Is your multifamily screening process compromising your business growth?

Assessing applicants ability to pay is critical to the financial stability of your operations.  You want a screening solution that minimizes the risk of nonpayment to you the time, effort, and cost of evicting a resident. 

Beware, many traditional multifamily financial screening processes can also compromise your business’s growth. Relying entirely on standard credit reporting and credit scores is likely resulting in stifled revenue and occupancy rates.  

Fortunately, there is a way to offset that risk while also maximizing your occupancy with reliable renters. You just may have to reframe how you think about “financially risky residents,” or prospects who fail to meet traditional financial screening targets (or have low credit scores).

Here are a few myths that are preventing your portfolio from meeting its full potential.

MYTH 1: Credit scores are a good indicator of risk

A credit score is a popular financial barometer designed to represent an individual’s credit risk — or how likely they are to pay their bills on time. While credit scores feel straightforward, the reality is far more complex. 

FACT: Credit scores are an outdated financial metric

Rather than providing a comprehensive assessment of wealth or overall financial stability, credit scores primarily evaluate an individual’s debt management and repayment history and are heavily influenced by one-time events.

Factors contributing to the limitations of credit scores

Credit Scores Don’t Predict Ability to Pay Rent: Credit scores do not consider an individual’s cash flow including; income, savings, job history or rent payment history, which are crucial indicators of future behavior and likelihood to pay rent. Instead, they focus primarily on historical patterns of borrowed money (credit) and length of credit history. 

Credit Scores are Prone to Errors: The Federal Trade Commission (FTC) reports that 1 in 5 people have an error on their credit report, and other studies suggest that up to 79% of reports may contain inaccuracies.

Credit Scores are Negatively Impacted by Paying off Debt: Although counterintuitive, factors like paying the minimum on a credit card or having multiple credit card accounts can improve your credit report, whereas paying off a loan or minimizing credit card usage has a negative impact on a credit score.

Reasons applicants might have a low/insufficient credit score

Residents May Lack Credit History: It’s a common hurdle for young individuals just starting their financial journey, recent immigrants, or those rebuilding their credit after a divorce. 

Trouble Accessing Credit: Certain groups, such as low-income individuals, those who are unbanked or underbanked, and certain minority communities may face barriers in accessing credit, resulting in limited credit histories and — consequently — lower scores. 

Financial Hardships or Setbacks: Job loss, medical emergencies, or other unforeseen circumstances can also lead to missed payments or defaulted accounts without being a prediction of future behavior.

MYTH 2: Gig workers are high-risk renters

The multifamily industry’s traditional income verification methods often fail to accommodate the unique circumstances of gig workers. Many assume these are simply a small portion of the population who don’t make enough money to pay their rent, or that their income stream is sporadic, unreliable, and unverifiable.

FACT: A significant portion of U.S. population makes a living as independent workers

Thirty-six percent of employed respondents identify as independent workers — i.e., freelance, contract, or gig workers. In fact, more than 50% of the US workforce is expected to participate in the gig economy by 2027. 

Many of these contractors earn just as much as salaried workers. A 2022 study showed that 49% of respondents made at least 60% of their living in gig work earning under $50,000 a year, while 23% of respondents earned between $100K and $4 million per year. And these gig workers aren’t all working for Uber or DoorDash, either. ADP Research Institute reports the top three industries that use gig workers are construction, recreation, and business services. 

FACT: Gig workers can provide legitimate proof of income

Requiring proof of income at two to three times the monthly rent for a consistent period can be a significant hurdle for gig workers whose earnings may fluctuate based on project-based work, seasonality, or personal preferences. Instead of relying solely on pay stubs, these workers may need to provide alternative documentation, such as 1099s, invoices, or tax returns to accurately represent their income.

It’s crucial to recognize that overlooking gig workers as high-risk renters or misunderstanding their legitimate income streams can result in excluding a substantial portion of potential residents. By adapting income verification processes to account for the diverse nature of independent work, multifamily operators can avoid excluding qualified applicants.

MYTH 3: Some vacancies are necessary to get quality residents

There’s a cost to your denied applicant pool. When you deny a rental applicant, you are not guaranteed that the next applicant who walks in will be.

FACT: Finding low-risk applicants to replace your denied applicant pool is expensive

It costs your business money to reach that applicant, whether on Apartments.com or a different marketing channel. But once a financial screening disqualifies them, you can’t recover that cost of marketing. Instead, you will pour additional dollars and resources into attracting the next resident, hoping they will be a financially qualified applicant. And as you now know, defining risk is more nuanced than most standard tools can capture.

These denials also cost your team. Your staff devotes time and energy to communicating with applicants and showing properties, too. It’s a waste of their time and yours when a credit screening ends in a flat-out denial.

Let’s not forget the costs associated with carrying vacant units. If your units remain vacant for long enough, you may be compelled to offer concessions to renters, which is a significant cost on its own. If you consider that revenue loss on a portfolio-wide basis, those empty units have significant financial implications. Accounting for expenses such as preparing the unit for new occupants, marketing efforts, and potential incentives offered to attract tenants, the average turnover cost of a single unoccupied unit is around $4,000.

MYTH 4: Traditional financial screenings aren’t perfect, but it’s the only option you have to assess rental risk

You deserve a credit screening process that goes beyond “good enough” and truly delivers accurate and reliable assessments. Fortunately, there’s an alternative to help recapture residents that have been turned away based on traditional financial evaluations of resident risk. By embracing a nonstandard screening solution, you stand to drive business growth, maximize your occupancy rates, and increase leasing velocity.

FACT: There’s a screening solution that unlocks your full business potential 

Liberty Rent is a resident screening solution that allows multifamily communities to improve conversion rates and reach full occupancy faster, while protecting against rent revenue loss. Our underwriting process looks at a comprehensive set of financial data to thoroughly understand applicant risk. Approved applicants gain access for the term of their lease, during which the property is covered for up to six months of lost rent.

With Liberty Rent, you stand to:

  • Increase community occupancy
  • Increase leasing velocity
  • Reduce revenue leakage on defaults
  • Minimize wasted marketing spend
  • Improve ESG impact

Want to maximize your rental property’s occupancy without compromising on risk? Reach out to us.