So, you’ve decided to rent out your real estate investment property (whether as a short-term vacation rental property or a long-term residence) and are searching for a potential tenant. Real estate investors and landlords will quickly find that reviewing and interviewing potential tenants is similar to hiring someone for a job. You’ll have many candidates, but not all of them are good. The key is having the ability to separate the good from the bad.
In the real estate housing market, no real estate investor or landlord wants to have problems with his/her tenants. When landlords are conducting a tenant screening process, it could be hard to determine the factors needed to be taken into consideration. In addition, sometimes it’s tempting to ignore the red flags and give someone who seems to be worthwhile a chance or find the best tenant for the rental property based on personal preferences. However, this will cause a landlord and a real estate investor a bundle of problems as a friendly applicant will not necessarily make the best tenant.
Related: What Are the Main Obstacles to Investing in Real Estate Properties and How to Overcome Them?
What are the factors and red flags that real estate investors and landlords should definitely be paying attention to during a tenant screening process?
Tenant with Bad Credit
This is the most obvious red flag. As a landlord, one of your first obligations is to find the best tenant who is able to pay rent on time, every month, without any urging from your side. The best chance of finding the best tenant is by running a credit check on all applicants.
Real estate investors and landlord have to remember that prospective tenants first have to approve a credit check to legally run one. If potential tenants are unwilling to approve a credit check, this presents another red flag. When prospective tenants don’t want you seeing their credit history, chances are they have something to hide. Therefore, it is important to make the credit check an obligatory part of your tenant screening process, and let go of anyone who doesn’t consent. This can dramatically shrink the pool of potential tenants, but it is the best way of finding the best tenant for the rental property.
However, what real estate investors and landlords should look for when they actually run the credit check?
The score: Nowadays, most credit scores land between 300 and 850. The exact credit score a real estate investor or landlord should be looking for will vary based on the housing market of the area in which the real estate investment property is located. In general, anything below 600 is bad and should be avoided. Trustworthy and financially responsible tenant candidates are likely to be somewhere between 700 and 800.
Related: What is a Good Credit Score? Everything Real Estate Investors Should Know
When running a credit check, look at these four sections:
Identifying information: This includes information you already know about prospective tenants, like names and Social Security Numbers.
Credit history: This is the core of credit checks you run. It includes a list of the prospective tenant’s creditors, credit cards, mortgages, and loans. This gives landlords a sense of the prospective tenant’s debts, previous payments, and overall financial reliability.
Public records: If this section is empty, that’s a good thing. Public records include things like bankruptcies or court judgments, which are obviously bad news and are major red flags.
Inquiries: These are lists of people and organizations (like employers, banks, and other landlords) that have requested the prospective tenant’s credit history.
Tenant with Criminal History
In addition to running a credit check of prospective tenants, real estate investors and landlords should also get them to approve a criminal background check. In the US housing market, most states allow landlords to reject potential tenants if they have been convicted of violent crimes, sex offenses, or drug offenses, as these indicate the person could be a threat to you, your real estate investment property, your neighbors, or other tenants you may have, which is a huge red flag.
If a tenant isn’t following the law, you may end up with the police called to the rental property, which is the last thing real estate investors and landlords want. However, when checking a criminal history, a real estate investor or landlord must do his/her homework and make sure he/she knows the rules; this helps in avoiding being the subject of a discrimination lawsuit.
Tenant with Eviction History
Another red flag is if potential tenants have been evicted by a landlord in the past. If unpaid rent or lease payments were collected through a court, this will be shown in the credit check report. Moreover, during a tenant screening process, the best way to find out if potential tenants have been evicted in the past is by speaking to the tenant’s previous landlords, as it will show you other red flags such as late payments, rental property damage, or simply rudeness.
Tenant with Scattered Employment History
There are several reasons why landlords should look into tenants’ employment history. First, landlords should make sure that their tenant has steady employment with a salary large enough to pay for rent and living expenses. Second, scattered employment history is a major red flag in the housing market. A tenant who can’t seem to have a steady job is not only unreliable when it comes to regular payments, but is additionally a relocation risk.
Searching for new tenants is a stressful and complicated process that you don’t want to keep repeating. Therefore, landlords should find the best tenant who will stay in the rental property in the long term, and one of the best ways to do that is by selecting tenants with a steady employment history, which typically means a higher income and a stable life.
Dishonest Tenant
In the housing market, prospective tenants who lie are not worth your time as a real estate investor. If your checks discover that a tenant lied on the application, drop him/her. A tenant who will lie on an application will certainly lie more down the road; the last thing anyone needs is having a person you can’t trust living in your rental property.
This is why it’s important to conduct a thorough tenant screening process. If the real estate investor or landlord simply took a tenant’s word and doesn’t double check the application, he/she could be setting him/herself up for disaster. Thus, real estate investors and landlords should verify everything on the application as you can never know whether a tenant is being truthful.
Related: 8 Ways to Avoid Real Estate Investment Scams
Can You Judge a Book by Its Cover?
Short answer – yes! Real estate investors and landlords can learn a lot about tenants when meeting face-to-face by looking at how they carry themselves and take care of their own real estate investment property. Moreover, you also can learn their manners. Did they wipe their feet before entering? Did you see or smell if they smoked?
Another few additional red flags to pay attention to while you show potential tenants the rental property are:
- Did they speak negatively about their current or previous landlords?
- Are they in a hurry to move into the real estate investment property? If there isn’t a good reason for the rush (a sudden job relocation, for example), this might actually be an indication of another red flag, like an eviction.
- Were they on time? If they’re late to a showing, then they will be late on other things, like paying rent.
- Are they criticizing the rental property? If they’re already complaining when they’re not even renting, imagine what it’ll be like when they actually move into the real estate investment property.
- Listen to the questions they ask as they indicate what’s important to them and how they prioritize things. Are they asking about the best time to host a party? This is definitely a red flag.
The Bottom Line
Your real estate investment property or rental property is one of your most valuable assets as a real estate investor or a landlord. If you are planning on renting it out to someone you don’t know, you need to make sure that the tenant is a friendly, responsible, and honest person. By keeping an eye out for the red flags listed above, you should be able to filter out the unqualified and find the best tenant.
With time and experience in the housing market, real estate investors and landlords develop something like a “sixth sense”. They seem to be able to go through the tenant screening process better and reduce problems like late rent payments, noisy tenants, or general trouble-makers.
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