Starting a rental business, or growing one, means making a lot of important decisions. From which property makes sense financially to who will help you keep your properties maintained, you have a lot to consider. What some people tend to overlook is how important it is to carefully choose who will live in those properties.
Why Do Good Tenants Matter?
If you’ve considered buying a rental property, or you have a few and you’d like to take over your own property management, one of the most important skills you can learn is how to choose tenants. The right tenant ensures all goes well over the long haul, but the wrong tenant can literally derail your entire rental business.
“As a new investor/landlord, initial tenant selection is critical to success,” says Kristen D. Conti, broker-owner at Peacock Premier Properties in Englewood, Florida. “It instills confidence in one’s decision to invest in rental properties. It provides stability in the financials. It sets the stage for future dealings. A bad first experience as a landlord can leave one jaded and unwilling to go through the process again. A good tenant can be a win that will start one’s investment career off on a positive footing.”
But a tenant is more than just someone you’re renting a property to. They become a sort of partner in your rental empire. Without their help, it’s hard to know if a property needs maintenance.
“Choosing a good tenant is so important because you are essentially giving access rights to someone you may have just met to probably one of the biggest investments you have under your belt,” says Brennan Gouaux, Realtor with Keaty Real Estate in Lafayette, Louisiana. “Picking the right one can prevent unnecessary damage, encourage cooperation with either doing things that are required or staying out of the way when work is being done, and most importantly, ensure timely payments.”
Choosing Good Tenants
Of course it’s easy for someone to tell you to just choose good tenants, but it can be harder to know what a good tenant looks like. Some small landlords still mostly work on a handshake and a gut feeling, but more and more, landlords of all sizes are moving toward a system that makes tenants easier to compare side-by-side.
“The qualifications we look for in a resident are broken down by quantitative and qualitative,” says Jessie Lang, owner at Unlocked | Rentals-Made-Easy Method in Columbus, Ohio. “We have an applicant scorecard that we use to rank each application based on credit score, time on job, rent-to-income ratio, average length of residency and percent of on-time payments. For each category, they can score a 0, 1, 2 or 3. Once the score is tallied, the final score will determine if the resident is qualified for the unit or not.”
If their score is high enough and they like the unit, the next step is to check referrals of the provided employer and prior housing references, Lang says. There’s a set list of questions and a section for open ended notes.
“This section is more subjective and you will need to pick up on clues during that conversation,” Lang says. “References will be pretty honest, either positively or negatively.”
Other things to look for in a good tenant include:
– A history of long tenancy at previous addresses. Knowing that your tenant is in the habit of staying around for a while means that you won’t have to keep searching for new tenants, or fixing normal wear and tear that’s caused by people moving frequently.
– Good communication. It’s vital that a tenant is able to talk to you directly about any problems that may occur while they are occupying your property. They’re your eyes and ears, and the only way you’ll know if the toilet is leaking before they move out. A communicative tenant is a tenant who saves you money in repairs in the long run.
– Similar expectations about your responsibilities. Too often, repair responsibilities are left vaguely defined in lease contracts. That’s why it’s so important to talk to a tenant about what they expect you should be fixing in their rental unit. A tenant who thinks you should drop everything to change a lightbulb is not ideal, but you probably don’t want a tenant who will try to do their own major repairs, either.
Red Flags to Watch For
Sometimes a tenant can seem really good, or even too good, and you’re left wondering why that person is renting rather than buying a home. These perfect tenants may, in fact, be perfect, and you certainly shouldn’t look a gift horse in the mouth, but it’s important to keep an eye out for common red flags.
“The top red flags include evictions, recent late payments, and last known addresses that don’t match a credit report or application,” says Grant Garcia, COO of Cherry Development, which develops premium apartment complexes in downtown Las Vegas, Nevada. “Another red flag, but something more so on the bottom of the list, is if their previous residence was managed by an individual owner and not a professional management company. A little more research is completed to make sure that this residence was in fact a property that was being leased and not a friend or family member filling out their rental verification.”
Even though it’s nice to think that applicants are always on the up and up, there are other ways that tenants can take advantage of a potential landlord. Today, technology can be used to generate documents that are usually required with an application.
Lang keeps an eye out for paperwork that doesn’t quite add up, watching for “any income documents from a ‘pay stub generator’ website. It may seem unbelievable that someone would do this, but it can be pretty common. Most of these fake pay stubs will have a small logo somewhere on them.”
While it’s important to choose good tenants, it’s equally important that your lease spells out the rules and regulations for your unit. That way if you do get stuck with a less than ideal tenant, you have a legal document to fall back on when looking for a remedy. Leases can include things like rules against smoking in the unit, whether or not pets are allowed, and even who is legally responsible for what kind of damage.
A Short Lesson in Housing Discrimination
Although limited types of housing are exempt from the Fair Housing Act, most rentals will rub up against this extremely important law, or other similar state laws. First signed into law as part of the Civil Rights Act of 1968, the Fair Housing Act originally protected tenants from being discriminated against based on race, religion, national origin and sex. Later, it was amended to cover disabilities and familial status.
As a landlord or a potential landlord, it’s important that you understand this law and what it means for choosing your tenants. You can’t, for example, paint people of a particular race with a broad brush, and assume they’re all going to destroy your apartment or not pay their rent. On the other side, you also can’t assume someone of a particular gender or with a certain type of family will always be a responsible tenant.