone who is? Do you think it's a good idea? Bad idea? Would love your feedback and comments below.
This means that us landlords CAN discriminate against prospective residents based on their credit report, with the only limitation being that one often can not use credit worthiness to discriminate against the poor or recipients of federal / local housing assistance.
Many landlords offer a rent "discount" for residents who pay on time, effectively turning the "stick" of a late payment penalty into a "carrot" of a pay-on-time discount with excellent results.
This bypasses the credit issue, effectively avoiding the credit risk penalty by incentivising everyone, regardless of history, to pay on time and rewarding those who do.
As a landlord, if you do decide that you want to charge poor-credit residents a higher rent, check your local and state laws, as it may be outright illegal to do in your market.
Are you charging more for your lower-credit prospective residents? Do you know anyone who is? Do you think it's a good idea? Bad idea? Would love your feedback and comments below.
Jeremy Shapiro is a real estate investor and industry expert interviewed and quoted by the Boston Globe, National Public Radio, New England Cable News, CBS, Fox News, Boston Business Journal and more.
It is all about making a buck, isn't it. Risk pricing has been done in lending since the early 80s, upwards of 37% rule of 78. However, should a landlord be able to...seems to be landlords trying to cash in on the economic woes. Do landlords not take a large downpayment to protect from the risk of damage or last months rent missed? Then why should landlords profit each month from someone elses misfortune?
Sharon, thank you for the insightful thoughts and perspective. Landlords certainly do request a security deposit, but in some states, the evicition process can take months and damage to a unit can far exceed the amount of the refundable security deposit.
If all borrowers are used to paying more for lower credit, i.e. on car payments, mortgage payments and credit card payments, could it be argued that this could extend to monthly rent, too?
I'm not sure if landlords would be looking to "profit from the misfortune of others", or if this is even legal in all states. It's a matter of landlords asking to be compensated for risk.
It would come down to the renter anyway, wouldn't it? If they had a choice of one property where the landlord wanted to charge more and another where they didn't, wouldn't the lower-credit tenant simply choose to only apply to properties that didn't charge higher rent for lower credit?
Would love further discussion on the topic.
Great article Jeremy. I wonder if Fair Housing or some other federal Law will prohibit this practice. I am fairly certain that Section 8 rules will prohibit it.
In addition to investing notes, Tim runs another site called the field guide, on there one of the subject matter experts explains how to do it in detail. I just started doing this and the admins of the section 8 program where my apartment building is in Spokane, WA have no problem with it. I am testing it there. If it does what I expect it will I'm rolling it out to all of my properties.
You can read Leigh's in depth article on Tim's site here: http://fieldguide.reitactics.com/do-you-base-your-rent-credit-strength
Thank you Sean and Gary for the feedback regarding Section 8s view on basing a residents rent on their credit. Has anyone else had any experience with this in their local market?
I'm not in the business but believe EVERY effort should be made to protect your property. Security deposits, credit checks, background checks. Just my two cents :)
Great post!