Real Estate 101: Finding Good Tenants

The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series, posting every Friday, based on his experiences.  (To read the series from the beginning, start here.)   The series is designed to give prospective investors the basic tools they need to succeed.

You always want to minimize vacancy time and get a property rented as soon as possible but never at the risk of a poor tenant.  If it is taking a bit longer to rent a property than you had hoped it can be tempting to lower your standards and accept a tenant you might normally refuse.  DO NOT DO THIS!

Vacancy is always preferable to a bad tenant. Nothing will cost your more money, more time, and more frustration.  They are the cause of nearly every real estate horror story you have ever heard. 

Something you need to keep in mind when you are deciding what properties to buy is that your tenant quality will be tied to the quality of your properties.  If you have older dated properties in less desirable neighborhoods, it will be more challenging to find good tenants.  There are still good tenants to be found for most properties, but your overall tenant quality will inevitably suffer if your properties are of poorer quality. 

If you have good properties finding good tenants is not that difficult.  Regardless of what type of property you have, finding good tenants involves a good advertising strategy, carefully crafted policies on who you will reject, and good screening tools.

Advertising

Your advertising must be on the Internet.  Classifieds and print advertising is dead.  There are many places on the Internet to list rental advertising but I have found that the only one that you really need to use is Craigslist and of course it’s free.  I have tried some of the pay services.  I found very few prospects from them and have never found a qualified tenant through any of their services.  The key to good advertising exposure is the place with the most traffic, and right now Craigslist appears to be the dominant place where people search for housing. 

The most important thing about your ad is that it must include pictures of your property.  I would have to be desperate before I would contact a landlord about a property to live in that didn’t show pictures.  Good tenants want to see pictures.  Tenants who don’t need to see a picture don’t care what it looks like when they move in.  They won’t care what it looks like when they move out either.  Never put up an ad without pictures.  By doing so you are reducing the number of tenants who will consider your property and self-selecting from a worse tenant pool.

The pictures should showcase your property well but accurately.  Resist the temptation to make your property appear better than it is.  If your property is older in an older neighborhood and all you show is the updated kitchen and bathroom with granite counters, that is not an accurate representation of what you are renting.  This will result in wasted showings as none of your potential tenants will be interested when the real property falls short of what was advertised.

Your ad does not need to be long with flowing prose.  It merely needs to list the facts that are most relevant in a concise fashion.  If you have any restrictions list those in the ad as well.  You will still get calls about pets even if you say no pets, but it will reduce some of them.  The goal is not to get calls or showings.  It is to get a tenant with the least amount of time and effort on your part, so make your ad as specific and accurate as possible.

From my experience, the best time to find tenants has been 45 to 15 days prior to the unit being available, with the most interest coming on the 1st through the 15th of the month before it is available.  Once you get passed the 15th of the month interest generally slows down.  That’s getting a little close to the end of the month for most people.  Responsible tenants generally do not wait until the week before they are homeless to find their next place.  You should make sure all your tenants meet your qualifications but you should be extra certain for someone who applies on such last minute terms. 

Policies

Make sure you have a list of policies that spell out the reasons you will reject someone.  This is important because it keeps you from taking a risk you know you shouldn’t, and it also helps to protect you against discrimination lawsuits.  Discrimination in housing is not to be taken lightly.  The penalties for doing so can be very costly.  Federal law prohibits housing discrimination on the basis of race, color, national origin, religion, sex, family status, or disability.  Many states have additional restrictions such as sexual orientation, age, etc.  If someone sues you for discrimination you need to have a valid and defendable reason why they were denied.  Having policies that you strictly follow and having the prospective tenant sign a copy of them prior to applying will be very helpful if you need to defend yourself.  Policies themselves can be considered discriminatory so be careful that your policies cannot be construed as discrimination based on how they are written. 

Some of the policies that I consider most important focus on the ability to pay and the history of tenancy.  I require income that is at least 3 times the rent, no previous evictions, no recent criminal record, and only a few delinquent payments on the credit report. 

Screening

There are 4 things that are important to evaluate during the screening process. 

1. Past rental history.  This is the most important item.  If they have been evicted before, you may have to do it again.  If they have had a history of not paying rent they will do it with you as well.  Make sure your credit screening service shows you evictions and always contact any previous landlords.  I deny anyone with previous evictions or previous refusal to pay rent.

