There’s no doubt that owning a rental property can be a lucrative endeavor. However, it also comes with a lot of work and decisions to make. One of the most crucial decisions for any rental property investor, whether it’s their first property or fifteenth, is who will occupy the home. Making the wrong decision could cost you money and time. In this article on how to screen a potential tenant, we’ll help you understand what goes into making the right choice.
What to look for in a potential tenant
The screening process is intended to assess risk. These factors are similar to the ones your lender used to approve you for a mortgage. Although you have the ability to set your own parameters, it is important that you establish minimum requirements in order to safeguard your financial health.
Criteria any potential tenant should meet
Here are some examples of factors to take into consideration when deciding whether or not to rent to a particular candidate:
- Minimum credit score – You can decide what that score should be. Many times it will be dependent on how much you’ll be charging for the property. Not having a 750 credit score doesn’t necessarily mean your prospective tenant won’t pay their rent. But an extremely low score can indicate that they’ve had some issues with paying bills in the past.
- Proof of employment – Unless the person applying to rent the home is independently wealthy, they’ll need a job in order to pay the rent. While it’s easy to just trust that a person works where they say they do, proof of employment is a must.
- Ability to pay a deposit and first month’s rent – This probably seems like an obvious one, but you’ll need to be sure they actually have the ability to pay before they sign a lease. That could be in the form of a bank statement, or waiting until a check clears before handing over keys.
- Clear background checks – This is one that is too often overlooked, particularly by first-time landlords. Many rental property owners follow their instincts based on the impression that a potential tenant has made on them. And yes, background checks can be expensive. But you need to truly know who you are allowing to live in your property. A small misdemeanor from someone’s past shouldn’t immediately disqualify them. However, renting to someone with a history of crime or domestic issues should be carefully considered.
It’s fine to be flexible with some criteria. The reality is, it’s your property and you can rent it to whomever you want. We highly recommended though that if you choose to rent to a person with a low credit score to ask for a co-signer.
These red flags could also indicate problems in the future when screening potential renters:
- Unstable employment history – Even if a person has proof of current employment, it doesn’t mean it’ll stay that way. An unstable employment history could mean an inability to stay employed. In the same way an employer would question a candidate with gaps in their resume, or too many jobs in a short amount of time, you should too.
- Evictions – This is nother one that falls under the category of being pretty obvious. A potential tenant that has a history of being asked to leave prior rentals could mean a lot of problems in the future.
- Bankruptcy – There are several reasons a person may file for bankruptcy. The cause and timeframe should be factors of consideration with this one. Either way, someone with a bankruptcy in their past should be looked at very carefully before being allowed to rent your property.
- Criminal history – A person who has committed violent crimes, domestic crimes, drug related crimes, or property crimes in recent years is probably not someone you want to rent to. However, if you feel a sufficient amount of time has passed, then a person with a criminal history could be considered. Just be sure to proceed with caution.
These red flags can be a warning sign that you should ask the potential tenant. You might be able to forgive an unreported error on their credit report, a stolen identity, or, as common as 2020, or the negative effect of COVID-19.
It could be that the prospective tenant has had a difficult life that is now on track. You will need to decide if you are willing to take a chance on them.
Legalities and responsibilities
As a landlord, you have legal and ethical responsibilities during the vetting process. Let’s discuss a few of those.
State and local laws
Familiarize yourself with local and state landlord-tenant laws as well as renter’s rights. This includes local discrimination laws. Also, in several states landlords cannot refuse to rent to victims of domestic violence.
Additionally, security deposits may be limited by law. Some states require that a landlord charge no more than one and a half times the amount of monthly rent.
Fair Housing Act
The Fair Housing Act prohibits you from discriminating against renters on the basis of their race, color or religion. It is illegal to refuse to rent to someone based on any of those reasons. You also can’t lie about the property’s availability or change rental terms or conditions, offer less-appealing amenities or delay maintenance repairs to evict tenants based on any of these characteristics.
Steps to screening a potential tenant
These steps will act as a guide for you to choose the right tenant for your situation.
Establish a minimum criteria
First, you’ll need to figure out what your minimum criteria will be for potential tenants based on what we discussed above. What you’ll require when it comes to credit score, finances, employment, and background check should be figured out before you start taking applications.
Lifestyle should also be considered. Will you rent to smokers, or allow pets? If so, will you require your tenants to smoke outside, and what types and sizes of pets will you allow? If you’re not sure, take a look at similar rental properties in your area. See what other rental property owners around you are allowing to help you decide.
Create a detailed listing
A detailed listing can help a renter decide if the property is suitable for them, and if they would be a good candidate. Before you meet the tenants, it sets expectations.
This will help you filter out tenants who do not fit your criteria or are unwilling to comply with your policies by including this information in the rental listing.
Include the following details:
- Monthly rent
- Deposit amount
- Any application fee
- That you will conduct a background check
- Reference requirements
- Smoking and pet policies
Quality listings are a great way to attract qualified applicants that meet your specific requirements.
Collect applications, review, and get consent
Ask for applications from people who are interested in renting your property. This will allow you to learn more about potential tenants and run background checks and credit checks. You should include the following information in your application:
- Name, contact information, date, birth, license number, and Social Security number of the applicant
- Addresses of the applicant in the past
- Names of any other occupants (roommates, children etc.)
- Information about income and employment
- Contact information for personal referees
- Additional screening questions regarding pets, past evictions, reasons to move, etc.
Select the tenants that you would like to screen from the applications. You must first get the consent of prospective tenants to pull their credit report or run background checks. You must get their consent in writing and keep a record.
Perform a credit check and criminal background check
You should look beyond your credit score when running a credit report, and make sure to verify the following information:
- You were provided with the correct name, date, and past addresses by the applicant.
- They don’t have any past or current financial problems. This includes missed or late payments, bankruptcy, or excessive debt.
There are three options depending on the information in your credit report. You can either go ahead with the tenant, consider leasing to them with higher deposits and co-signers, or you can deny them. You might ask the tenant to clarify any discrepancies that you notice.
A criminal background check can help you identify if the potential tenant may be a risk to your property or neighborhood. This background check can be used to help tenants stay and avoid being held responsible. This background check will uncover any felonies or misdemeanors, and eviction records.
Again, it is up to you to determine if there are situations in which you can still proceed with a tenant with a criminal record. You should consider each case individually. It is a good idea to ask the tenant for details and to consider the severity of the crime and the time frame.
Identify your new tenant and sign the lease
Once you have a list of potential tenants and run background checks on them, you’ll be able to make an informed decision. In the event that your first choice is not available, you may choose to have a second or third choice. Once you have decided on the tenant, it is important to notify them immediately and arrange a time for them to sign the lease.
You should always consult a local lawyer to create a lease agreement and go through it with you.
If this seems like a lot, it’s because it is. Finding and screening a new tenant can be an involved and time consuming process.
One way to make sure that all these steps are followed properly and legally, is to contact a proven property management company to do them for you. Their knowledge and expertise are invaluable during the process and save you a lot of time and headache. By choosing the right property management company, you’ll have the tenant of your dreams in no time!