Did you know that there’s a direct correlation between the quality of your tenants and your success as an investor? Probably, because that’s pretty much common sense for most investors. You’d be surprised, then, to learn that so many investors choose to ignore this when marketing their properties, and even forgo some of the steps necessary to ensure high quality tenants are chosen.
Which is what I want to discuss today – those critical steps you must take so you end up with the best tenants possible. While it’s never okay to discriminate, and it’s illegal anyway, there are certain actions you can take when evaluating rental applicants and underwriting your lease.
Credit Check – First up, you’ll want to run a credit check. For some investors, the type or class of property they have will dictate what the minimum credit score is for a potential renter. B and C class homes, for instance, will likely be occupied by people making less money than A class properties, so their credit scores may be lower overall. In addition to finding out their credit score, doing a credit check will tell you their credit to debt ratio, as well as if they have a history of paying bills on time or have defaulted on anything.
Monthly Income – The credit check will also give you an idea of the person’s monthly income. I list this separately because, in my opinion, it’s just as important (if not more so) as knowing their credit score or payment history on debts. Why? Because you need to be sure that they are able to pay the rent every month. If you’re charging $1,000/month and they’re pulling in about $2,000 each month, that’s a major red flag that they’re not going to be able to pay. I shoot for about 3 times the rent in gross income.
Background Check – A criminal background check is another important step in the screening process. For me personally, I want to know if I’m renting to a murderer or a drug kingpin, and I assume most other investors feel the same. I do recommend having a tenant screening company perform this task for you, as it can be extremely time-consuming and you likely won’t have all the tools and resources available to you that they would. Keep in mind that in some states, it’s illegal to refuse to rent to individuals with certain criminal convictions, so be sure to check your state’s laws on this subject.
Rental History – On the rental application, you should ask for the contact info for at least two of the tenant’s previous landlords. Talking to former landlords will give you more insight into what kind of renter the person is. Some of the questions to ask are whether or not they paid the rent on time, if they gave 30 days notice before moving, why they moved, and if they ever damaged the property. On the application form, you can also ask if they’ve been evicted before (this should also show up on the credit check), and if so, what were the circumstances. If the person is a first-time renter, it might be a good idea to ask for a co-signer on the lease.
It’s also worth mentioning that in any situation with a prospective tenant, go with your instincts. If your gut is telling you that renting your place to Bob is a bad idea, then don’t rent to Bob. Make sure you’re within the parameters of the law, but don’t rent to him if your instincts are screaming, “Don’t do it!” Performing your due diligence with tenant screening is an important part of your short- and long-term success as an investor, so use the guidelines above to help ensure you rent to high quality tenants.