High-risk tenants can be a nightmare for a real estate investor. You don’t want a renter who regularly makes late payments, complains about every little thing, or always causes headaches for you and your team. Needy renters can eat up your positive cash flow in a snap. If you are not getting paid for their occupancy, you will need to evict and replace them in a timely manner.
In my career as a real estate investor, my partner and I have rented out hundreds of units. As co-owner of the company, I still am the one to approve or deny rental applications. Though I could delegate this task, I still find it high value, so I do it. The tenants you place in your property is very important.
The value of leasing agents
I use in-house leasing agents who take care of paperwork and documents for rental applications. The paperwork that we obtain from applicants is their three most recent pay stubs and bank statements in addition to final check stub from previous year. We only take the bank statements if they are self-employed. Once the documentation is submitted, our agents begin the process of qualifying the prospect. For you to protect your business and avoid back & forth problems, it’s very important that you obtain all the necessary documents. If a potential renter does not want to or cannot provide the paperwork that you have asked for, just move on. It will be better in the long run.
The criteria we use to screen tenants
Companies have various screening strategies that vary based on the demographic of their applicant. If you have a C classified property, you may accept tenants that only have a 600 credit score, but if the property is an A class place, the needed credit score could be up to 700. With my property rentals, I deal (the majority of the time) with the working class. These individuals generally have a ‘so-so’ credit score (which is the reason that they are paying $700-$800 in rent per month). To check the potential renter’s credit history, I use a software called Propertyware. This helps me check to see if there are outstanding balances or any red flags.
To rent properties that I own, potential tenants have to prove that their income is 3x the monthly rental amount. For me, this is the most important factor to approving an application. If a person cannot prove that they earn enough to rent the property, there must be a co-signer on the application. Other criteria I look out for is having no evictions in the past seven years, job stability, and no felonies in the previous seven years.
One thing you need to remember is to stay objective. Stick to your criteria. Keep your rules for renting to potential tenants your rules— no matter what. Staying with what you have outlined when underwriting rental applications will help you down the road. This is especially important, because you must treat every applicant the same due to fair housing rules.
I tend to be an optimist, expecting the best from people and tenants. That being said, I have seen some interesting stuff in my time of underwriting applications. One tenant almost conned me by having a friend pose as their current landlord. They submitted pay stubs that were fraudulent.
When I get the rental application, I look for any points of concern— red flags that make me think the potential tenant is not a good choice. I then take into account all the other documentation— including income, rental history, job, etc— and due to my thorough background checking and paying attention to details, I have yet to kick out and evict a tenant.