Landlord Advice: Ultimate Guide to Finding and Choosing Good Tenants for Your Rental Home
Tenant Selection Process Overview
Selecting tenants for a property is like picking out a piece of jewelry for your significant other…you’re not quite sure what to buy, how to buy it, and if it’s really going to put a smile on their face. Typically it’s something people are unfamiliar with, just like the tenant selection process. By the end of this article, you’ll feel much more confident in this process, and can claim to your family and friends you’re the local expert!
What’s the first and most important thing that comes to mind when thinking about finding a tenant for your property? Really, take a moment and think. It’s interesting how answers here change depending on the type of homeowner you are, i.e. strict investor, casual second home owner, or maybe you inherited grandma’s house where you grew up eating her homemade meatballs. Either way, some will claim the most important is making sure the tenants will pay rent on time, others will insist it’s having them treat the property like their own, and some say it’s finding someone without pets. Truthfully, they’re all concerns that are worth pondering over.
Fair Housing Laws and Equal Opportunity Rights
Ok, you’re searching for the perfect tenant. You probably have some preconceived notions about types of people you absolutely don’t want in your property, and what the perfect applicant would entail. It’s a typical conversation property managers hear from clients: “I want a single person in my home, not a family, no kids, and they have to be from Wisconsin because they are just such good people.” Ok, maybe that’s an exaggeration, but fair housing law and the civil rights act is in place to prevent discrimination. Boiled down, it means no interviewing, selecting, or advertising to tenants based on:
- National Origin
- Family Status
Landlords or property managers that fail to abide by this are subject to penalties, so it’s important to be familiar with national and local laws concerning this subject. The most common place landlords run into this issue is in advertising. Look at the example below, can you spot the trouble?
Property For Rent!
$1,200 per month
Huge house available for rent! Wood floors throughout, granite countertops, and large bedrooms. Located in upscale neighborhood consisting of mainly retired individuals, so please no kids. Prefer single person of white origin.
Ok, we made that one pretty easy. But surprisingly advertisements like this exist, and are mainly found with unfamiliar landlords that aren’t using a professional management company who don’t haven’t garnered the necessary experience to avoid these mistakes.
Tenant Background Check: How to Collect Information from Prospective Tenants
When you have found an interested party for your property, now begins the most important part. All of the time and effort it takes up front to collect the information from the prospects can save landlords headaches and money in the future. This is in fact so important, it’s recommended a professional real estate service or property management company is used as experience is key here. There is a very fine line of doing this the right way, and wrong way. There are application forms you can look up online, but in essence, you’ll need to collect the following information to help you make an educated decision:
- Credit Score
- Income verification (bank statements, paystubs)
- Employer’s contact and written permission to contact
- Last place of residence with contact information
- Length of time at current residence
- Personal Information: phone numbers, emails, etc
Most applications have signature lines that OK the use of the information you collect for contacting their employers and using the information to make a decision.
Tenant Screening and Verification
Tenant Credit Check
With all the information on the application in hand, let’s discuss how to digest the information. When looking at the applicant’s credit scores, keep in mind their age. Someone that is in their 20’s will likely not have the same score as someone that has a life long history of making payments ultimately yielding higher scores. Typically, the best way to check an applicant’s credit is by using a third party service like Equifax, TransUnion, or Experian. These services typically charge a yearly fee for landlords, plus a fee for every credit score ran. Check with your accountant as these costs are usually tax deductible! Professional property management companies perform this service that is typically included in their service charges. They will also typically look for prior evictions on the applicant’s record, along with performing criminal background checks. They usually benchmark a “good” score at or around 740. Depending on your local market, these numbers can vary. For example, Southwest Florida (Cape Coral area) was number one in the United States for foreclosures. Naturally, former homeowners needed a place to rent after losing their homes, and credit scores were bleak. Use your best judgement in determining what’s an acceptable score for you and your market.
Income Ratio and Verification
When verifying the applicant’s income, generally professionals will look at a 1:3 ratio of rent cost to income. So, on a $1,000 a month rental, the combined income should be $3,000 per month. This is a good rule of thumb that will help you ensure tenants will actually have the funds to make their monthly payment. This verification is done by contacting their place of work, or asking them to provide three months of bank statements or pay stubs so you can ensure there is movement of money into the account every month. Employers are typically good about providing this information if you can provide a copy of the aforementioned application that gives permission to collect the information.
Contacting Prior Landlords
Probably your best friend throughout this whole process is the previous landlord for your applicants. Here, you can learn mostly everything you’ll want to know. They can confirm on-time payments, cleanliness and living style, and how they left the property upon move out. Be careful though! Sometimes tenants can come from properties where the landlords were family, or friends, and will tell a white lie or two.
Tenant Personal Information
Be sure to keep a file containing the tenant’s personal information. This will hold their phone numbers, emails, emergency contacts, and any other special notes or information you may need during their tenancy. Typically, it’s suggested to keep this with a copy of their lease.
Red Flags: What to Look for When Screening a Tenant
If you learn what to look for that may raise an eyebrow, you’re going to improve your chances of having a successful experience with your tenants. During the application process, there are a couple of key issues to look out for:
- Unnecessarily long time to provide requested documents (usually income verification)
- Applicants who claim their income is only in “cash” and can’t prove their monthly income
- Applicants who offer to pay multiple months at once (usually indicates they are planning on only staying for those few months, then vacating the property)
- Applicants that claim they will get rid of their pets so they can rent the “pet free” home
If you decide to go with a rental property management company, make sure you find out if their rental agents make the decision on who goes into the property, or if it is a non commission based employee. With a conflict of interest, often times agencies who let agents make the decision will approve whoever they can so they can get paid. They end up with a percentage of your rent, and you end up with a bad tenant!
Deal or No Deal
Once you’ve made a decision on acceptance or denial, make sure to quickly inform the applicants. The rental market moves much faster than the general sales market, so it’s only fair to inform them of your decision in a timely manner. If you turn down an applicant, it’s recommended you inform them of why, and you’re sorry of any inconvenience. Just be sure to base your decision on their ability to make their payments, and take care of your property.
Avoid the Hassle and Stress of Tenant Screening
Finding good tenants can be a pain in the butt. Let Douglas Realty find the best tenants for you!