5 credit metrics for assessing tenant risk

Using credit metrics to assess risk is important for agents and property, as many tenants are exiting the rental market.

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PayProp reveals that over half of the participants cited finding good tenants as their biggest challenge in the current market.

Johette Smuts, PayProp head of data analytics, says they analysed credit checks on prospective tenants done through PayProp in Q1 2021.

“Minimum-risk tenants represented almost 40% of the checks done through PayProp in Q1 2021.”

More than 60% of tenants fall into the combined minimum- and low-risk categories, whereas a quarter of tenants were labelled as high risk.

 “While this seems counterintuitive, it could be that high-risk tenants fall out of the vetting process even before a credit check is done.”

Read also: Top 10 lessons for investing in property

Credit metricMinimum-riskLow-riskMedium-riskHigh-risk
% of tenants38.9%22.4%14.6%24.1%
Net monthly incomeR41 956R34 034R30 720R26 424
CPA accounts8.738.687.206.37
NLR accounts0.481.572.284.09
Major delinquency0.8%14.5%25.8%41.2%
Debt-to-income ratio35.3%39.1%45.2%47.4%
Credit score690644619592
Source: PayProp

Consider these 5 credit metrics when assessing tenant risk:

1. Income

Minimum-risk tenants tend to have higher incomes than those in other categories. In Q1 2021, the average monthly net income was nearly R42 000, almost R8 000 higher than low-risk tenants, and +R15 000 higher than high-risk tenants.

2. CPA and NLR accounts

Tenants across all risk categories have between 9 and 11 Credit Provider Accounts (CPA)and National Loan Register (NLR) accounts, respectively. CPA accounts are regarded as ‘good’ debt and NLR accounts is viewed as ‘bad’ debt on credit checks.

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Smuts says CPA accounts include insurance, mobile phone contracts, retail stores and vehicle finance. NLR accounts comprise short-term loans from micro-lenders, usually with very high interest rates.

“High bad-debt accounts can indicate that a would-be tenant needed additional funds to make it through the month. They may also not have qualified for credit from other providers,” according to Smuts.

3. Major delinquencies

High-risk tenants recorded 41% major delinquencies compared to 25% of medium-risk tenants. A major delinquency can consist of judgements, notices and adverse accounts, for example. Fewer than 1% of minimum-risk tenants had a major delinquency against their name in the first quarter of 2021.

Read also: Beware of penalty fees charged for early lease agreements termination

4. Debt

Riskier tenants spend a higher percentage of their monthly income on debt repayments each month. In Q1, debt-to-income ratio averaged 47% with these tenants spending just over R12 500 a month on debt and other financial obligations.

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5. Credit score

Minimum-risk tenants have higher (better) average scores than higher-risk tenants, with almost 100 points difference (690 vs 592).

Smuts adds: “When vetting tenants, it is important to consider the credit score and other factors, as well. We recommend looking at bank statements and salary slips where possible, and contacting references before making a final decision.”

Read also: North West records highest rental growth of 3.7%

Edited by Gudrun Kaiser

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Safrea or its members.


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