Best Practices for Screening and Accepting Prospective Tenants
Accept or Deny- that is the question!
The most common advice I give investors is to: mitigate as much risk as possible when investing. If you have been listening to my podcast or staying up-to-date on my Advisor Guide articles, you will notice I regularly discuss this topic at length. Strategically using your due diligence period, having an ironclad lease, and diversifying your investment portfolio are all ways to help mitigate risk when investing in real estate. In this article we will discuss how to determine if an applicant for your rental property should be accepted or rejected. It seems like a silly topic and a decision that should be easy to make however, sometimes I find that desperation or extenuating circumstances play more of a role than logic and data.
Whether you are acquiring a vacant property or your tenant has just given notice to leave, you must develop a system to assess the prospective tenants’ applications. This process will keep your property safe and keep you financially and legally secure by using all available resources to help you make the most informed decision. Developing this process on your own may be difficult, so I have outlined a suggested method to give you an idea on how to properly and effectively screen your potential tenants.
The Screening Process: what to look for
When assessing tenant applications there are a number of factors to consider so that you can make an informed decision. Taking a look at finances, background, rental history, and criminal records are good outlines to help you determine if a tenant is the right fit for your property. In addition, I like to look at things like social media behavior, previous landlord references, employer references and the length of occupancy in each apartment or rental unit. Let’s look at each one in depth and what specifically to look for.
Identification — You want to ask your applicant to submit ID to verify who they say they are, they really are. Make sure the identification card is not expired and the information checks out with the rest of their application. You will want to verify all previous addresses match and none were omitted. If you find one that was omitted, generally it is a good idea to ask why. ID’s can be fake and if that potential applicant has something to hide, they generally will hide it. Think of the entire application process as test to see if you can spot something that was purposely hidden. If you find it, you win! Literally. You likely decided that this was not the best applicant and you were right.
Financials/Paystubs — You will want to make sure that the person you are renting to can afford your rent consistently every month and that they are gainfully employed. As part of your application process, ask them to submit the last two full months of paystubs and any additional income they may receive. You will want to be certain the proof of employment is current. Additional income could be a Section 8 housing voucher, grants, scholarships, social security checks, and other forms of governmental assistance. The more information they provide you of their financial landscape, the better you can determine if they are financially eligible. If your applicant does not have paystubs you can ask their employer to write a verification letter that provides information on how long they have been employed and what their monthly income is.
I typically advise landlords to secure a tenant with a NET income of 2.5 times the total monthly rental rate. I would use 3 times a months rent if the unit was a 3 bedroom or larger home.
I generally advise not to use a cosigner as this provides you with no true guarantees. If the applicant cannot be qualified on their own, they likely should not be approved.
If the prospective tenant has submitted the proper identification and financial information proving they can afford the apartment, you can move on to processing their background and credit information — this will include a credit check, criminal history, and rental history. If they cannot get past the first two steps, there really is no point in continuing the application process.
Credit check — You will want to make sure their credit is at a reasonable number. A bad credit score is an indication of inability to manage money, which could be lead to financial trouble for you if the tenant stops paying rent. Only you can determine what an acceptable level is however, keep in mind you must has a 580 credit score or better to purchase a home. This should give you some indication of what creditors deem as an acceptable score. Generally the higher the rental amount, the higher the score should be. It is essential that you have some knowledge of what an average score would be for the type of rental you are trying to lease out so that you don’t find yourself waiting for something that may never happen.
Criminal history — There are a number of things to consider when looking at someone’s criminal history — severity of the offense, how many offenses, and when these offenses occurred should all be weighed when making this decision. There is no right or wrong answer, but there is nothing inherently wrong with renting to someone who has been in trouble with the law in the past. If their offense is minor, happened a number of years ago, and the rest of their application checks out, they could be a potentially great tenant. Some people do learn from their mistakes and appreciate a second chance. On the other hand there are things you should stay away from like recent drug charges, incidents involving children or domestic disputes as this could indicate a lack of ability to make good choices and also indicate your building may become an uncomfortable living situation for other occupants.
Rental history — Perhaps one of the most important pieces of the puzzle, looking at past rental history can give you a great indication of your future success. You can tell a whole lot about a renter by looking at their payment history, how long they stayed in each rental, if they left in good standing, if they had any evictions, and how their previous landlord felt about them. If they have a past eviction, it’s a hard NO from me. The roof over your head is the single biggest expense for everyone and the most important bill anyone will ever pay. If your applicant had an eviction or even previous court action for non- payment not only do they clearly not make good decisions, but they are likely a repeat offender in the future. Think of this part of the screening as a job opportunity. Would you want an employee that jumped around year after year? I would say the same for a potential tenant. The longer they stay the more you make. You want to find a tenant that will stay for a long time while continuing to pay market rates for rent.
Employment history — Does your potential tenant have a good paying, stable job or are they a using a temp agency to find work? Did they stay employed during Covid? Are they considered an essential worker? Has this tenant been at their job for more than 2 years? Is there any overtime available and are their hours consistent? How far do they travel for work everyday? These are all things to consider when verifying employment history.
Social Media — Yes it sounds a bit like I am asking you to be a stalker, but in reality it is very serious. All tenants will try to paint a beautiful picture about who they are. How they behave on social media will be like showing you the future through a crystal ball- trust me! You will want to make sure who they are on paper matches who they are in the real world if you want to make the best decision.
Other measurements to take
In addition to the screening process, you can do your own research on your prospective tenants. A Google search is sometimes a good way to find out additional information. It may lead to articles on arrests or other police involvement that may not be visible on their criminal history. I typically like to look at Pennsylvania’s Unified Judicial System portal. There, you can type in a prospective tenant’s name and see if they have been involved in any court cases or have any pending violations. The internet is a fair way to obtain more information about a tenant before having them sign a lease. Don’t be quick to decide, do your research.
A word about fair housing
It’s extremely important you understand the laws surrounding housing at both a state and federal level. If you receive an applicant that meets the required minimums to rent your property — you must rent to them. You cannot wait in the hopes that a “better” or “more likable” tenant comes along.
Document everything — from the entire application process all the way through acceptance or denial. If you do not rent to them, you need documented proof as to why they did not meet the requirements for the property. This will save you a legal headache should someone every try to accuse you of discrimination for housing.
This information may not be used as a substitute for legal advice and you should consult your attorney for legal advice if you have any questions relating to this advisor guide.