Rent by the Room Month-to-Month Leases: Change your screening?

Question

This is my first rental property....

I have a 7 bedroom home, and have opted to do 4 month leases that convert into month-to-month leases.  I'm not interested in comments on this strategy at this time.  I am interested in hearing feedback on how this could change the screening process.

Here's my current screening process:

• Collect & Verify last 5 years of rental & employment history.
• Run Checks: criminal, credit, and eviction.
• Income Requirement: 3x monthly rent (this can be substituted by paying a security deposit of 4x rent)
• Phone Interview
• In person (or video) Interview

My rental strategy seems to greatly reduce my risk (eviction, damage to property, vacancy, etc).  I was entertaining the idea of changing the screening process to this: (changes in bold)

• Collect & Verify last 2 years of rental & employment history.
• Run Checks: criminal, credit, and eviction.
• Income Requirement: 3x monthly rent (this can be substituted by paying a security deposit of 4x rent)
• Phone Interview
• In person (or video) Interview

I'd super appreciate your feedback, so I can brain-storm this through.  Maybe I'm not considering all the factors I could be or I'm considering factors incorrectly....

Grant Shipman · Answer

Thanks for your feedback @Bettina F.  It sounds like you are suggesting I keep everything BUT ditch the credit minimum and ditch the rental/employment collection & verification.  Do I have that right? What amount do you suggest for a max SD?

Thanks so much to you too @James Carlson for your feedback!  I'm looking now at the TransUnion BP tool- how did you decide between the $25 and the $35 option?

I greatly appreciate the help- Along with the goal of wanting to gain great tenants (for the landlord and fellow tenants sake) I have the goals of making the application process as easy as possible for both me and the applicants.   The feedback is very valuable to me!

Grant Shipman · Answer

@Thomas S. Am I not correct is that a month-to-month lease reduces my potential for an eviction process b/c I can simply provide a 30 day notice that the lease is not being renewed?  Yes all laws are important to follow.

Bettina F. · Answer

I think your criteria are too tough, and you are going to have a hard time filling your vacancies.

Think about who is going to rent a room in shared housing -- who are your target customers?  Young people, new college graduates, recently divorced guys, singles who recently relocated to Denver, graduate students.  These are not going to have 5 years worth of rental or job history.   Some young people will have no credit history.

What you need is a non-discriminatory proxy for responsibility.  I would do credit/criminal/ eviction; maximum SD; 3x rent verified income; and have a clear set of written rules that the tenant agrees to.  I would do monthly inspections until a clear pattern of responsible behavior is established, and keep new tenants on month to month (or even week to week) rental agreements.  Make electronic rent collection mandatory.  If someone proves responsible, you can offer a longer term lease for a lessor amount and back off on the supervision.

Rooming houses are more management intensive, but have greater profitability.  Paul Sandru from the Short Term rental board will probably have valuable advice for you.

Thomas S. · Answer

You choose what ever screening standard works for you and that you are comfortable with.

The term of a lease has no bering what so ever on your tenant choice. Renting by the room will be your most significant deciding factor. You will need to test out the market to determine how low if any you need to lower your standards.

Check your state regulations, you must know the law to operate your business. Chances are you are not allowed to have 7 unrelated individuals renting in the same property. Neighbours will be an issue which will likely torpedo your plans..7 adults, 7 vehicles, 7 pets, 14 boy/girl friends not next door to me thanks.

Keep in mind a rooming house will not attract "great" tenants. Turn over will be high as most will not get along.

Bill S. · Answer

@Grant Shipman so you are being a bit stiff with your approach. I understand it has to be able to be written down. Here are some thoughts. 1) request the last three places they have lived. If they complain they don't have a rental history tell them living in the college dorm and living at home is adequate. After you get that information verify it. Talk to as many people as possible and find out their character, if they pay bills and are dependable. I certainly don't want to penalize the kid just out of college over someone who has lived in a different place each of the past five years.

2) request past employment and call them. I have found that how people were at work is a good indicator of how they will be to live with. Someone who misses shifts or calls in sick whenever there is a great powder day would not make the cut.  Someone who is dependable and reliable as an employee will typically make a great tenant.

3) Lose the whole 4x rent for SD in exchange for income. It's a smoke screen at best. People without income don't make good tenants in the long term. The exception would be someone moving to the area without a job but in a field that is in high demand (nursing) if they have savings. I don't drain the savings by asking for a high SD. If they are good people you will not likely have a problem.

