Oh no! That pesky tenant is causing you grief. Whatever will you do? If you’ve been a real estate investor long enough and you’ve done your own property management, you’ve ran into tenants of all kinds. Usually there are some easy red flags and warning signs that give you a bad taste in your mouth when a tenant comes to talk to you. Here are a couple that we’ve heard!
“The last landlord I rented from was an idiot!”
“Well, I got evicted from the last place I rented because my boyfriend/girlfriend stopped paying rent, but I’m not with him/her anymore. My new squeeze is a much more reliable person!”
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The so called “tenant from hell” is very real. This phenomenon spurs the most common complaint I hear the from real estate naysayers. “Real estate investing is too risky: the tenant will trash the house.” (The second most often complaint I hear is “I don’t want to fix toilets at 3am”, but this is unfortunately a distant second!)
It’s not surprising that people feel this way. Nearly everyone has a friend or family member out there who has had bad tenants that stripped down the house of all doors, ripped the washer/dryer out, started a trendy Paint and Sip Studio using the property’s walls as a canvas, “forgot” to pay the rent for about six months, and darted off into the sunset without a trace. No one ever wants to be in that situation. It could ruin all of your hard work.
As a landlord, you need to eradicate poor renters and find quality tenants who are able to pay their rent on time, take care of the property, and be good to the neighbors and nearby community. Here are some starting criteria you can use:
WARNING: Tenant-landlord laws vary by state. Make sure to check the laws that apply to your particular state first! Nolo.com has a great resource here.
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1) Credit score
Pulling a credit report and checking the credit score is a great way to screen a tenant. This is perhaps one of the best ways to judge someone’s character too. Income shows you their capability to pay, but credit shows you their willingness to pay, and is also a strong judgement of character and reputation. If someone cheats their credit card companies, chances are they might be a bad tenant and will do the same to you.
To avoid discrimination issues, use a hard limit on the credit score. Don’t try to come up with your own scoring system based on report details. This is just asking for a lawsuit! If the score is below a certain limit, but the tenant ranks high on your other criteria, see if the tenant has a co-signer (such as a family member or trusted friend) available to take responsibility if the tenant cannot pay. This all depends on the amount of risk you want to take on.
2) Steady employment
On top of income, steady employment history is important to ensure the tenant has some job responsibility. This is going to be very important for paying the rent, of course. If the individual does not have a job (for example, a student, retiree, persons with disabilities), remember the co-signer option I discussed in #1.
Income is obviously very important. Having a job is nice, but if you have a house renting for $2,000/month, a minimum wage earner isn’t going to fit the bill. Use a hard ratio of income to the amount of rent the tenant is expected to pay, or a similar objective factor. For example, your gross monthly income requirement could be 3 or 4 times the rent check to ensure the tenant has plenty of extra cash to survive after paying taxes and the rent. If the tenant is strapped for cash and can’t fulfill basic needs, the rent is what he/she is going to try to get a pass on.
4) Felonies/domestic disturbances
When screening a tenant, you always want to pull a background check to make sure you are dealing with a law abiding citizen without a criminal record. Felonies and domestic disturbances will give you insight into how much risk you take on by renting to them. Background check websites, such as TransUnion SmartMove, Experian Connect, and RentPrep can help you get the information you are looking.
Be careful with this one though. The Fair Housing Act and local ordinances consider certain criteria against felons as discrimination. I am not an attorney, nor do I play one on the Internet, but this article, written by an attorney, gets into concerns with Disparate Impact, which is basically when objective criteria has an “adverse impact” on people in a protected class, such as race, color, religion, national origin, and gender. This is why it’s important to involve a real estate attorney with your tenant screening procedures and lease applications, or you can just seek the help of a property manager!
5) Prior Evictions
Since you are already checking the tenant’s credit report, a past eviction would also be likely to show up. The background check should also show a small claims court case for an eviction. See if the tenant has good references from previous landlords or other community members to help bolster honesty. Requiring an additional deposit may also be a good way to offset risk. If you are getting a poor assessment of the tenant via other criteria, this eviction may help you put the nail in the coffin and weed out the bad tenants who apply to lease your property.
6) Valid Credentials and Identification Card
Get the applicant’s legal name and a copy of their Social Security Card, Permanent Resident Card, or Passport. Be sure they have some sort of identification that gives you a way to track them down if they trash the property or run off. This usually scares away some of the tenants who don’t want to be held accountable for their actions.
Approving Tenants: First Come, First Serve
We talked a lot about discrimination above. Remember that the best way to support an unbiased selection process is to take the first acceptable tenant who brings you deposit money. If you don’t have a hard and fast rule for this, it could cause conflicts. First come, first serve is the way to go. This removes any chance of you picking favorites, which is illegal!
Once They Are Approved…
What do you do once the applicant is approved as your next potential tenant? What do you include in your lease to keep your tenants honest? Here are a few things you should include in your lease:
- Move in checklist: no holes in sheet rock, stove and oven are clean, windows clean, etc.
- Require a security deposit. If they can’t afford it, they are not going to afford to pay your rent on time every month either. This also adds another layer of accountability and gives you some small layer of protection against damages.
- Don’t accept partial or late payments. If a payment is late, you need to tack on a late fee and require the entire payment is made at once.
- Don’t allow painting or decorating without your prior written approval.
- All utilities should be in tenant’s name. Some rentals offer free water, cable, etc. It’s usually better to lower your rent to be competitive and charge the tenant for all services.
- If a payment is late, begin eviction proceedings. Again, follow your city/state/federal landlord laws. There are very specific guidelines on how to deal with these problems so your case will hold up in court.
Related Post: Being a Landlord: Preparing for Eviction
If you can control these two factors appropriately with lease agreements, security deposits, and strict guidelines on timeliness of rent payments, most of your problems will be solved and you can even start turning around a bad tenant if they know you “mean business.”
As mentioned before, we are a proponent of getting a good property manager in your area to handle your investment properties. Focus on investing and growing your business, not dealing with tenant issues, fixing toilets, and collecting rent–unless you’re into that sort of thing!