When you buy an investment property to rent out, you put lots of money and effort into the purchase, renovation and repair to make it ready. Great tenants make your investment pay off, but to get them, you must also put time and money into finding and keeping them. Here’s how to screen potential tenants.
Follow Fair Housing laws
As a first step, you must bone up on the requirements of the Federal Fair Housing Act, which governs the tenant application and interview process as well as your decision to select or reject an applicant. A misstep here can be very costly.
Talk to rental applicants
You can get a good feel for people through conversation, so when prospective tenants contact you, cordially ask about their needs, goals and why they are looking for a place to rent. You must avoid questions that discriminate on the basis of race or color, religion, sex, family status (having or not having children) or disability. But you can ask questions about the person’s work schedule and whether the person smokes, has pets or will have roommates.
The importance of a good application
Verifiable information is the key to screening tenants and finding good ones. A successful search starts with a good application.
Besides the basics of name, social security number and contact information, you should request the applicant’s last two years of employment and rental history, as well as personal references unrelated to the applicant. You need contact information for employers, landlords and references. When you contact these people, verify with employers the applicant’s work history as well as his income, with copies of pay stubs if possible. (As a general rule, the applicant’s income should be three times the amount of the rent.) Ask previous landlords about the timeliness of payments, any damages to property, and complaints or other potential issues. Ask personal references how they know the applicant and whether they know why the applicant is moving.
Don’t forget to request a copy of the applicant’s state-issued identification.
Run a consumer report
Your application form should have a place for the applicant to sign authorizing you to request a consumer report. This document will show credit history, current debt obligations (if they’re significant, they may make paying your rent more difficult), and the applicant’s history of repossessions, foreclosures and bankruptcies. You want a tenant with a FICO credit score of 650 or higher. A full credit report will also show rental payment history.
Eviction, an expensive and stressful process, is a matter of public record. If a potential tenant has been evicted, it will show on the consumer report. If a tenant cannot pay and agrees with the landlord to move out rather than be evicted, that private decision will not show on a credit report. You could learn about it, however, from talking to previous landlords.
Some consumer reports provide criminal history. Laws vary by state as to whether and how you can use such information, so carefully research your state laws. Some states do not allow criminal history to be used in tenant acceptance or rejection decisions.
As with the Federal Fair Housing Act, you must know and follow the rules governing the use of credit report information when screening tenants.
Get help with the screening process
If you don’t have time to thoroughly screen potential tenants or find the job overwhelming, help is available. You can hire a property management company. These services gather applications, interview prospective tenants, collect deposits and rents and manage maintenance and repairs. There are also apps and software packages that help you manage these tasks as well.
Service after the sale
Once you find a good tenant, make sure you keep them. It is less expensive to retain good tenants than to continually replace them. Treat them with courtesy, send them thank you cards and gifts, and promptly help them with needs.