2. Ability to pay.  If their income is low or from questionable sources, they will have difficulty finding the rent each month.  They may want to pay you but that doesn’t really make your situation any better if they don’t have the money.  If they cannot pay you will eventually have to take action perhaps including eviction.  Your screening service should either do employment verification or you will need to do it by contacting their employer.  If the applicant does not have sufficient income I will deny their application.

3. Criminal history.  Your screening service must provide criminal background checks.  If an applicant has a history of being involved with drugs or other criminal activity, they are going to bring that to your property and your neighborhood.  Their problem will become your problem.  If it spreads to your neighbors they will make it your problem as well.  You should avoid anyone who has any kind of recent criminal activity.

4. Credit history.  Most screening services include credit history.  Some people will not accept tenants with a credit score below a certain number.  This is a simple and easy way to do a credit assessment, but I prefer to look at recent delinquencies instead of credit score.  Having a bankruptcy or foreclosure will destroy someone’s credit score and there are many people in that situation right now.  But if you look at their credit report you will often find it is just the mortgage they couldn’t pay or perhaps one big medical expense forced them into bankruptcy.  Their inability to pay their $3,000 mortgage doesn’t shed much light on their ability to pay my $1400 rent.  The low score from one big event doesn’t bother me nearly as much as a list of delinquent accounts.  Too many delinquent accounts is an indication that they can’t keep up and eventually that will include rent.  That’s why my policies list too many delinquent accounts as my criteria for denial rather than a particular credit score.  I know that policy is a bit vague.  What qualifies as too many is a judgment call, but the policy has worked well for me.  I have some very good tenants with credit scores that are abysmal but they only have a few minor delinquent accounts.

You can learn a lot about a tenant by talking to them and talking to their past landlords or getting the landlords to fill out a form about their rental history.  They will almost never answer judgment based questions like were they a good tenant.  Most will answer questions like how much was their rent payment; were they ever late and how often; did they ever refuse to pay rent and how was it resolved; Were there any complaints or damage issues that they caused and if so what.

These are all fact based questions that most management companies have a documented history for and do not have a problem sharing if you have a signed form from your candidate allowing them to release these records.  The application that I have tenants fill out for my screening service has them sign a release that gives me and my screening service access to this information.

Your gut often gives you a good initial sense and you should not ignore it, but you should not rely on it exclusively either.  You need to verify it with information.  Both because using your gut could get you into a discrimination lawsuit and your gut can be wrong.  Always make sure you do proper information based screening which includes rental history, income verification, criminal history and credit history.

Finding a good tenant sometimes takes a little patience, but it is time well spent.  Careful selection of good tenants is the most important decision you will make about the day-to-day operations of your real estate business.  Many decisions are important but if you consistently get the tenant decision wrong, none of the other decisions will really matter much.

Update: To read the next post in this series, see Keeping Good Tenants.

Comments

[Luis]

I agree with these posts. The summary in the last five years I have been renting my single condo follows:
-All ads have been on Craigslist, I have yet to spend money on any ads.
-Policies for tenant rejection allow for tenants with no credit history since my population largely lacks credit history of any kind. I base on combination of previous landlord recommendations, safety deposit, and income. Most tenants of mine make six figures and additionally I get monthly checks directly from their employers. I check credit at youcheckcredit.com and also reject based on delinquincies.
-Screening is important but I personally do not do a thorough criminal background check, just the basic terrorist check as the law now requires.
-I've never had problems with a tenant so far, knock on wood! If I did, my month to month contract would allow me to quickly end the contract. As such, I do not really get families with school age children as tenants.

Apex, I have two questions do the policies on tenant rejection need to be dated and notarized? Would an expired contract really give me as landlord expedited authority to remove a problem tenant?

Thanks.

[Apex]

@Luis,

The purpose of the policies is not to remove tenants. It is to spell out reasons for denying a tenant application so that if the tenant claims you denied them for a discriminatory reason you can point to your policies which they signed as an acknowledgement that they were aware of them.

As such there is no reason to have them notarized but you should have the tenant sign and date. You could not use them to remove a problem tenant however. You can only do that based on your lease, not your policies.

[RichUncle EL]

Have you come in contact with a tenant that lost their income and wants to apply for state funded rent assistance? I have a friend that is in the middle stages of allowing this type of government funded program to a family he is renting too.

[Apex]

@RichUncle,

I have not. If the assistance was merely a government subsidy that required no extra agreements from me to follow any special rules of a government program I would have no problem with that. In fact, it is illegal to refuse to accept government subsidies as rent at least in my state, and it could be a federal rule, I am not sure.

