Let’s talk about how to screen tenants. If a big part of your real estate investment strategy is to buy and rent properties, finding good, quality tenants is 100% imperative for your long-term success.
Get this wrong, and your real estate investment career will turn into a nightmare.
This is going to be a lengthier post than usual because I want to make sure you walk away with a clear understanding on how to screen tenants properly. Let’s begin.
Find People Looking To Rent
Before I discuss how to screen tenants, I feel I should first talk a bit about finding tenants.
Now, if you’re still living in the dark ages, and relying solely on yards signs and ads in the newspaper to find tenants, slap yourself on the hand, and promise you’ll stop right away.
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You need to get your listings on major real estate sites where people actually go looking to find properties for rent. I’ve written a great post about how to do that here.
Once your listing(s) are online, people will likely start contacting you pretty soon thereafter.
In my experience, the vast majority of inquiries you receive will be from folks who are just tire-kickers, who aren’t serious, and won’t qualify anyway.
You need a way to filter these people out, so you can be available when that diamond in the rough calls in. I’ve written a piece on auto-responding to tenant inquiries. Check it out here.
Tell-Tale Signs A Prospect Is “No Bueno”
When people are serious about wanting to rent a property, they will likely wish to speak with a property manager to ask questions about about the property, getting approved, etc. Take this time to prequalify them.
Here are some common tell-tale signs, they are likely NOT qualified:
They don’t have money to pay the application fee
I trust this one doesn’t require any further explaining. By the way, I recommend always charging an application fee. Mine is $25. This will do two things: 1) it will help you filter out the duds, and 2) why should you work for free?
They need a place right now
This is likely the case because they’ve been living in their car, a shelter, a short-stay motel, or they are getting evicted.
They ask if you can work with them on the deposit
I’ve tried to work with people in the past by spreading the deposit out over two months, or whatever. It has never worked out. If they don’t have the money now, they won’t have it later.
They have recently been evicted
Again – pretty obvious. If they don’t disclose this up front, it will show up when you do a tenant screening.
Their only form of income is some form of government-assistance
Nothing against government-assistance or people on fixed-income. The issue is, and I hate to say it, if you have to evict these folks, you can’t garnish those earnings. Here’s a great fact sheet from US Dept. of Labor about garnishing wages.
They want to pay you directly for utilities
…instead of paying the utility company directly. This is because they have an outstanding balance with the utility company, and they can’t get utilities put in their name until they pay the balance owed.
They’ve been living with friends & family
They could be hiding past issues with landlords. Look for people with at least several years of real verifiable rental history.
The Application Process
I use Buildium as my property management software.
Within Buildium you can create an online application that you can put on your website or send to prospects directly.
Once the applicant fills out the application and inputs their bank account or credit card info to pay the application fee, Buildium notifies you by email that you have a new application. It’s that simple.
Here’s a great video about the Buildium online rental application.
How To screen tenants
Once a prospect submits an application, you’ll be able to initiate a tenant screening right in Buildium. It only takes a few seconds of your time, and Buildium sends you the results. It couldn’t be any easier.
Below is a video to explain further how the tenant screening process works in Buildium.
Review Tenant Screening Results
You’ll want to get an application and do a tenant screening for every adult who will be living in the property.
Once the tenant screening is complete, Buildium will provide you with a credit, criminal, and eviction report. Additionally, Buildium will provide you with a recommendation status.
What To Do With The Results
You’ll need to set your own qualifying standards, but, here is the approach I take:
I’m pretty flexible with credit. Most people who are renting won’t have great credit (probably a main reason why they’re renting). However, if they have a lot of recent delinquent accounts or accounts in collection, that concerns me.
You’ll see everything from traffic tickets to felonies. Again – just depends on the crimes and when they were committed.
If the applicant has a history of beating up his girlfriend, I probably won’t rent to him. If someone has a drug possession charge three years ago, I likely won’t disqualify them for that.
I’ve decided not rent to people who have been evicted. I advise you do the same.
Income & Employment Verification
Alright we’re in the final stretch. Understanding how to screen tenants properly includes knowing how to verify income and employement.
When it comes to income and employment, it’s ideal if you can just call the employer and verify employment and income over the phone.
In some cases, you’ll be able to do this, but many employers will refer you to a 3rd party such as The Work Number, and make you pay at least $35…ouch!
I just ask the applicant for two-months of recent paystubs, and take the chance that they haven’t been fired in the last couple weeks. On the paystub, I’m looking at their weekly take-home as well as YTD earnings to ensure that their pay is consistent.
Now, if you’re considering an applicant who makes most of their money in tips, it’s obviously going to be much harder to verify their true income.
I require that the total gross monthly household income (all tenants combined) is at least 4x the monthly rent.
I like to see at least a couple years of verifiable rental history.
When it comes to verifying rental history, some landlords will gladly take your call, others are impossible to get a hold of, and others require you to fill out a tenant verification form.
Do all you can to get feedback from previous landlords. If you just can’t get it, then you’ll have to rely more heavily on other areas to get the applicant approved.
Hopefully now you have a better grasp on how to screen tenants. Once you have all the pieces, it’s up to you to determine if you feel comfortable renting to the applicant.
There are often patterns, so look for them. If someone has wrecked credit, inconsistent employment history, and spotty rental history, that’s probably a pattern that should disqualify them.
People tend to be moving in the direction of making positive choices for the their life or negative choices. If you look hard enough, the patterns are there.