The Importance of Top-Notch Tenant Selection

Believe it or not, purchasing and renovating your rental property isn’t actually the only hard part of real estate investment. Sure, they pose their difficulties, but in the end it is actually tenant selection that is equally critical. The tenants can often times make or break the investment. If the tenant is a good-quality candidate, then you’re on the road to smooth sailing and a decent cash flow and return on investment (ROI). However, if your tenant selection isn’t right, you could find yourself in a very bad situation.

Finding qualified tenants can be a lot more difficult than you would think—especially if you’re new to the process. Looks can be deceiving and people do not always disclose the right information. Tenant selection can be extremely time-consuming, when done correctly. While it may seem like skipping some steps to speed things up is a good idea, we can assure you it is not. In the majority of states, once a landlord and tenant have entered into a legally-binding agreement, the laws begin to favor the tenant. If the tenant fails to hold up to their end of the leasing contract, the legal actions of pursuing an eviction can be lengthy and costly to the property owner. And, meanwhile, the landlord is often not receiving rent during this time period.

A real estate transaction is a business deal—and should be treated as such. You’re not entering into a partnership or friendship with prospective tenants; the tenant/landlord affiliation is simply a business relationship. Looking at it from this point of view will help you make more informed, unbiased decisions. It is important to find the best tenant for the property. But, how do you go about doing so?

There are several steps one can take when attempting to find a high-quality tenant.

Stages of Tenant Selection

The ultimate goal of any landlord is to keep the property occupied. While it may not seem like it on the surface, a property’s vacancy rate can be affected by the tenants selected. Poor tenant selection can lead to shorter rental periods, causing periods of vacancy while a new tenant is chosen. It is important to choose wisely.

When selecting tenants, there are several stages that the landlord and prospective tenant will go through. How far you make it through these stages will vary depending on the applicant. If they’re clearly not a good fit, you may not make it to step two. If they seem like a good fit but something doesn’t feel right, you may make it further only to stop halfway. For those that make it all the way through these stages, congratulations. You’ll have a potentially good tenant.

Contact

First contact is generally made by the prospective tenant. He or she will find your property through some channel, whether it be driving by and seeing a sign or finding a listing on the internet, and will reach out to find out more information. This is the perfect time to weed out undesirable tenants by asking a handful of pre-screening questions. While these questions are often simple, asking them during first contact will alleviate wasting anyone’s time in the long-run. A good tenant will be happy to answer your questions and verify the information.

Examples of good pre-screening questions include:

-What is the reason for your move?

-How soon are you looking to move?

-What is your monthly income?

-Can you provide references from previous landlords and/or employers?

-Would you be willing to submit to a background check and rental application?

This conversation is also a good time to find out if they’re looking to bring in pets and how many people they will have living in the home. Keep the conversation light and friendly while maintaining a professional manner. Listen for questions they avoid or heavy pauses before answering and take note of their answers. This will help you in the future as you can compare their original answers to the written responses they turn in on the rental application.

Showing the Property

If you’re satisfied with the responses you received in the first stage then it is time to take the next step. Schedule an appointment to show the prospective tenant the property. This will be the first face to face meeting with the applicant and can be vital in the process. First impressions are important and there are a few things you’ll want to notice of while meeting for the first time. Pay attention to their hygiene and cleanliness. If they’re unkempt and their car is a mess, chances are your property will get the same treatment. Likewise, if they’re tidy, polite, and respectful, these are often good signs that they will possess similar quality traits and will take good care of your property. Look for red flags, such as frequent complaints about previous living arrangements or heavy critiquing of the property itself. Do they bring a group of people with them or do they only bring those who will be living in the home? Were they on time or running late? These are all indications of how they will behave as a tenant in the future.

Submitting the Application

If you felt comfortable with them at the showing and they are still interested after viewing the property, then you can move on to the rental application. You’ll want to ask for references from previous landlords and employers and get written permission to run a credit report and background/criminal check. If they seem unwilling to divulge any of this information, you’ll want to understand why before you get further into the process, as these are often warning signs.

Approval and Signing

If you seem to get along well with the tenant—they’re polite, they appear to be a hard worker, and their background and credit checks came back clean—then you’re ready to sign the lease. When you reach this point, schedule an appointment to sit down and thoroughly comb through the lease with the tenant. Discuss each point in the lease agreement with them, making sure both parties have full understanding of what is required of them. If there are any disagreements regarding the lease, either party is still able to walk away at this point.

Get Help

If you’re new to the process or you’ve been left in the dark due to poor tenant selection, it is okay to ask for help. There are many companies on the market that specialize in tenant selection. A good property management company will be able to handle all your screening processes and likely already have a qualified pool of tenants readily available. They’ve done the legwork. They know what works and what doesn’t, what red flags to look for during the encounters, and what to watch for on applications, background checks, and reference forms. It is important for landlords and property management companies to consider all factors in order to maximize the tenants’ tenure in a property, and in turn, maximize the performance of the rental property. Regardless of location—whether a property is in LA, NY, Miami, or Detroit—scrutiny of prospective tenants is a vital step in the rental property investment process. Real estate is a huge investment... Do your best to protect that investment with careful tenant selection.