However if it was to enter a program such as section-8 which requires me to have my properties inspected by the government, follow their rules, and allow them to amend my lease (which section-8 does), then I would not allow that and would force them to leave. It is not illegal (in most states) to refuse to accept section-8 vouchers from the government because it comes with other rules that the government imposes on you.

[RichUncle EL]

Thanks for the input, it is section 8 and I will let my buddy know. I have heard horrible stories of tenants having more power than the owner and eviction rules being too strict.

[Apex]

@RichUncle,

I don't have any first hand experience with section-8 because I refuse to take it. I don't know the details of eviction rules being stricter, etc. What I do know from other investors who have done it is that you have to get your properties inspected and meet their rules whether they make any sense or not. But even worse the program requires you to give them power over your lease.

In one case the section-8 housing program had a reduction in funding and the state came in and unilaterally reduced the rent that every section-8 tenant was paying. They simply over-rode that portion of the lease while leaving the rest of the lease in force and giving the landlord no options.

One particular investor I know had over 80 units participating in section-8. He went to the section-8 hearing on the issue being held by the state board and told them if you do this, you will scare aware many of us who have participated in this program for years. He told them he would not renew any section-8 tenants if they forced down his rent. Imagine this investor having his rent forced down on 80 units? The board did not care, they had a budgetary problem and this is how they solved it.

This investor does not have a single section-8 tenant today explicitly because they did this. He did not know they could do this prior to it happening. I suspect most landlords do not realize the power they give up when they allow the government to give them money and sign papers giving them power to dictate terms.

I also have heard horror stories about the types of tenants you are more likely to get when you self select from the section-8 pool, which is another big reason I avoid it. In your friends case that is not a problem since he already knows the tenant.

Is he getting paid rent in the meantime while this tenant is trying to get approved? If not I think that is a mistake. If he is getting paid rent one way or another that may be ok but if not, I fear he may have to just right that money off and it would have been better to just move to a new tenant if that is the case.

[Jim]

All great advice.

Past starting with a good investment property, picking the right tenants is probably the #1 key to success with rentals.

Having patience for a qualified tenant is very important.
At the same time you don't really need to hold out for a 'perfect' tenant. Most people will have a blemish on their history.

Sticking to basic selection rules like income, rental history and criminal history is important. It should go without saying but: the #1 way to avoid discrimination lawsuits is to not discriminate.

You also need to learn your local and state rules as there may be additional protected classes.

While you do need to obey laws, I wouldn't be paranoid or freaked out about discrimination lawsuits. Its not like every other tenant sues you or anything. My dad has owned rentals for over 4 decades and never had an applicant or tenant file an actual discrimination complaint or lawsuit. Course it certainly helps that he doesn't discriminate, but you know there are always fake, imagined or illegit complaints.

I think its a good idea to pre-screen your potential applicants on the phone. Ask basic questions and reinforce basic rules. If you don't do this and just setup showings to everyone you call then you may waste time with someone trying to convince you to bend a rule or springing their unemployment status on you last minute.

Take all applications. Refusing or turning down an application could look like you're discriminating or just invite suspicion among applicants.

DO NOT change any rules or policies or selection criteria from applicant to applicant. You can't change your mind or be flexible in some ways. Or it can potentially be viewed as discrimination.

Make applicants pay for credit /history check. This screens out people who aren't serious and stops you from wasting your time and money. You could make it refundable to the tenant you rent to.

Lawn signs : In addition to posting on Craigslist I would also recommend putting up a 'for rent' sign on the actual property. You'd be surprised how many renters this can attract.

[Apex]

@Jim,

All good advice, especially the phone screening. I always ask a few basic questions on the phone to make sure we are not going to be wasting time.

The other thing I do is if someone sets up a showing 2 or 3 days in advance, I tell them that they will call me the day of the showing by noon and confirm. I make it very clear they must do this. If they do not call and confirm, I will not be showing up to show them the property. The percentage of times you get stood up for a viewing that was booked a few days in advance can approach 50%, and they never call to cancel the viewing. So if you don't want to get stood up repeatedly, you should make the applicant confirm the day of.

[rick]

Agree with all points made. Only wish to add a question to the list for previous landlords. That is if the tennant is eligible to rent from the previous landlord again. Often this is in the record and will cover problems which you did not specifically ask. It is on my list.

