How to Find Good Tenants
By Omar Ruiz
For apartment investors it’s critical to know how to find good tenants. Renting to good tenants makes all the difference in the world to running a good real estate investment business. Once you know how to find good tenants, your property becomes less management intensive because it’s bad tenants that cause the headaches.
The Common Mistake:
A common mistake first-time real estate investors make is being anxious to rent their property and having weak qualification practices. First-timers are naturally focused on having their property produce income as quickly as possible. Not properly qualifying prospects can allow a bad tenant to occupy a rental and delay or refuse payment of rent and damage your property.
Knowing how to find good tenants is especially important in this day and age, because the pandemic has encouraged some tenants to behave badly and refuse paying rent – even when they are able. The internet has allowed bad actors to provide fake income documentation, that the untrained eye will believe is legitimate. Having good systems that qualify applicants to screen for good tenants will make owning rental properties enjoyable.
Over the many years in business, we’ve audited, adjusted and refined our qualification practices to create a system we feel is amongst the best and will allow you to know how to find good tenants. To be clear, no system completely eliminates tenant problems especially when managing numerous units in larger apartment complexes. Tenant circumstances can change over time and good tenants can have bad unforeseen situations that cause financial hardships. Our company has been fortunate that our system has minimized the impact of tenants not paying rent due to covid related issues.
You start by getting a completed rental application from your prospect. After getting the application, if you focus on the following 4 items, you will learn how to find good tenants:
- Employment History
- Credit History
To properly qualify applicants, request that they provide 2-3 months of pay stubs or other form of income documentation. Getting a good sampling of pay stubs/income documents allows you can take into consideration fluctuations in pay, such as changes in hours worked; over-time pay; pay rate changes, etc.
You want to confirm the applicant makes enough income to afford the rent. Most management companies use the tenant’s gross income and compare it with a simple 2-3 times rent amount. We prefer to qualify by using a rent to income ratio (divide the monthly rent by their income). A rent to income ratio of 45% or less is our general requirement. The ratio can be adjusted lower for stricter qualification criteria. Computing the right income amount is the first step in knowing how to find good tenants.
We’ve found that applicant with long periods of time with their employer(s) make for good tenants and an indicator of steady finances. People that switch constantly from one job to the next can become unstable and have issues with making on-time payments.
During an internal audit conducted many years ago, we discovered with people we filed evictions, that they had a common situation – job histories of less than one year at their current employer. They made enough income to afford the rent and qualify, but eventually lost their job for unknown reasons and had to be evicted. After discovering this, we adjusted our qualification criteria to require a minimum one year of employment history with their current employer. This change significantly reduced evictions.
Qualifying tenant prospects based on credit score and history is subjective. Depending on the type of rental (house vs apartment) and location, you’ll come across a wide range of differences. On apartments it’s not uncommon to come across people with no credit score, because they never use credit and have no history. In our opinion this is not necessarily a disqualifier, but for the credit bureaus it doesn’t work.
In general a minimum score of between 600-650 is reasonable. If you have challenges with applicants having lower scores, review their credit history closer to see if there’s special circumstances that can be explained and request a letter of explanation that’s kept on file. Depending on local laws, you may be able to charge a higher security deposit as insurance against payment default.
One of the red flags we look for when reviewing applicant credit history is late payment notations for a variety of different items (credit card, car payment, medical bills, cable, etc.) and especially utility bills. Late utility bills are a bad sign and we typically disqualify people that have a history of not paying their utilities.
You want to keep the residents of your community safe. This is when an applicant’s background comes into consideration. This is also very subjective and local statutes need to be recognized. It’s good for your applicants to have a clean criminal check, void of severe criminal/felony convictions. This is especially true in apartment complexes, where many people, families and children live close by. In some states it’s illegal or discriminatory to use criminal history as a deciding factor in disqualifying applicants. You should review the local laws and be in compliance as you do not want to bring any undue legal liability.
Now You Know How to Find Good Tenants
Knowing how to find good applicants will make owning rental properties more enjoyable. You’ll reduce the intensity of management because of higher likelihood of getting rents on-time and less need for posting notices and chasing around tenants. You will also have better peace of mind that tenants are less likely to damage your property. Your residents will feel better knowing your putting effort towards finding good neighbors and creating a safe environment. The guidelines outlined in this article will help you to find good tenants.
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