Let’s face it, as a rental real estate investor, the main goal is to maximize revenue and minimize risks. Napkins, scrap paper, fancy spreadsheets, and technology tools all help make the deals make sense, but there is another huge factor that helps reduce investment liability; proper tenant screening.
As an investor, your goals for profitability are to reduce tenant turnover, decrease issues stemming from late payments and property damage, and help foster and create a responsible and respectful community of tenants.
Whether you are a seasoned investor, or this is your first rodeo, let’s cover a few quick tips that will help to jumpstart your journey in a positive direction.
Why Tenant Screening Is So Important
Shielding your investment from potential pitfalls should be a daily consideration at each step of your journey. Properly screening potential tenants will reduce the need for costly repairs due to tenant neglect.
Mortgages, hard-money loans, seller financing, taxes, or anticipating capital improvements are all expenditures that investors deal with regularly. Making sure that your tenant is financially stable and can, not only pay the required rent for the unit but also pay on time, will help to stabilize your income statement.
We all hope that a tenant treats our property as if it is their own. Completing minor maintenance, maintaining clear communication, landscaping or decorating tactfully, and doing their part to maintain a positive tenant/landlord relationship. These attributes help you to maintain the value of your investment but also contribute to a portfolio full of responsible people who create a positive ecosystem of tenants.
Steps to an Effective Tenant Screening Process
1. Create Clear Tenant Criteria
Define the requirements of your tenants upfront, ie., income, credit score, rental history, etc. This will help you to have consistent information to share with potential applicants. It is also important that you explain your standards in the property listings, as you market your available properties.
2. Conduct Comprehensive Background Checks
The internet is full of useful tools (and some not-so-useful) to help complete this task. Make sure that you are reviewing criminal history, eviction records, and credit reports. To help ensure that your tenants are financially able to handle the monthly requirements, also be sure that you verify income and employment history. Many landlords use income requirements of 2.5-3x total monthly rent as a guide.
3. Check References Thoroughly
And be THOROUGH. You must speak with previous landlords regarding their experience with their previous tenants. Questions you should ask to help uncover rental behavior are length of tenancy, rent payment habits, and property maintenance (however, before you ask questions be sure to check your state and federal laws to be certain that the questions you are asking are legal).
If the previous “landlord” is a parent or family member it may be a wise decision to require a co-applicant that is also liable.
4. Trust Your Gut—But Back It with Data
One of the best BS detectors you have in your toolkit is your gut. If something seems off with the applicant, and the data supports your feelings, it is often best to trust them and move on to a better applicant.
Always be sure that you have objective evidence to support your decision-making to help avoid legal pot-holes.
Quick Takeaways for Effective Tenant Screening
Screen for Responsibility
A strong rental reference paired with a good work history and verified income are great ways to help determine whether or not you have a good potential tenant for your property. Some landlords also like to use credit checks to help corroborate the data.
Be Consistent
Follow the same process every time. This will help you to make informed tenant decisions and keep you out of “hot water”, avoiding Fair Housing issues that can potentially lead to fines and/or legal troubles.
Leverage Professional Tools
Consider using technology to assist you with your search. Although it is never perfect and does not guarantee a great tenant, it can help to analyze data and reduce your time devoted to tenant screening.
Here are a few options we would recommend (pricing and fees may vary):
TransUnion SmartMove
RentSpree
TurboTenant
Conclusion
Tenant screening is one of the most important ways to help you maximize your real estate rental investment. A responsible tenant will help you to feel like your investment is more passive and help to free up time for you to find the next deal.
Adopting these tips will not only help catapult you to success but also create a population of responsible residents in your area.
If you are having problems with selecting responsible tenants, or all of this sounds like just too much, reach out to us at www.almarproperties.com or email our team at info@almarproperties.com. We would love to help provide information to help ensure a successful rental investment.