SS92: What is a Credit Tenant?

What is a credit tenant and why should I be focuses on renting my properties to credit tenants? In this episode, Charles discuses credit tenants and why they are the sought-after tenant base for A and B multifamily properties.

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Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is a credit tenant?

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Charles:
A credit tenant is a tenant with good credit and consistent income, such that there is a very high assurance of timely rent payments.

Charles:
Typically you will hear the term credit tenant used when describing a retail office or other commercial real estate tenant, but the term is also used with certain classes of multi-family real estate, a credit tenant in the usual commercial real estate definition would have a credit tenant lease from a landlord to a tenant that carries guarantees where lenders perceive the rent cash flows are as reliable as a corporate bond. Now, certain lenders will actually lend against these leases. A tenant in this example would be a national tenant like Walgreens or CVS or another publicly traded corporation who will usually have a triple net lease with the landlord. These tenants have strong financials and are able to whether it recessions in other periods of economic volatility. When we are dealing in class a and class B B plus multifamily are strategy includes renting renovated apartments on 12 month leases to credit tenants, these tenants have good credit.

Charles:
They have a solid source or sources of income and a clean criminal record, or maybe a couple minor blemishes. The key here is that the likelihood of a credit tenant paying rent on time is very high. Paying their rent on time is a priority obligation for credit tenants. They most likely purchase on a credit and want to buy more on credit in the future homes, cars, et cetera. So maintaining a good or great credit rating is important to them. They also have reserves. So if a source of income ends or is reduced, they’re still able to meet their obligations, including paying their rent. Now in class C class D multifamily people paying rent is really the only requirements buyers want to see many class C and D tenants avoid credit and avoid banks. They cash their checks at check cashing stores and pay rent in cash, or with money orders.

Charles:
When their income stops, they stop paying bills, including rent, and they have minimal reserves. Buyers of these assets might perform a lease audit where they review every tenant and lease prior to purchasing the property and then grade the leases and the tenants on the scale showing how strong the tenants are. But institutional buyers who are the ideal exit strategy for B and B plus, and a multifamily are paying for an income stream and minimal issues, or they would’ve just done the value. Add themselves. Now the value add strategy in a and B class multifamily really boils down to purchasing underperforming assets with good tenants and some less than ideal tenants in doing renovations and improvements and leasing up the property with credit tenants. You, as the operator are compensated on the value that is created. You can also be certain that when you are selling a completed asset, the buyers will be forming, lease audits and checking the strength of the income or in the case of multifamily checking the strength of the tenant base. So I hope you enjoyed, please remember, rate review, subscribe, submit comments, and potential show topics at global investors, podcasts.com. Look forward to two more episodes next week. See you then

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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