[Jim]

I try and do an 'open house' on saturday afternoon. That way I can then arrange to show the rental to multiple people at the same time and not have to run back and forth multiple times at everyone elses convenience. If they can't make it on Saturday then I'll show it at other times, but most people can make it on Saturday so it saves a lot of trips and wasted time.

[Jonathan]

Apex -
Regarding Craigslist - in the city my rentals are in, there are literally 100 new listings by noon (meaning your listing gets pushed to the second page halfway through the first day). Do you have a strategy for keeping your listing current and visible?

[Terry]

Great tips!

One thing that I do to verify income is to request to see one or two recent pay stubs. I've been burned by tenants who aren't completely honest about their pay checks.

I'm always a little suspicious when someone tells me that they have a secure job selling things on eBay, and their girlfriend is in the process of finding a job. I want to just rap them on the head with a rubber hammer, and say "Hello, is anybody in there? Selling t-shirts on eBay is not an real job."

But, I never actually do that. I just say, "Okaaay, we have a lot of applications for this property. We'll contact you if you are selected."

[Apex]

@Rick,

That's a good tip.

[Apex]

@Jonathan,

What city, state are your rentals in?

I am in suburbs of the Minneapolis/St.Paul metro area.

If you look at that entire area my listing would be pushed down within an hour, but I don't consider it important that I show up in the broader listing.

I think most people are searching on the suburb area they are most interested in. I think they are also likely filtering by price and bedrooms. On that criteria I stay up very high until I can renew the post in 2 days which I always do.

But here is some advice that I also do. I list as many local suburbs that surround my property in the listing as possible. I find ways to mention things in those cities, like malls or other attractions to get the city name in the ad. If there is nothing to list I simply list nearby cities. This will make my listing show up for people who search on those cities.

Another idea is to make two or three different listings that use different text. Craigslist won't let you put up the same or nearly same listing prior to 48 hours. But if the listings are considerably different they will both go up. This would let you keep one of these listings near the top each day.

A third tip is never let old listings linger while creating duplicates over and over. I see this on craigslist all the time. The same listing is out there today, and 3 days ago, and 10 days ago and 30 days ago. Rather than delete listings they are submitting the same listing over and over. Sometimes with different prices. I am not sure what the strategy is here but if I am looking for a place and I see this person has been listing their unit over and over for a month, changing prices, etc, I am going to assume 2 things. One there is something potentially wrong with this place because it won't rent (what's wrong with it could be the price but who knows). Secondly if I did view it I am going to think I can talk you down in price because it may look desperate.

I would never let multiple listings be out there that are more than a week old and don't let there be multiple listings with different prices.

[08graduate]

As a tenant (and a good one, IMHO), I really appreciate landlords who follow your advertising strategy. If I have to parse the ad carefully to determine the unit's amenities, I might still be interested, but we're starting on the wrong foot. If there are no pictures, it's not worth scheduling a viewing. If the pictures are dishonest, trust is broken and there's no chance I'm renting.

[Kim@Eyesonthedollar]

Thanks for the tips. We had our first tenants move in this week and they met all of your criteria, even if we had a little drama on move in day. I hope we made a good choice.

[Tushar @ Everything Finance]

It's important to be a good landlord in order to recruit good tenants. If you don't maintain the property or do your duty as a landlord, any chance of keeping a good tenant will be significantly reduced. I've never looked for a rental in a newspaper and it's surprising that this is still a advertisement method.

[SteveD]

Great tips! Here's another one:

I have a couple single family house rentals in a working class neighborhood. I tried Craigslist, but found that most people who responded were pretty flaky (like asking me to be at the house and never showing up). However, with a simple "for rent" sign in the window I was able to find families with kids who were already in the neighborhood, and were being foreclosed (this was two years ago, during the peak of the foreclosures). The sign led to better interest and better quality candidates than Craigslist. While they didn't have perfect credit, both families have been pretty good tenants.

I also did renovate the houses to make them more attractive ($10-20k each in new paint and carpet, and kitchens and bathrooms where needed). I think this has helped attract tenants who take better care of the house (and who pay a premium rent).

[Apex]

@SteveD,

Yard signs are certainly good ideas too. I like Craigslist for the wider audience but it's certainly a good idea to get any drive by advertising you can get as well.

[New Landlord]

Question: is it gross income or net income when referring to the 3:1 ratio of income to rent?