Screening and managing tenants is one of the most stressful aspects of real estate investment. In fact, it’s what determines a profitable investment. You want renters that will pay on time, keep the property clean, and hopefully stay awhile!
But it can be challenging to know what to look for in a prospective tenant for your property, and how to find the right candidate who will pay the rent without any issues.
During the screening process, you will have a chance to evaluate the potential risks of any new tenant. To do so, you’ll want to make sure that your application process takes all of the following factors into consideration:
Positive Rental History With No Evictions
The ideal tenant is someone who has never had an eviction in their rental history. However, sometimes leniency can be extended if the applicant has had a change of life events and a significant amount of time has passed since their last eviction. Typically, an eviction that occurred more than 7 years ago should be less of a risk, especially if the applicant now has better job stability and a good credit score. Some landlords decide not to allow any evictions at all. You’ll also want to check for good relationships with their previous landlords, and a history of paying on time.
Employment History & Job Stability
Job security and employment history are also an important part of the process. If a new renter has just started a new job, and doesn’t have a work history yet, it can be difficult to assess if their current income will continue. Likewise, if an applicant changes jobs frequently or works in a very unstable industry, their ability to pay the rent on time each month is questionably.
Ideally, you will want to see at least a few years of steady employment history, with little to no time between jobs. If a job history is not yet available, consider the stability of the new job and the likelihood that their employment will continue. You can also help hedge your bets by requiring an extra deposit or the addition of a cosigner on the lease.
Financial History & Credit Check
One of the best ways to legally assess risk is to run a credit check. A credit score of 600 or above is best, with 520 typically being the bare minimum you would want to consider.
You’ll also want to check for collections and other derogatory accounts on the report that show a history of not making payments on time.
When screening potential tenants and their employment information, you most certainly cannot take their word for it. Applicants could be exaggerating or even flat out lying about their job or their income. Therefore, income verification is a crucial step in the application process. Most of the time, pay stubs and W2s are enough to prove income, but you can also contact employers directly if there is any doubt.
A Clean Criminal Background
While the financial and employment parts of the rental application can depend on just one person, when it comes to criminal background, you will need to screen each person who will be living in the rental unit.
Obviously, you will want to avoid renting to any tenants with a major criminal background, especially if the type of crime involves the home, such as selling drugs or domestic violence.
It is important to have a written policy here, with guidelines such as automatic denial for a violent felony, or for multiple misdemeanors within a certain period of time.
A prospective tenant may look great on paper, with a solid rental history and background check, but the key question is – can they afford the rent? The gold standard for income is 3 times the amount of the monthly rent. In large urban areas with a higher cost of living, 2 or 2.5 times the monthly rent can suffice if a tenant appears to be responsible and financially stable.
A Final Note
Screening tenants is a balancing act. You will quickly find that there is no such thing as the perfect tenant, but also that a vacant unit is better than a problem tenant. Learning how to screen prospective renters takes time, and often trial and error on the right limits for your area.
It is your choice what you will accept in order to fill a vacancy or find interested tenants. If it is a difficult market, and you have many vacancies to fill, you may not get to be as picky with your renters. On the other hand, if you have a line of applicants out the door and a history of being fully rented, you’ll definitely want to accept the best possible candidates.
Also, keep in mind that there are some things you cannot ask and some protected categories you cannot use to determine rental eligibility. HUD protects tenants from being screened by color, race, national origin, religion, sex, family status, or disability. Other states and municipalities may have additional protections such as sexual orientation or gender identity.
The best thing you can do to cover yourself legally is to get all of your rental criteria in writing and run it by a qualified attorney before you begin screening prospective tenants.