Home Is Where the Heart Is: Choosing the Perfect Tenant
So, you finally decided to rent out your house.
Letting someone else live in your home for the first time takes a huge leap of faith. It can be nerve wracking, and rightfully so–of the 33 property owners we interviewed who found tenants without the help of a property manager, 45% have had to deal with an eviction at some point. The reasons for these evictions range from unpaid rent to property damage, but, as any experienced property manager will tell you, this is almost always preventable.
You just have to know what to look for.
Finding a tenant requires a lot more work than many first-time landlords realize. A lot of folks think that they can run background and credit checks and be done with it. In many cases, however, this is not sufficient. One reason people get into real estate investing is because owning a home comes with a certain personal touch that you simply can’t get with, say, a stock portfolio. Deciding who lives in that home should be equally personal.
Let’s start with the basics. Background checks are standard fare when it comes to finding a tenant. Yet even something as simple as a background check can be difficult and costly. For one, the Fair Credit Reporting Act requires that all background checks be conducted through an accredited Consumer Reporting Agency. If you didn’t feel like reading all 108 pages of the FCRA, don’t worry–that’s what property management companies like Chalet are for!
That said, don’t be fooled into thinking a background check alone will suffice. Based on Google search trends, people tend to place more value on a clean background than a clean credit history, when in reality both are equally important. Good in the eyes of the law does not necessarily mean good in the eyes of the bank.
That’s all well and good, but how exactly do you go about running a credit check?
Good news: there are plenty of great tools out there that won’t break the bank. Kristie Lorette goes over a few of them and offers some wonderful tips on what to look for in her guide on MoneyCrashers.com. Many landlords choose Experian, which is completely free for homeowners but charges prospective tenants $14.95. Some speculate that forcing applicants to pay for their own credit check will rub them the wrong way, while others argue that a tenant who has a problem with paying $15 for a credit check is not a tenant you want in the first place. No matter where you stand, be mindful of the laws regarding credit checks in your state.
Now that we’ve covered the basics, let’s get into some other criteria you may want to consider.
Background and credit checks are the bare minimum, but they certainly don’t tell a prospective tenant’s whole story. To get a better feel for each applicant, you should make a point to call as many references as possible. Person A may have an 800 FICO score and no criminal history, but past landlords will report that they were rude and left the house a mess. Person B may have less-than-stellar credit after falling on hard times a few years back, but their references will attest that they have been model tenants since then. Landlords who base their screening process solely on background and credit checks tend to fall into this trap.
It should go without saying, but if you decide to choose your tenants yourself, you should always meet them in person at least once before renting your home to them. References should help narrow down the applicant pool; speaking to them in person should serve as a final test before signing the lease. Many investors begin to neglect this once they acquire more and more properties. It’s hard enough as it is to determine how responsible a tenant is, so why add another unknown? A good rule of thumb: if you wouldn’t trust a tenant with your wallet, you shouldn’t trust them with your house.
Now that you’ve found a prospect with good credit, no criminal background, and solid references, what’s next?
Many property management experts abide by the rule of three: a tenant’s monthly income should be at least three times the cost of rent. No matter how good their intentions are, life happens. Everybody deals with unexpected costs — car repairs, hospital bills, and the like. Circumstances like these can financially cripple your tenant and, as a result, prevent you from getting your rent on time. As a landlord, you need money as well. You have bills and perhaps even a mortgage to pay. Make sure your tenant is prepared for these situations.
Landlords often implement blanket policies such as no smoking or no pets. Nolo, an excellent law website, goes over some of the legal reasons you may and may not reject a tenant in this article. Remember, the more restrictive you are, the more good tenants you’re likely to filter out! For example, some of the best tenants own pets, and they don’t harm the house in the slightest. Unless you’re steadfast on a certain policy, it may be better to hold off and wait to see who applies first.
A common theme we’ve noticed is that renting to family or friends often ends poorly. Obviously, this is not always the case; however, the closer you are to someone on a personal level, the more likely they are to expect favors from you, and it can even hurt your relationship in the long run. Don’t forget, renting your home out is ultimately a business decision. Mixing business and personal matters to that extent is a recipe for disaster.
At the end of the day, the tenant selection process boils down to one simple question: “Do I trust this person to live in my home?” Deciding who lives in your home is difficult, and it’s why we at Chalet pride ourselves on giving you the best options possible. Of course, we give you the final say–only you can tell what your gut says.
What’s your opinion? Do you have any tips for finding the perfect tenant? As always, we’d love to hear your thoughts, so tweet at us, like our Facebook page, or write a response below. Don’t forget to check out our website!
