How to Choose Good Tenants
Real estate is a people business.
As long as you are buying, selling or renting properties you will continually meet and interface with a wide variety of people, from bankers and attorneys to realtors — to tenants.
The last one is for many people, the trickiest category to deal with. A well-behaved and responsible tenant makes your real estate life fairly easy, but what about those nightmare stories you’ve heard about tenants who fail to pay their rent and trash the place when they’re done?
First of all, remember, there is no reward without risk. Furthermore, greater rewards come with greater risks. This is true for any type of investment.
One of the risks of real estate investment is accepting a tenant who just might fail to uphold the terms of the lease, whether it be failure to pay rent or violating certain rules. This is never a fun situation but once you acknowledge that the occasional difficult tenant is part of the package it’s easier to take it in stride.
Still, there’s a number of things you can do to carefully vet the people who reside on your property. These measures break down into roughly two categories:
- Objective criteria (personal minimums)
- More subjective indicators (behavior, impression)
In flight school there is a term pilots use, “personal minimums.” This refers to a bare minimum set of conditions the pilot needs in order to operate the aircraft safely.
I’ve found this principle also works beautifully when it comes to renting real estate. For both your and your future tenant’s sake, it’s important to establish a set of personal minimums upfront.
Just as you wouldn’t want a pilot who had too few hours in training to operate a commercial flight, you wouldn’t want a tenant to rent from you if their monthly paycheck is too low compared to the rent you charge. In either case you and the other people involved are taking very unnecessary risks.
A few logical criteria will go a long way in making sure you and a prospective tenant are the right match. Here are some examples of personal minimums to have:
Credit scores aren’t everything, but they are usually a pretty good indicator of whether a tenant is responsible with money (and honoring their obligations). If their credit score is not the greatest there may be a valid reason, but be willing to dig deeper and find out why.
A tenant can’t pay rent if their income is insufficient. Make sure that their monthly income is at least 2x but ideally 3x the amount of the rent they will owe each month. This piece of criteria accounts for the other expenses in their lives, including unexpected ones.
Requiring a certain amount of money that is not refundable until the tenant reaches the end of their lease agreement helps ensure that the tenant is responsible and forward-thinking.
This amount shouldn’t be so high that it discourages honest prospective tenants, but it should be enough of a requirement for them to commit to the lease terms. In the case they still fail to uphold the terms of the lease, the security deposit amount will help to offset your loss.
Recommendation From Former Landlord
Social proof is a powerful thing. A prospective tenant who hesitates to give you the contact information of their former residences is usually a red flag. Be sure to ask for addresses and phone numbers and make contact with a prospective tenant’s former property manager, landlord or employer.
Keep in mind that these personal minimums, while very helpful, are not a guarantee. And while nothing is a guarantee, you can minimize your risk by paying attention to any signs the prospective tenant may be giving off during the interview process.
More Subjective Indicators
Your personal interactions with prospective tenants offer you a wealth of clues about their character and modus operandi. These indicators are more subjective, but should be taken into account along with everything else. Body language, attitude and other behavior are important factors when getting to know a person.
Was the tenant on time for their interview with you? If they needed to reschedule, did they let you know sufficiently in advance? Did they do everything they promised to, such as returning your calls and filling out the necessary paperwork?
Behaviors like these from a prospective tenant can give you a taste of what it might be like to have them as an actual tenant.
Pay attention to what they tell you about themselves. Does the story they tell you add up? Are they straightforward and easy-going or do they act cagey when you ask them questions?
A pattern I’ve noticed over the years is that many less-reliable tenants are often overly eager to move into a new place. This is because they have burned their bridges and need to find another option as soon as possible. A good tenant should be excited to move in, but not in a rush.
On the other hand, it could also be a red flag if the prospective tenant acts blase or lackadaisical about moving in. Signing a rent agreement is a big commitment, time-wise and money-wise, for all involved. For this reason you don’t want anyone moving in who does not treat the process with the consideration it requires.
Each person and each encounter will differ in some unique way, so ultimately it’s up to you to listen to your gut and decide whether you and the prospective tenant will be a good match.
After doing your best to choose the right tenant, always be prepared for the unexpected. People are idiosyncratic and unique. You may have a few weird experiences, but they will offer valuable lessons and in many cases storytelling fodder later on down the road.
Remember that your tenant, once you have drawn up a lease with them, is in a sense your partner. You have an agreement that goes both ways, and any serious drama that comes into their life could well end up affecting you.
For this reason, it’s best to never lower your standards — your personal minimums. The risk just isn’t worth it.
At the same time, be sure to treat everyone you come across with grace and respect, and be sure to be a good communicator as well. As you do so you will be more likely to attract and keep the kind of tenants you want, creating a win-win situation for both parties.