You have an investment property and you want to rent it to tenants to cover the mortgage. That’s fine, but if you rent to the wrong person, you could find your investment costing you money. Not only might a bad tenant fail to pay their rent, but they can also do damage to your property, either through careless living or (worse) in retaliation.
So how do you choose a good tenant?
The top three things to look at when screening potential tenants are income consistency, rental history, and credit history. These three attributes should be able to tell you what you need to know about a potential tenant and their history of paying bills. Income consistency shows that the person makes a consistent income and can afford to pay their rent (rent should be about 30 percent or less of their monthly income.).
Their rental history also gives you some insight into what kind of tenants they are and their long-term potential. Do they have any large gaps or short-term leases in their background? Ask for an explanation for these. Choose someone who has a long-term rental history and excellent recent references from verified landlords or property management companies. Finally, their credit history can also give you enough background on their financial history to see if they can afford to pay for your property on a regular basis. You can also check out any bankruptcies, evictions, collections, credit accounts, and other debt information while running their credit checks.
When you are working your way through the tenant screening process, it may be a good idea to use an exemplary tenant screening service to help keep in mind all important elements of a back ground check when screening potential tenants. They don’t necessarily indicate a bad tenant, but historically these have been some of the signs that you need to watch out for:
- How many people come to look at the property? A large group of people may not indicate that they will be bad tenants, but it could indicate that there may be a lot of traffic coming in and out of your property if you rent to them. It could also indicate a group of people who are “casing the joint” in order to pursue burglary or other illegal activities in that neighborhood. Be sure and clarify exactly how many people will be expected to live in the unit or property before moving forward.
- How many jobs has the potential tenant had? Some folks may switch jobs to make more money and improve their work-life balance, but if the person seems to be playing musical careers, that is a red flag when it comes to picking a reliable tenant. Multiple jobs plus any span of time of unemployment is also another red flag to consider. How did the person pay their rent while out of work? Work history is one of the few things you can legally look at to make sure that you are selecting someone who is trustworthy and able to afford their rent.
- Does the potential tenant offer to pay in cash? Paying in cash is not always a good thing when it comes to renting, especially if they are asking for a fast application process in return. Few people carry around hundreds of dollars in cash and if they are, ask yourself why. Are they involved in something illegal? Is it the last of the money they have from a job they were fired from? No transactions that are legitimate should be done in cash; that is for their protection and yours! Using checks or debit cards gives you a paper trail for taxes and records and they should want the same.
- Does the applicant smell like drugs or alcohol? The smell of alcohol or behavior that indicates signs of addiction is a definite red flag that you should never ignore. They are most likely bad news already and will end up costing you money in the long run if you can’t depend on them to make their rent on a regular basis. You also don’t want to invite any criminal elements to set up camp on your property either, otherwise, the police may have to get involved.
- Do they have any references other than friends or family? Legitimate references include real apartment buildings, single-family homes, and other living spaces that are professionally run and operated by a management company or individual. Just like job references, if you cannot get hold of someone who has worked with the person, then proceed with caution. If the potential tenants are only listing friends or family as references, that is a red flag because friends and family won’t always be truthful about someone’s rental history. Be sure to research each reference, find out who owns the building, and if the person has a history of paying on time and taking care of the property.
One final thought on screening tenants: Be sure that you are up to date on the legal tenant guidelines. There is a difference in screening vs. discriminating when asking questions of potential tenants. What this means is that according to the U.S. Department of Housing and Urban Development’s Fair Housing website, “No one may take any of the following actions based on race, color, national origin, religion, sex, familial status, or handicap:”
- Refuse to rent or sell housing
- Make housing unavailable
- Deny a dwelling
- Set different terms, conditions, or privileges for sale or rental of a dwelling
- Provide different housing services or facilities.
In addition to these stated protected classes, state laws will vary but can also make it illegal to discriminate based on marital status or sexual orientation and gender identity. Just be familiar with your state laws before you begin the process of finding tenants. A reputable tenant screening service will help you ask the exact same set of questions to all applicants to ensure everyone is treated fairly and legally equal as you search for the best tenants for your property.