One of the scariest things about real estate investing is finding the tenant that will cover your carrying costs on your property. This is usually the last step of the entire investing process. There is always worry about finding a terrible tenant who will make your life a living hell. Do not worry, and do not fret as I’ll share my top 5 to-do’s when choosing your next tenant. Most Realtors normally opt to NOT openly share this type of information with you, but I find that if you’re armed with this kind of knowledge, then real estate investing is really not that scary after all.
If you want to take a full, in-depth dive into how to attract the best tenants, you can read that Insight Article here,
The Insight Article above is a guide for attracting the best tenants, but this Insight Article today sheds light on what you should do when you’ve found some potential tenants and the best way to screen them. So here it is, the top 5 to-do’s when choosing your next tenant:
#1 – Always consult Google and social media.
We live in the digital age where almost anyone’s phone can be used to do a quick Google search to learn about something or someone, almost instantly. So make sure you always do a quick Google search on who your prospective tenants are. It literally takes 2 minutes. I always check their Facebook, Instagram, LinkedIn and Twitter pages. The types of social media posts or comments they make, or the type of professional background they have is often indicative of what type of person they are (you can often get a general gauge). If the prospective tenant owns a pet, it’ll likely be on Instagram. If they party a lot, there will be a lot of tagged photos of them on Facebook. Also, check their LinkedIn profile to see if their job references line up with what their tenant application shows. If there are any red flags, don’t trust them with your property. If there is nothing substantial found from these social media searches, then proceed to the next step.
#2 – Use Narborly.
This one is important if you are not hiring a Realtor. Narborly is a free tool for landlords to use artificial intelligence to screen tenants. Narborly will conduct a background check on your prospective tenants using their tools. When their check is complete, they will provide you with a full report and score. You just simply need to enter their name and the address of your property, and then your prospective tenants will fill out the application. In 2 to 3 business days, you will get a full report with a score out of 100. I usually look for a score of 75+ on the Narborly report.
#3 – Know how to read credit reports.
This one may be difficult because most people who have seen a credit report will generally have only seen their own. I’ve had the liberty of reviewing hundreds of credit reports and know how to read between the lines. So what I generally look for is how much money is owed by the prospective tenants and if they have made any late payments. Here are a few other things that you should look for in the credit report that will determine if your prospective tenants are financially responsible enough to be your tenant:
- No late payments. Most reports have an area for 30/60/90-day late payment. If there are multiple 60 or 90-day late payments, then that is a red flag.
- High credit utilization. Look for someone who doesn’t utilize the maximum amount of credit available via a credit card or a line of credit. If the credit utilization is close to being full, then it means that your prospective tenant is always in debt.
- Look for outstanding student loans and car payments, and see how large of a payment is required each month. If these payments are large, then make sure their gross income is high enough to cover these other monthly obligations.
- Look for mortgage debt. This one may sound weird but a lot of the times, life circumstances may cause the prospective tenant to require an additional place to live. Make sure the mortgage debt plus the rent is sustainable for their income.
#4 – Understand the gross-income-to-rent ratio
I generally try to make sure the gross income is 3 times that of the rent. This means the gross income shown must be greater than 3 times that of the rent that will be collected in 1 year. An example of this would be if your property is listed at $2,000 per month. This means that in 1 year, the prospective tenant will owe you $24,000 (12 x $2,000). The minimum income that I would look for is 3 times that amount, which would be $72,000 gross income per year. If they earn less than that, it could be a red flag.
#5 – Always call past references.
In the tenant application, there is an area for past landlords. If there are names and numbers available, then you should 100% call their past landlords. Here are a list of questions that you should ask the previous landlord.
- What was the previous address of the prospective tenant? This allows you to verify that the reference is real.
- Why did your prospective tenant move out? This helps to determine what the reason for the move was.
- Did your prospective tenant miss any rental payments?
- Did your prospective tenants have any bounced cheques?
- Did your prospective tenants cause any damages?
- Did you have any complaints about the property while they lived there?
- Did the prospective tenants have any complaints?
The Wrap – So there you have it, those are the top 5 to-do’s when choosing your tenant. Keep in mind that no matter how well you can screen a prospective tenant, there can always be bad apples out there. The bad apples can cause you some major headaches, so that’s why it’s good to arm yourself with the knowledge of the landlord tenant board – I’ll be going over just that in the next 2 weeks so stay tuned!
Until Next Time, Happy Real Estate-ing,