Selecting the Right Tenant for your Investment Property

[Rod Zahavi]

Finally you have purchased that fantastic investment property! It’s in a great neighborhood in a high performing school district, with low crime and friendly neighbors. You got it for a low price and the expected rental returns are going to bring in a plump profit. Now it’s time to find your first tenant.

You sit down with the management company to discuss the strategy for finding a tenant. What kind of tenants do you want? A family or a single professional? Would you allow pets? The management company can help you figure out who is best for your property. They have high expectations for your rental investment property, and tell you that you can expect to get the very best of tenants.

But who are the best tenants? For a landlord, a good tenant is someone who pays, doesn’t complain, and doesn’t wreck your investment property. Finding a tenant like this requires work and careful vetting of applicants by you and the property management company. Advertising the rental is the first step in getting the right people to apply. Once the potential tenant applies there are a few criteria that the management company will use to determine if the applicant is a good fit for your rental.

Credit Check and Finances

The bottom line – a financially stable and responsible tenant is someone who is more likely to pay their rent on time. And chances are, they will be more responsible with your property. Your management company should use an analytical model that adds credit, income, job stability, and other factors to determine an applicant’s financial situation.

You want to ensure that the tenant earns sufficient money to pay the rent, and that they don’t have a history of not paying their bills or significant debts. The property manager will verify their income by contacting their employer or checking pay stubs.

A credit check can alert you to any large debts that may prevent your potential tenant from paying their rent. Applicants with red flags such as bankruptcy, a previous eviction, missing utility payments, or defaulting on alimony payments should be avoided.

Rental History

A previous rental history is the ideal way to find out how a potential tenant will treat your investment property. Previous landlords will provide an unbiased recommendation that should be directly applicable. You can find out if they paid rent in a timely manner, why they are moving, and how they treated other investment properties. Be sure to ask about cleanliness, whether there was any damage, and if they were difficult to deal with.

Checking the applicant’s rental history will also help you determine if they show consistent patterns in their life, like staying for long periods in rental properties and jobs. Long term tenants help you avoid the wear and tear of regular move-ins, and save you the hassle of looking for new tenants every year.

Criminal Background Check

The management company should perform a criminal background check on any potential tenant. It is important to ensure that they present a valid ID so that they don’t try to pass themselves off as someone else. In most cases, people with a serious criminal history may not be the best tenants.

Personal Circumstances

The living arrangements, jobs, family status, and other lifestyle elements of your tenant are not major factors, but these personal circumstances do tell you a great deal about a potential tenant. For example, a recently divorced person whose kids live with a new partner has a different rental profile than a family with two kids. There is no right or wrong answer, but understanding their story gives you insight, helping you determine whether they are a good fit for you and your investment property.

At the end of the day, a robust process run by experienced property managers should provide you with the highest quality tenant for your investment property. Your selected management company should provide you with information about how many of their properties end up in eviction proceedings or with other tenant problems. That information will tell you how carefully they select their tenants. A careful selection process will allow you to reap the benefits of positive cash flow without the headache of a bad tenant.