There are a lot of different thoughts and numerous tools out there that can help you select a tenant. By and large, however, I think it can be helpful to focus on the following key components:
- References
- Credit Score
- Criminal Background Check
- Income Information
- Employment Verification
- Gut Check
Components 1-5 can be integrated into your tenant application. A brief side note on tenant applications: for our company, we have prospective tenants fill out an application after they’ve met with our property manager at the rental home (or a similar unit) of interest and decided they’re serious about wanting to rent. To save some time for our management team and the customer, we charge a nonrefundable $100 application fee. If we decide to rent to a prospective renter, we will apply this fee toward the renter’s security deposit or first month’s rent. I think an application fee is a great strategy to narrow down tenants and help prospective renters become self-selective. It’s unusual that prospective renters will pay the $100 application fee unless they’re really serious about renting and think they would make a good candidate.
In this article, we will discuss each component listed above and its importance in the tenant selection process. By the time we finish, you should have a decent understanding of how to narrow down your prospective tenants, hopefully making a great decision in the end. Let’s begin with the first component useful for tenant selection: references.
- References
Simply put, behavior is the best predictor of behavior. If you want to know whether or not someone will be a good tenant, I think calling his or her references can be the best way to find out.
On our tenant application, we ask for the prospective renter’s current landlord and previous landlord’s contact information. Typically, if landlords have had a bad experience with the renter, they are more than happy to talk about it. Previous and current landlords can give you an idea of any issues they encountered while renting to the prospective tenant. This could be issues with noise, pets, payment history, cleanliness, or other key factors that could help you determine whether or not you want to work with a prospective renter. Calling references is a great way to determine if you want to rent to someone and is probably your very best tool.
- Credit Score
Running a credit report on prospective tenants will tell you a person’s previous payment history and can be a great indicator of whether or not someone can pay rent on a regular basis. Many companies have a minimum credit score that a prospective tenant must meet in order to become a renter. For our company, we require a minimum credit score of 650. Please note that there can be some exceptions to this rule, especially if a prospective tenant had major medical expenses, experienced a divorce, or endured some other life circumstance that negatively impacted his or her credit. In these cases, calls to previous landlords become even more important in ruling out a potential customer. It can also be helpful to talk to the prospective renter and just ask him or her to help you understand their credit report. We’ve had some great tenants with credit scores lower than 650, so I would encourage you to use some common sense when navigating credit reports.
There are several online services that you can subscribe to in order to run credit reports on prospective tenants. Services like TransUnion and Experian charge a fee to run credit reports, but they are great at protecting a potential renter’s private information, while still delivering the information you need and giving you a recommendation on whether or not you should rent to the prospective tenant.
- Criminal Background Check
Everyone’s tolerance for criminal backgrounds will vary. For our company, there are two types of tenants that we won’t rent to: those who are registered sex offenders and those with a history of violent crimes. There are two reasons behind this decision: (1) renting to a registered sex offender or violent tenant may open our company to additional liabilities and (2) we have a responsibility to protect our other tenants and their families who live in the same area.
For criminal backgrounds that are nonviolent or nonsexual, we will probably still investigate the tenant with a longer conversation, but it’s likely that we will be more open to renting in those situations.
Both TransUnion and Experian can perform criminal background checks, though there are several other services you can use.
- Income Information
Our company does not ask for income information on our tenant applications, but I know a lot of people who do. This step requires prospective tenants to include their financial information on their application for the sake of determining whether or not they can afford a certain amount of rent. Frequently, people operate by the idea that rent can’t exceed 30-35% of someone’s income—though this is debatable, especially when dealing with outliers. For example, people that are at the lower end of the wage scale frequently pay up to 50% of their income on rent/utilities. Many people in this income bracket may still be great tenants, so I would encourage you to use some discernment and common sense when looking at someone’s financial information. I’ve had many outstanding tenants whose rent would have been greater than 35% of their income. I have personally been enriched and our business has been strengthened from opening our minds to consider those outside of the typical target ratios.
Some companies require income information because they work with federal dollars or housing authorities and must rent to families who qualify as low-income. In this case, tenants will automatically be required to provide income information during their application process.
- Employment Verification
I know some landlords who call a prospective tenant’s employer to verify employment. Our company does not ask for employment information, but I can see how it could be beneficial.
- Gut Check
At times, some of the most important information may be harder to put your finger on. It’s the sum of your experience in dealing with the prospective tenant. Over the years, I’ve noticed a few essential gut checks that can help pick out potential red flags. When meeting a prospective tenant, ask yourself these questions: Is this person well-spoken and reasonable? Is he or she clean and well-groomed? What other information can you gather about the prospective tenant outside of the application that would lead you to believe they would be a good or bad tenant? It’s important that you learn to trust your gut and pick up on some of these non-verbal cues. If you don’t have a good feeling about someone, trust that feeling. It’s okay to tell a prospective tenant “No, I don’t think this is a good fit for you.”
I knew a landlord who would intentionally walk the prospective tenant back out to his or her car to see how clean and well-maintained their vehicle was. While this isn’t a foolproof strategy, it can sometimes provide insight into how a prospective tenant may treat your rental property. Typically, if someone keeps their personal car in disarray, he or she may be less likely to keep your property in good shape.
After following the criteria above, you should hopefully be able to move through your tenant selection process with more confidence and decisiveness, ultimately landing on a tenant who is a good match.
It’s important to note that taking your time during the tenant-selection process may be the single most valuable thing you can do as a landlord. I can share several horror stories about bad tenants who have stiffed me out of thousands of dollars on rent, forced me to go to court to evict them, and destroyed my property—all of which could have been avoided if I hadn’t rented to them in the first place. Simply put, a bad renter is worse than no renter at all. Sometimes, as landlords, it’s easy to forget that having someone that doesn’t pay or doesn’t respect your property is worse than letting it sit vacant.
In Summary:
- Tenant selection can be a tedious process, but with enough due diligence, it can be a beneficial experience.
- Charging an application fee upfront can help tenants be self-selecting, ultimately saving both parties time and energy during the application process.
- There are several criteria you can use to help narrow down your prospective tenants, but I find that references are the most helpful tool. Behavior is the best predictor of behavior!
- Decide on what your minimum credit score should be, but also be prepared to make a judgment call if someone can explain why they have a low credit score.
- Consider what criminal history that you are okay with in a prospective tenant.
- Don’t lose heart and make a hasty decision to rent to someone that’s going to cause you greater headaches down the road. The time it takes to rent a unit is 4-6 weeks (on a national average), so don’t be impatient!