All it takes is one bad tenant to negatively impact your real estate investing business. In most cases a tenant doesn’t become a problem overnight. The late payments may come as a shock but there is typically a previous negative track record to look at. It is up to you to find out what those issues may be. You can avoid a good majority of your problems simply by doing some due diligence on your tenant before you sign a lease. Once your tenant is in the property it is often too late to fix. Dealing with bad tenants is not only time consuming and frustrating but they will also impact your bottom line. Here are five things you can do to find the best possible tenants.
- Application. It is amazing how many landlords do not require a formal rental application. This has to be your starting point with any new tenant. Your application should answer all the questions you have yet not be too long that it intimidates your tenants. Your application should include information regarding employment, income and rental history. If your prospective tenant balks at providing these items it should be seen as a major red flag. Even if the tenant is from a referral or a friend of a friend they still need to fill out an application. The application will serve as a great source of information if they do eventually rent your property. It is important to remember that you are not simply looking for a tenant to fill a vacancy, you are looking for the best possible tenant. If you have some doubt after you review the application you should consider someone else.
- Credit Check. On the application in addition to their name you should ask for their date of birth and social security number. This is all the information you need to run a credit check. Before you pull their credit report you may need to have a signed authorization by your tenant. On the credit report you are not necessarily concerned about the score. There are a number of different things that can pull a score down that aren’t a major factor to you. The first things you need to look for are any bankruptcies, foreclosures, evictions or repossessions. These may not necessarily eliminate the tenant but you need to find out how they got into that situation. You can also look at employment and payment history on the credit report. Simply adding up the minimum monthly payments of the liabilities can give you an idea if they are overextended and should be considered a risk factor. Finally you want to look for any judgements, liens, collections and charge offs. If someone ignores an account long enough to bring it to collection they may not be concerned with paying their rent on time, or at all.
- Income. There are a handful of tenants that truly believe the landlord will take their application at face value. They will list whatever income they think will work to get the property. You have every right to ask for one or two recent paystubs. On the paystub take a look at not only the gross income number but what they have earned to date. You can also look to see if there are any deductions for loans or withdrawals from retirement accounts. Some landlords go so far as to ask for two years W2’s or even bank statements. Your tenant is not applying for a mortgage and these items can be excessive and scare good tenants away. Once you know their monthly income and the debts on the credit report you can get an idea if they can comfortably afford the property.
- Call References. Checking income and employment will give you an idea if they are qualified but you also need to call any listed references. Previous landlords and current employers can tell you more about a tenant than anything else. It is important to call as many different references as possible. One landlord may have a glowing review while another may have left with a bad taste in their mouth. You want to get an idea of their payment history and how they ended the lease. Anything else can be subjective and impacted by the property and the landlord themselves. As for employment you want to be confident that they will remain employment for the foreseeable future. The longer they have been at a job the more likely they will not be fired out of the blue. Don’t just ask for references to be listed pick up the phone and call them.
- Security Deposit/Lease Dates. The final step in committing to a tenant is signing the lease and receiving the security deposit. If you are looking for a rental this should not catch you off guard. Not have sufficient funds or asking to meet a week or two later is a definite red flag. There are exceptions you can make in extreme circumstances but this could be a sign of things to come. This is also the case when you set a date to sign and review the lease. Your tenant should be able to work with you on meeting at the property. If they keep canceling or postponing they may not be very responsible and will treat your property as such.
Doing these five things alone will give you a very good idea of who you are renting to. Good tenants won’t just fall on your lap. You need to do a little homework to find the best possible tenants.