After buying the right rental property in the right location properly, screening potential tenants is by far the most important thing you can do to ensure that your rental property is a success. This can absolutely make or break your investment, so you definitely don't want to overlook this process.
Owning investment property can be an amazing way to grow your net worth over time. However, in order for that investment to make sense and really work, you need great tenants that pay the rent and take care of your rental property. So today we're discussing my top six tips on how to properly screen potential tenants and avoid any bad apples.
#6 Run a Criminal Background Check
This should be one of the pillars of your screening process. You want to know who's going to be occupying your rental property. It's pretty simple. However this is regulated both on a federal and local level typically. So you want to Google the laws around running criminal background checks, what you can and can't screen for, and when and when you cannot run those criminal background checks.
#5 Look at the Length of Prior Tenancy
This is something that is often overlooked. If you are an experienced landlord, you probably already know that the majority of your expenses are going to come at turnover. So if you have a tenant that looks great on paper, you know, 700 credit score, no criminal background, no collections, all that good stuff however you want to go one step one step further and look at maybe their last two or three places. How long were they there? If they were only there for a year or less in each of the last 2, 3, 4 places they've lived, it might be a tenant worth avoiding. You want a tenant that's going to be there at least three plus years. That is going to greatly reduce your turnover costs and help make that investment a successful one.
#4 Collect Bank Statements
This, for us, was a game changer. We started collecting bank statements a couple years ago, and it can have a huge impact on your potential tenants. We're looking for two things: Number one, we're looking for a cushion. So if the car breaks down or something in life happens, like it always does, we want to make sure that that tenant has some kind of cushion in their bank account to not only take care of that broken down car, but also pay their rent at the end of the day. The second thing is we're looking at spending habits. If you make $10,000 a month, that's fantastic, but if you're spending that $10,000 every single month, then you're breaking even. What we want to see is a tenant that is saving a portion of their income every single month in case of that rainy day or that emergency that they need to fund.
#3 Run a Credit Check
Now this should be the foundation of your screening process. We are looking for, of course, credit score and then also collections. We want to make sure that there are no collections when it comes to utility bills, phone bills, that type of stuff. However, we do see medical bills occasionally, and we tend to look at those a little bit differently. The second thing is credit score. It is very important to ensure that the tenant has a credit score that is adequate for the property that you own. TransUnion released a study a couple years ago that has really great information and it basically proved that credit score has a direct correlation to the chance of having to evict that tenant. It is a pretty eye opening article so I definitely recommend checking it out.
#2 Look For Evictions
You definitely want to look on their tenant record to see if they have any evictions. You are obviously renting your rental unit to them. You're going to give them your rental property to occupy, and it's the same thing that the last landlord did or the landlord before that and had to evict them. You don't want to be in that same type of scenario and have to evict that person again. If they did it once, there's a high likelihood that it may happen again.
#1 Look Out For Fraud
5 to 10 years ago, this really wasn't that big of an issue, but now we are seeing it all over the place. There are actually different services that you can buy that provide fake bank statements and pay stubs and tax returns - all this stuff in one package makes it really, really tough to find this fraud. I highly suggest putting your detective hat on and you know, putting the bank statements side by side, checking the logos, checking the format, making sure that everything is identical. The last thing you want to do is fall for the fraud, have somebody move in, pay their first month's rent and then you never get a dime from them after that and you have to evict right off the bat. Horrible situation - and unfortunately we do see it from time to time.
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