Whether you’re a real estate investor, or you’ve happened into the role of landlord by default, one of the keys to success is knowing how to find (and keep) good tenants. Likewise, it’s crucial that you avoid letting the wrong tenants sign a lease agreement. But, contrary to popular belief, screening tenants isn’t as easy as it seems.
The Importance of Tenant Screening
Good tenant screening is crucial on so many levels. Here are five specific reasons it pays to lean in and master this aspect of landlording.
- Lowers risk of payment issues. Research shows that 84 percent of landlords report “payment concerns” as their top concern with new tenants. By thoroughly screening a tenant and reviewing their financial track record, you can lessen your chances of dealing with payment-related issues.
- Lowers risk of eviction. By lowering the risk of payment issues, you also lower the risk of eviction. And when you consider that it costs $2,500 to $3,500 to evict a tenant, this is no small feat.
- Protects your property. A good tenant doesn’t just pay on time – they also protect your property and treat it with respect. This prevents costly problems and unnecessary wear and tear.
- Protects your neighborhood. You owe it to the neighborhood to avoid bringing dangerous people into the area. Good tenant screening will help identify any obvious red flags (like a sex offender status or past criminal convictions).
- Provides peace of mind. When it’s all said and done, thorough tenant screening gives you significant peace of mind. It doesn’t guarantee that everything will go smoothly, but you can rest easy knowing that you did everything you could.
Good tenant screening can make the difference between owning a property that’s a thorn in your side and owning a property that generates steady and predictable monthly cash flow. You have to get it right.
7 Tips for Better Tenant Screening
While there’s no foolproof method for finding the perfect tenant, there are plenty of things you can do to increase your chances of identifying ideal tenants who are most likely to pay on time, protect your property, and benefit the neighborhood. Here are a few suggestions:
1. Outsource to a Property Management Company
The easiest way to handle tenant screening is to outsource it to someone who already has the proper system and tools in place. Most full-service property management companies will have this as part of their services.
Green Residential, for example, screens tenants at no cost to any client who is already using their property management services. They screen based on credit, employment, and rental history. They also conduct criminal background checks.
We’re not saying you have to outsource tenant screening – and we’re going to supply you with plenty of tips to do it yourself – but you should know that this option exists.
2. Abide by the Rules
There are strict tenant screening laws in place to prevent landlords from unlawfully prohibiting certain people from obtaining access to housing. If you want to avoid lawsuits, you must be compliant with federal fair housing laws.
“Federal fair housing laws specify illegal reasons to refuse to rent to a tenant, such as rejecting an applicant because of race, religion, ethnic background, sex, or because the applicant has children or a disability,” Nolo mentions. “In addition, some state and local laws prohibit discrimination based on a person’s marital status, sexual orientation, or age.”
You’re free to choose among a group of prospective tenants, but you can’t violate any of these laws. Fair consideration must be given to all applicants without consideration for any of the factors previously mentioned.
3. Verify Income Sources
While you can’t discriminate based on uncontrollable factors like race or sex, you can choose whether or not to accept a tenant based on their income. You have every right to ask how much someone makes and verify that income with their employer. In fact, it’s highly recommended that you do so.
Once you verify that a tenant’s income is accurate, you can crunch the numbers to make an educated decision on whether or not they can afford the property. The general industry standard is a 3:1 ratio of income to rent. In other words, if rent is $2,000, then the applicant’s gross income should be at least $6,000 per month. If they’re only making $4,500 per month, this gives reason for concern.
4. Check Social Media Profiles
Get creative and check a prospective tenant’s social media profiles. Facebook, Instagram, and Twitter can give you keen insights into the person’s lifestyle. And though you can’t use this information to discriminate, it could help you identify risky behaviors that disqualify them from living in your property (like drug use, gang activity, etc.).
5. Contact Previous Landlords
While it’s a good idea to contact a prospective tenant’s current landlord, this shouldn’t be your only call. (After all, the easiest way for a landlord to get rid of a bad tenant is to give them a glowing recommendation.)
Always make at least two calls to past landlords. A previous landlord from a property where the tenant no longer lives has no reason to lie. They’ll give you the honest truth.
6. Run Background Checks
A background check might seem like overkill, but you never know what’s lurking in a prospective tenant’s past. It’ll cost you a few bucks, but a background check is worth it for the peace of mind it provides.
7. Develop a Documented System
Once you find a system that works, it’s important that you document it. This means literally writing the process down in a step-by-step manner.
By documenting your system, you make it repeatable. Whether you hire an assistant or continue to handle this aspect of the business on your own, documentation leads to greater efficiency.
Putting it All Together
Good tenant screening requires a combination of technical competence and intuition. Too little of either will make you susceptible to making poor decisions. Leverage the tips from this article, and don’t forget to trust your gut. It’s at this intersection that wise decisions happen.