Barriers to Entry!

In my last post, I talked about an unfortunate inherited tenant situation that ended in a notice to vacate. The stress and headache of a bad tenant is something that I would never wish on my worst enemies. Luckily, I was able to get this person out quickly and fill the vacant unit with a great, new tenant. Tenant screening is one of the make-or-break parts of any real estate business. Finding great tenants takes a lot time and work, but it is worth the time investment in the long run. In this post, I want to share my process for screening tenants and securing a great resident. Here are my five barriers to entry for prospective tenants:

1. Do not accept the first person that shows interest

Renting your vacant unit can be stressful. There is a lot of pressure to rent to the first person that shows some interest in your unit to get it occupied, but you have to resist the urge. The last thing you want is to fill your unit with a poor tenant. Pre-screen potential tenants on the phone and in-person. One of the best ways to filter out the bad applicants from the good ones is to conduct a brief phone interview the person time they get in touch. I typically ask variations of the following questions when I have a prospect on the phone:

• What is the most you are looking to spend on rent?
• Why are you looking to move?
• When are you looking to move?
• If I pull credit and a background check, will that be a problem?
• How many people will be staying in the unit?
• I will verify employment and rental history. Will that be a problem?
• Do you have any pets?
• There is an income requirement of 3X the rent. Will that be a problem?

These eight questions are the basics before scheduling a showing with a prospect. If they answer all of the questions, and I don't see any initial red flags, I go ahead and schedule a showing. The pre-screening process should not stop at the phone call. When they come to see the property, I continue to talk with them and get as much information as possible. I try to find out where they work, if they enjoy what they do, and I ask again why they are looking to move. I also make a point to meet every single person that will be staying in the unit. The more information I can get, the better I can judge the information on their application. I also let the prospect(s) know my expectations as a landlord. This is a great way to navigate potential problems. It is always better to be upfront with someone, so then if they see my rules as an issue, then we can end the process right there. If they are still interested, I give them an application and we move onto the next step.

2. Verify income and that the prospect has a bank account

This tip should go without saying, but you must verify income with two of the prospect's most recent pay stubs, or by speaking to their employer directly. If you can, I would recommend always speaking with an employer anyway. This is how I found out that the "Bad Tenant," from my previous post, no longer had a job. A "triple the monthly rent" income requirement is an industry standard, and I recommend sticking to this number. If forced to choose, a tenant will rarely opt to pay their rent over their other expenses. While screening, if the prospect does not meet the 3:1 income requirement, immediately say "No." In addition to checking income, I always verify whether the tenant has a bank account. This may seem like an odd question, but my last two inherited tenants did not have one. This became an issue when I attempted to setup automatic rent payments. If the tenant does not have a bank account, or wants to only pay rent in cash, this should raise some red flags. Make sure you understand the reason the prospect does not have a bank account or why they only want to pay in cash. Automatic rent payments is my preferred method of collecting rent.

3. Review rental history

If the prospect does not have a rental history then this could be a potential problem. They could be a first time renter, which is not necessarily a bad thing, or they could be withholding their rental history because of a problem they had with their previous landlord. If there are any gaps with their rental history, always ask the questions, "Why do you have a gap in your rental history?" and "Where were you living during the gap?" It is similar to a resume in the sense that a potential employer would ask you about a gap in your work history. The employer is more likely to have questions or not move forward with the candidate that was fired from a previous job. You should always find out why there may be missing information in a prospect's rental history. After verifying their rental history, it is always necessary to have a conversation with all previous landlords. You can get a lot of useful information regarding the prospect's previous tenancy. Needless to say, a poor review from a previous landlord should raise additional concerns or end the prospect's chances of securing the unit.

4. Pull the applicants credit report and conduct a background check

Credit reports and background checks do not lie, so they are easy ways to identify problems. Multiple collections or judgments on their credit score should be concerns. If they have problems paying people or businesses on time, where does rent fall in their priorities? Evictions are a clear red flag, regardless of how long ago it was. Anyone that had to be removed from their lease by court order, implies they had issues either paying rent or following rules. Background checks are important, as they allow landlords to verify any criminal history. You don't want to be renting to Tony Montana. Make sure that anything you see on the background check, you get further explanation from the prospect. Understanding any charge that you may see is very important if you are looking to rent to this applicant, or politely dismiss the application if you do not want to see criminal history. Again, this is your asset and you are the gatekeeper to those who gain access. Never be afraid to say "No" to someone who has issues on their credit report or background check.

5. Review the lease and landlord expectations

If a prospect's income, background and credit check all come back without any issues, then I set a time for us to go over the lease and all of my expectations as a landlord. This is the last major hurdle that the prospect will need overcome before anything is finalized. I do not have many expectations that are not written in my lease. I recommend having a thorough lease that clearly lists the rules of your property. I, for example, do not approve of smoking in my units. Therefore, I have several clauses in my lease about smoking. I recommend going through the lease line by line and have the prospect initial by every clause. If the prospect has a problem with signing the lease, then that is more than enough reason to not move forward with a tenant. Stay strong with your rules and do not waver when someone objects. As long as the rules are reasonable, there should be no reason that anyone should have a problem following them without breaching the lease or your expectations.

These steps will allow you to thoroughly screen and filter out the bad prospects, while identifying quality renters that will make your life as a landlord much easier. These are the steps I used to find my newest tenant. This process takes more time and effort, but is worth the work. The units that you own are the lifeblood of your business, and you should set the bar high to protect your assets. A tenant only gets the keys to the kingdom once they prove they are worthy.

Let me know your thoughts regarding my tenant screening process. Are there any steps that you take to screen tenants that you would recommend? As always stay motivated and happy investing!

Josh