How to Choose the Best Tenants

Tips to ensuring you have the best tenants occupying your rental property

 

One of the keys to long-term success in your investment property is having quality tenants. As we mentioned in previous posts your main goal in your investment is being cash flow positive, and a great deal of this comes from the rent roll from your tenants. At the very start of your investment the rent roll will go towards paying off any outstanding financing balances you may have. These balances may be payments towards your mortgage or any other form of financing you took as a way to pay for your investment (loan from friend, deal made with distressed seller who was willing to help with your down payment, etc). More importantly the rent roll will be the passive income you gain through holding your investment long-term. This, as we explained in detail, is one of the great benefits of investing in real estate. And your goal is to ensure you have a steady stream of passive income you can rely on as you hold on to your property.

Long story short, great quality tenants are the best way you can ensure you will receive a consistent stream of passive income without any road blocks. Road blocks can be a great hindrance to your investment property and can also cause significant headaches when dealing with tenants. Your job as a holder of a rental property is to screen potential tenants effectively and lawfully (very important!) in order to make sure they fulfill their duties as responsible tenants. These responsibilities include being orderly and abiding by the house rules of the building. Anything from being smoke free, to noise, to guest policies should be taken into consideration. These considerations will alleviate you of headaches and allow you to focus your attention on more pressing issues when they arise… because issues will arise. If you do your due diligence, you will save yourself many headaches and revert your attention to the things that matter. Now we will outline the things you should consider when presented with potential tenants for your rental property:

 

  1. Federal Fair Housing Act: This is by far the most important aspect of tenant screening to consider. Passed in 1968 as an addition to the Civil Rights Act, the Federal Fair Housing Act was designed to prevent discrimination against certain classes of people when dealing with housing. In short, one cannot discriminate based on race/color, nationality, religion, sex, familial status, and disability. Any violation of the act is intolerable and will subject you to imprisonment. There are also specific fair housing regulations associated with each state, which is important to know depending on where your investment is located.
  2. Good Credit: Having a financially responsible tenant is the best thing you can do for yourself and the best way to avoid significant financial setbacks. If tenants pay their bills and any other “dues” there is a good chance they will pay rent on time and be responsible. There are two ways you can ensure your tenant has good credit: a. Income Verification: a great rule of thumb for income is looking for a tenant whose monthly income is at least three times the rent of the apartment. A person with this much income shouldn’t have an issue paying off rent. In order to verify this, ask for copies of pay stubs and/or call their employer directly to get a better idea of their employment situation and whether or not it passes your “benchmark” as a quality tenant.  b. Credit Check: Does your potential tenant have a history of paying bills on time? If so, also check their debt-to-income. Even if their income is at least 3x more than monthly rent, they could have a buildup of debt you need to look out for. This could cause major issues in the long-term. Any prior evictions? These are all things to consider in detail.   
  3. Background Check: You will have the tenants name and date of birth through their rental application. Use this information to perform a thorough background check to search for any previous criminal activity. Federal court records will have both minor and major offenses and these are the things you must look out for. During this check you must ask yourself how tolerant you will be. Very thorough criminal background checks are time consuming and it may be worth it for you to hire a third party to perform it the right way. Remember, this decision is on you. There is a significant difference between a hard-drug charge/possession and speeding tickets. Understand that this is your decision and what you tolerate is then on you to be responsible for in the future.
  4. Tenant’s Rental History: If possible try to go as in depth as possible into the tenants rental history to get a better idea of who they are as a tenant specifically. You can go about this in one of two ways, either ask them directly and hope they give you a genuine answer or find out their previous landlords information and give them a call to learn more. Some of the questions you should be asking is “Did the tenant pay rent on time?”, “Did the tenant give 30 days notice?”, “Were they respectful to their space and their neighbors?”, etc. If you are in a situation where you are dealing with someone who is a first time renter with no history, such as a student, you can require a co-signer for the lease.
  5. Trust Your Instincts: When it comes down to it, as landlord, you have sole power to allow potential tenants to move into your space. At the end of the day, how you feel about the application and the person presented in front of you will dictate your decision. The screening helps, but when it comes to your investment you should go with your gut. The beauty of real estate is that once your invested everything is on you.

 

Best of luck with your screening!