3 Ways to Assuring Good Tenants for Your Rental

By on July 22, 2015

Eventually investors find they’re spending far too much time actively managing properties, and at some point the workload becomes too much. The job of managing multiple properties and working with tenants is often passed on to a professional property management firm. But for those stubborn few who continue acting as their own landlords, they discover the better the tenant the fewer the headaches. How do you find good tenants who pay on time, take care of the property and don’t call every time the toilet gets clogged?

Screening a potential tenant means completing many of the very same tasks a bank would do for a mortgagee. When a bank evaluates a mortgage application, both credit and affordability are validated. The borrower needs to earn enough money each month to afford the house payment comfortably and must shown the ability to do so with a clean credit report. For renters, a report of their performance as tenants both financially and behaviorally (treatment of the property, conduct as tenants) is also important. Here are the three primary things that are critical when screening a potential tenant.

Verifying Acceptable Credit

There seems to be no end to the number of commercials on television or online that want to protect someone’s credit. Credit alert services and fraud prevention is a big business. Consumers can order their own credit report and have their credit profiles kept private. That means a potential tenant can produce a fresh credit report they pulled on their own. Yet while that may be convenient for you and the prospect, it’s best to pull your own credit report. There are credit reporting services designed for landlords that allow you, for a relatively small fee, to order a credit report on someone else. Along with the lease application, you should also obtain from your prospective tenants an authorization form allowing you to not only pull credit but check references and employers.

Banks use credit scores for mortgage applications, but landlords shouldn’t require the same credit scores a mortgage company might. Mortgage lenders use a report specifically designed for them. Instead, landlords should look at the credit report line by line to see if there are any payments made more than 30 days past the due date. If there are one or two 30+ late payments spread out over time, that’s probably okay. More than that and you should find another tenant. Only payments past 30, 60 and 90 days will appear. Payments that are only a few days past the due date won’t appear on the report.

In addition to the payment history, look at the minimum payments required on each account and make note of them, particularly the total. For instance, record a car payment, credit cards or student loan debt. These total of these payments will be used when determining affordability. If utility payments were late, you can expect that rent payments were also late during that period, and if utilities went to collection that is a strong indicator that an eviction occurred, even if no court documents to that effect appear on the credit report.

Verifying Acceptable Income

No matter what the applicant’s credit, insufficient income to support the rent payment will invariably result in default. A landlord should determine affordability in the same manner a lender does by calculating debt ratios. Common debt-to-income ratios are 30% and 38%. The rental amount should not exceed 30 percent of the tenant’s gross monthly income. The renter’s total debt, in this example the car, credit card and student loan payments, should not exceed 38 percent of gross monthly income. These are general guidelines for lenders and there is some flexibility but anytime total debt ratios exceed 43 percent of income, there is a greater likelihood of default.

Validate gross monthly income with copies of an applicant’s most recent pay stubs covering a 30 day period. You should see when the prospect is paid and how much as well as year-to-date earnings. If there is no pay stub or the pay stub is handwritten, take a bit of caution. Irregular income and/or bonuses should be fully understood and validated, not just taken at the applicant’s word.

When someone signs the authorization form it should also allow you to contact an employer directly. You’ll be asked to provide a copy of the authorization form if you want to verify income but simply asking for the employee by name is enough to verify employment. While verifying employment, ask how long the employee has worked there. You want someone with job stability; banks typically verify at least two years of employment, so you should do the same.

A prospective tenant who has shown the ability to handle their obligations responsibly and the rent along with other consumer debt aligns with acceptable debt ratios, you’ve found your next tenant. Those with steady jobs and good credit are also those who will be responsible in other areas of their lives. Including paying your rent on time, every time.

 Verifying Rental History

Past behavior is the best predictor of future behavior in all areas of life: personal and professional.  Thus an applicant’s rental history is a critical component of evaluating tenant suitability.  You should be highly suspicious of any anomalies here. A minimum of three years rental history should be obtained, with at least the current and 2 previous landlords being contacted.  Ask probing questions to see what kind of answers you get. Often landlords will be leery of saying anything negative for fear of legal liability, so the question “Would you rent to them again?” is typically your ‘safest’ way to find out if you should accept them for your property.

Obtaining information from current landlords may be undesirable to the tenant (uncertain if ready to move) or suspect (landlords who want the tenant out may say anything to effect this).  Both of these can be overcome by asking for the tenancy information under a different pretense: as a lender for an automobile purchase, part-time employment, or other non-residential purpose. This will both avoid alerting current landlord to potential move and encourage candor in reporting (since doing so would not negatively impact tenant’s ability to relocate).

Surprisingly, few landlords – especially newer ones – perform all three of these screening activities. Yet these three simple steps, if performed diligently, are all that is needed to weed out bad tenants and leave you with the best candidates.  The small effort invested here will save you from the enormous cost and inconvenience of eviction.

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