Imagine cash flow from a rental property as water running through a pipe.
Every time the pipe leaks, you lose money. Once you’ve purchased a property, your returns (ROI) are based on minimizing those leaks.
So how do you maximize ROI and cash flow, while minimizing losses and leaks? By finding good tenants, who will pay on time every month, and serve as a solid pipeline for your cash flow.
Tenant screening is the most important activity any landlord does, in protecting their returns and profits. And despite what non-landlords might say, you really can predict who will be a good renter and who won’t, with 99% accuracy.
Here’s what all landlords need to know about tenant screening, rental applications and keeping your rentals occupied with excellent renters.
Step 1: Collect a Rental Application & Review for Red Flags
If you haven’t yet collected a rental application from each applicant over 18, email them one now.
Read it carefully. Do they have pets? If so, are the pets acceptable to you?
How many occupants would be moving in? More occupants means more wear and tear on your property, and besides, what kind of people squeeze eight people into a small two-bedroom apartment? Probably not the kind you want living in your investment property. (We’ll talk about Fair Housing laws later, don’t worry.)
How’s their housing history? Do they move around every 18 months, or have they been in the same home for seven years? Transient tenants are both a red flag and a sign you’ll probably have yet another vacancy on your hand within a year or two.
Likewise, how stable is their job history? Are there gaps? It’s one thing if your applicant moved companies to take a higher position elsewhere, it’s another if they can’t hold down a job. Get a sense for their career arc.
Step 2: Run Tenant Screening Reports
When prospective renters submit a rental application, run tenant screening reports on them. Screen every person over 18 who will be spending more than five nights each month at your property.
And no, you don’t need to pay for them. Select that the renter pays the cost for tenant screening reports when you submit the request for them.
What reports should you run? Whether you use our tenant screening service or a competitors, always pull a full credit report, nationwide criminal background check and nationwide eviction report. I actually argue that the eviction history report is the most important – it gets to the heart of what you want to know. Will this renter comply with the lease agreement, or will they break it and need to be evicted?
I don’t lease to renters with evictions on their record. Period.
With criminal history, some discretion is needed. I don’t lease to renters with fraud-related crimes on their record, or with recent violent crimes. Drug trafficking crimes are also a huge red flag, but I’m more lenient with minor drug possession offenses.
As for credit reports, avoid renters with public records. Bankruptcies, liens and judgments are all major red flags.
Get a sense for the applicant’s payment history. Do they make all their monthly payments on time, no exceptions? Or do they pay intermittently, inconsistently?
It’s very simple: some people pay their bills on time, every month, come hell or high water. Others pay when they get around to it, or when they happen across some extra money.
Step 3: Talk to the Applicant’s Employer
First, call the applicant’s direct supervisor. What kind of employee are they? What kind of person are they?
Do they show up on time for work, every day, week in and week out? Or do they wander in 20 minutes late sometimes?
Can they be entrusted with an asset worth $150,000 (or however much your rental is worth)?
Try to get to the root of how responsible and conscientious they are as a person.
Next, call the HR department at their employer’s office. What’s their income? Does it match their rental application exactly? If not, is there a good explanation, or did the applicant exaggerate?
One of the traits you’re screening for is trustworthiness. If the applicant lied about anything, however small, reject them.
Step 4: Call Their Current & Former Landlords
Current and former landlords can offer a wealth of information about what kind of tenants these applicants are. Do they pay on time every month? Have they ever been late? Do they treat the property well? Do they constantly call to complain and demand property upgrades?
Current landlords could theoretically lie and give a rosy review of their tenants, to get rid of them. I’ve found this to be rare. More often, they’re just reluctant to speak too badly of bad tenants. Just keep an ear out for hesitation in their answers. “Well, they’re not terrible…” Red flag.
For renters who have moved within the last five years, call their former landlord as well. These people will give it to you completely straight.
Step 5: Walk Through Their Current Home
This gets a little tricky. You want to give the applicants as little notice as possible, to try to get a sense of how they actually live and maintain their home, rather than an artificially clean condition.
I like to call and say that I’ll be in the neighborhood in a half hour, and wanted to drop off a blank lease agreement for them to look over. If they say they aren’t home, ask when they will be, and tell them you want to walk through the lease in person.
In particular, look over how clean or dirty their kitchen is. Sure, they may have rug rats with toys strewn on the living room floor, which doesn’t mean they’re dirty people. That just makes them human. But if their kitchen isn’t clean, with crumbs on the counters and spills caked onto the stove, it’s a big red flag. Likewise for the bathrooms, if you can get into one.
Get a general sense for how clean they keep their home, and how rough they are with it. This is how they’ll treat your property, too.
Fair Housing & Other Concerns
We have entire articles dedicated to what landlords need to know about Fair Housing laws, so we won’t belabor it here. But be aware that you cannot ask for certain documentation from some rental applicants and not others.
If you run resident screening reports on some rental applications, you must run it on every application. If you demand to see income verification from one applicant, you must demand it from all applications. No exceptions. The rental business is a business, and you need consistent policies like any business.
While everyone knows you can’t discriminate based on race or ethnicity, you need to be extra careful about familial status. Kids are tough on rental properties, no question, but you can’t reject families just because they have children.
One of the reasons to run tenant screening reports and background checks on all rental applicants is to protect yourself against claims of discrimination. Resident screening reports contain concrete facts that you can point to: “I rejected this applicant because they evictions on their record.” You can provide indisputable reasoning for why you chose one rental application over another.
If you want to keep your rental profits flowing, you need stable, reliable, conscientious renters who will pay on time every month and treat your property with respect. Your rents are the cash flow through the pipe, and your renters are the pipeline itself. Secure a solid, dependable pipeline, with no chance of leaks, and you’ll see excellent returns continue to flow.
What tenant screening tips have worked well for you? Have any horror stories you care to share?