To maximize the return on your rental property investment – and to minimize stress and hassles! – you need the right tenants. A thorough, rigorous screening process is a must for landlords and building owners. How do you start? With these five steps.
Know the Law
Under the Federal Fair Housing Act, you cannot discriminate against people on the basis of race/ethnicity, national origin, gender, familial status, disability, or religion. The state in which your property is located may also have local mandates, so brush up. Ignorance of the law is not a defense: you must treat all prospective tenants equally.
Check Prospective Tenants Credit
While you must treat all prospective tenants equally, that does not mean that all are an equally good “risk” when it comes to renting. You need people who can demonstrate financial responsibility. The first step is to verify their income. Request copies of their pay stubs and confirm their length of employment, monthly earnings, and attendance record with their employer. Ideally, earnings should be at least three times the monthly rent.
You’ll also want to run a credit check. Do they pay their bills on time? What is their income to debt ratio? This will give you invaluable information about whether or not they can pay their rent in a timely manner.
Run a Criminal Background Check
Ensuring you attract and retain the right tenants is essential. After you’ve looked into prospects’ credit, access public records to investigate whether or not they have a criminal background. Ask for a valid ID and use the name and birth date to find this information. Some helpful resources:
Sexual Offender Database for your state
Be aware that in some states, like California, it is illegal to discriminate against people with certain criminal convictions (typically nonviolent offenses).
Criminal background checks are time-consuming and often challenging; for example, it can be difficult to access records in other states or to even know where to look. A property management company can take on this chore so you can find the tenants you need.
Check the Prospective Tenant’s Rental History
Ask for references from at least two previous landlords. Some questions to pose: did they pay on time? Why did they move? Did they give proper notice before moving? Was their apartment clean and in reasonable condition? Did they cause any damage beyond normal wear? Were they good neighbors? Did they complain frequently?
If the prospective tenant does not have a rental history (e.g. a college student), consider requiring a co-signer to mitigate your risk.
Look for Signs of Stability
Investigating credit, criminal background, and rental history is crucial; you are looking for stability. As you’re doing your due diligence, look for red flags: do they move a lot? Do they switch jobs frequently? Do they regular periods of unemployment? While this doesn’t necessarily mean they’ll be a bad tenant, it’s worth examining. You don’t want to be dealing with a vacancy or with non-payment in a month or two.
Finding the right tenants ensures that your property investment yields strong returns. Because it can be a time-consuming and arduous process, consider having a professional property management service take on this task.