4) If you are having a problem filling you property you are asking too much for rent. Lower rents and you will get better quality people.

5) Avoid the "interview" requirement. You will have a lot of time to interact with them. Learn to ask open ended questions and let them talk. Ask things like, "What are you looking for in your new living situation?" Learn to pre-screen people with a few basic questions for the phone or email to weed-out tire kickers and deadbeats looking for a handout. Most people are going to want to view the property, so use that time to gauge them as people. Again ask them open ended questions about their prior living situations and their employment.

6) Have written criteria about what a tenant must have. For example, 3x income or must not badmouth previous landlord even if they were a bad landlord. Remember, the tenants selected them as a landlord so it shows a lack of personal responsibility for getting themselves in that situation.

7) Reverse your order of screening. If you ask them upfront if they have had evictions, criminal history or lousy credit and they lie you will find out. Most will be straight and tell you if they have issues. At that point, let them know they won't work and move on. They will have a story and want to tell you the story. Once they launch into that I usually tell them that they are probably great people but our attorney tells use we have to be consistent to protect us from fair housing violation claims . You are wasting a lot of time if you show the property and then find out they have an eviction.

8) It seems like from your process description you don't have an application. You need to get an application. They need to fill that out. The application should give you permission to verify the information on it and to run their credit.

9) Typical process would be something like this. 1) Advertise (everywhere you can and like a mad man) 2) take calls, emails and text inquiries (most want to see the property). 3) pre-screen applicants via phone, email or text (use the same questions for all inquires in order to be consistent and protect against fair housing claims). 4)Those that pass phone screening set appointments to see the property. 5) Prospects view property and go through your informal questioning 6) if applicants like the property and want to rent it, have them complete an application and pay the application fee. 7) applicants complete the application and pay the fee, THEN you screen the information on the application. 8) run credit criminal and eviction check. If they have passed to this point rent the property to them.

James Carlson · Answer

@Grant Shipman

First off, congrats on your first rental property. That's exciting. (A 7-bedroom house in Denver? I'm just interested where you're located.)

I get where you're coming from wanting to do everything in your power to prevent a bad tenant. I would agree with @Bettina F. that your screening process is pretty intensive (if only time-intensive for you). I use BP's tenant screening tool through TransUnion. If they come back okay, and I feel okay talking to them on the phone, then I'm good to go.

In the end, though, this is your property, and you need to feel comfortable with who you're letting come in. Do what you need to do and you'll learn and adjust as you go.

Makan A Tabrizi · Answer

Excellent summary for a beginner. Thank you Bill.

Bettina F. · Answer

I would do the maximum amount allowed by your local laws.  If you tenant pool tends to be young new grads with first time jobs (as I suspect), you want the protection of a maximum SD.  Even though your tenants may be young and poor, you want the one's with social capital -- Mom and Dad or friends in the background who can help them out of a tight financial spot.  Avoid tenants who have no family resources -- they have burned their bridges and their families have cut them off -- usually with good reason.

I have heard of LLs doing a sliding SD based on credit score.  Credit score above 650 = 1 month's rent; credit score 600-650 = 1.5 x rent ; credit score 600= 2 x rent.  I only rent 2 bedroom apartments and don't deal with the rooming house population.

The same reasoning goes for insisting on ALL move -in monies before handing over the keys.  Responsible people have friends and family who will loan them money to get situated.

Speaking of keys, I would install combination locks on the bedroom doors and unhidden security cameras in the hallways.  You want to avoid your tenants sneaking in unauthorized tenants.  Not that you are the morality police, but you don't want non-paying guests hogging the shower and laundry facilities.

There is a LL on the Mr. Landlord dot com board who is running a profitable boarding house.  He is regular poster there  and would be a better source of advice.  (Just tell him RathdrumGal sent you!)  Also post on the Short Term rental board here.  Paul Sandru does short term rentals for workers in the oil fields, I bet he has good advice for you. (If I knew how to mention him, I would.)

I would verify income and employment, but not require a certain amount of time on the job.  I suspect you will be getting a lot of new hires, or people who are relocating to Denver to take jobs.  In fact, I would market my house to the local major employers.

Rent by the Room Month-to-Month Leases: Change your screening?

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