Investors that focus on long-term hold periods must become experts in tenant selections. Great tenants add tremendous value to a property, while poor tenants not only detract from the property valuation, but will also take years off of your life. Every investor that has been in the real estate business for a while can share a tenant nightmare story. Tenant selection is a mixture of art and science, so here are a few quick ways to stack the odds in your favor.
1. Standardize the Process: Start with a basic tenant questionnaire. Focus on questions like employment history and rental history. Before conducting any tenant interviews, familiarize yourself with the tenanting laws of your state. A variety of questions are illegal to ask and could potentially open you up to litigation from rejected tenants. Additionally, familiarizing yourself with landlord tenant laws of your state will make you a better landlord. Regardless of the area, always assume tenants know their rights. Many lawyers specialize in finding tenants with the sole purpose of suing landlords.
2. Credit Checks: Always run credit checks on your tenants. If you have a mortgage broker, they can traditional run credit checks for you for a nominal fee ($15-$30), which should be passed on to the applying tenant. Credit checks should not be solely used to approve or deny a perspective tenant, but they should add to the overall tenant story.
3. Rental History: Be careful when verifying rental history. Bad tenants will often get excellent reviews from their current landlords. Think about it. If you have a nightmare tenant that is looking to move to another location, would you do anything to prevent them from getting out of your property? Get around this by asking for their past three landlords or more.
4. Employment History: Look for patterns in employment or any major gaps. Great tenants keep jobs for long periods of time, have no employment gaps, and work for strong industries. Be wary of tenants in bad industries (e.g., autos) or in commission-based jobs. These types of jobs layoff often and traditionally these people have fewer savings.
5. Financial Statements: Secure monthly income and expenses. The most important items to note are the credit card bills. Watch out for tenants with significant revolving debt, even if they pay it off regularly. Factor in what rents you will be charging and the expenses that will be passed through to the tenant.
Tenants should not be approved or denied on any one factor. Perfect tenants are tenants that value your property as they would their own. The best tenants not only have strong scores in the factors above, but also have strong character.
