Owning and renting property is one of the best investment strategies for building long-term wealth. Besides the money needed to purchase the property, what holds most people back is the fear of dealing with bad renters. It’s not a misguided consideration either. Take it from someone who knows – bad renters can be awful.
With that being said, in my five years of owning rental property, I’ve only had one bad renter who forced me to take legal action and pursue an eviction. I attribute that success to the process whereby I select tenants for my properties. I live by the adage that the best place to catch potentially bad renters is before they sign on the dotted line.
How to Screen Out Bad Renters
What can a landlord do to screen out a potentially bad renters? Here are six things I’m doing that may seem obvious but are often not followed.
1. Handle your emotions on a vacant property
It’s tough to have a property sit vacant without so much as a nibble from a prospective tenant. If that scenario continues for several months, desperation sets in, especially if the property has a mortgage. Faced with the possibility of indefinitely paying the mortgage out-of-pocket, landlords can make the mistake of taking anyone who comes along just to get someone in the property.
This emotional decision is not based in good business practice. It would be better to let the property sit than to let the emotion over lost income rule your decision about who resides in the property.
2. Request a non-refundable application fee
It should be obvious that the prospective tenant should fill out an application. But are you requiring them to pay an application fee? If so, is it non-refundable?
I require my applicants to pay a $35 non-refundable fee in order to process their application. You may call that a “greedy-landlord-getting-all-the-money-he-can” practice. I call it absolutely necessary and the first big test in the screening process. Here’s why.
If the prospective tenant balks at paying that small, non-refundable fee I know:
a) they are not that interested, so I shouldn’t waste my time with follow-up calls,
b) they think I’m being unfair because it’s non-refundable (thus demonstrating negativity), and
b) collecting a full months rent from them later is going to be a challenge.
By the way, I put that non-refundable fee to good use to pay for a service that conducts a background and credit check on the applicant. That’s why it’s non-refundable…I actually use the money on the business.
3. Complete a background and credit check
Conducting a background check will tell you what criminal record, if any the applicant has. If this person is going to be living in your property, you have the right to know what run-ins they’ve had with the law.
You also should know to whom else they owe money. Someone with poor credit due to negligence in paying off debt represents a big risk when it comes to paying rent on time each month.
If this seems intimidating, there are services to help you with this process. I have used an online service at E-renter.com with great success. They allow me to set my own parameters for the type of tenant I want. The report they generate informs me whether or not the tenant met my predefined set of standards.
4. Write up a lease agreement
In the old days, I’m sure you could spit-shake and have a gentleman’s agreement on what the rental terms would be. Unfortunately those days are long gone. Having a detailed lease agreement that spells out the responsibilities should be done whether or not the applicant is someone you know.
Lease agreements act like an accountability partner and that’s good for both tenant and landlord. The tenant knows what is required of them as they reside at the property. Conversely, by signing the agreement, the landlord guarantees he or she will follow certain behaviors. If either party falters on their obligation, they can expect to be called on it…even by a judge.
That’s right…the judge is going to want to see the lease agreement terms if there ever is a dispute in court. If you don’t have a lease outlining responsibilities, the matter in dispute will become a “he-said, she-said” battle in which you’ll have no supporting documentation.
Again, there are many samples of rental agreements that you can find online. Some are available for purchase and they vary from state to state. Make sure to know the laws for your particular state before putting one in use.
5. Call their employer and verify salary
On the application, I have the prospective tenant list their employer’s contact information so I can call them to verify that they are indeed employed. Yes, people do lie about that on their application.
I also have them list their salary. I try to verify that salary on the phone call with the employer, although some are hesitant to hand over that information and certain H.R. departments are hard to reach. What I’m targeting with salary are tenants whose rent payment will be no more than one-third of their take home pay.
While you have the employer on the line, there are also several other questions you can ask like:
How long has the applicant been with the employer? (looking for an answer that indicates life stability)
Are they on time to work? (looking for an answer that show promptness and dependability)
Is there anything else you could tell me about them? (you would be amazed at what information employers volunteer)
6. Always be interviewing the applicant
Finally, have multiple conversations with the applicant in person and over the phone. You can get a real sense for a person by looking them in the eye and listening to them talk.
I commonly ask about their current housing situation, what they are looking for in a rental, and their intentions on length of stay. I also look to see how they respond. Are they engaging? Respectful? Asking questions of their own?
All this interviewing may seem odd, but I’m simply trying to piece together this puzzle so I can make an informed decision. On more than one occasion after such conversations, I’ve developed a gut feeling that the applicant wasn’t a right fit. This feeling would not have come if I hadn’t talked to them.
So much can be done up front to filter out potentially bad renters. The key is to have a plan in place and implement it from the first contact you have with the applicant. It will save you time, money and headaches in the long run.
Questions: What other practices can you think of to weed bad renters? Have you ever accepted a less than stellar applicant out of desperation to fill a vacancy?
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