The difference between enjoying your investment property and not, depends greatly on the quality of the tenant you or we place in your rental. We use a Better Tenant System which works well for us and standardizes the process to a large degree. But there are five qualities to focus on with regards to finding the best possible tenant:
- Credit – You need to have a credit report pulled from at least one credit agency and preferably three and is should include a FICO score. What are you looking for in a credit report?
- How high is their FICO? Anything over 700 is considered “A” credit. A FICO score hovering between 500 and 600 is less than stellar. But there are reasons why a FICO could be low. It may be they only have a few pieces of credit and one of them is derogatory. It could they filed bankruptcy a few years ago. You should dig into the cause of a low FICO score.
- What are their credit card balances? A FICO score will be higher if the applicant has high credit card limits, but low balances. An applicant with a number of credit cards but where every one is maxed to the limit could be a warning sign and that person may be filing bankruptcy in the near future to eliminate those balances and including your rental in the filing.
- Are there collection accounts or unlawful detainers? Public records also appear on a personal credit report. This includes bankruptcies (chapter 7 or 13), judgments, collections and unlawful detainers. Although these do hurt the person’s FICO scores, these public records may mean the applicant has poor judgement.
- Capacity – The best indicator of a person’s ability to pay the mortgage is their current income. We suggest that the pool of income earning applicants gross three times the expected rent. If the monthly rent is $2,500, we would want to verify $7,500 in gross income or $90,000 a year. You don’t need to go into excruciating detail as if they were qualifying to buy your rental, but you should verify the amount of income they bring in. This can be done through a W-2, paystubs, tax returns or award letters (like social security).
- Criminal Background – We suggest you run a criminal background check on your applicant. There is a box to check on most rental applications that asks whether they have a criminal background, but not surprisingly, ex-cons may neglect to check that box. Depending on the type of crime, you don’t want to put a convicted criminal in your rental. There are laws which govern this, but you can reject an applicant depending on the type of crime and how long ago the crime occurred.
- Cash in the Bank – We have leased to clients who did not have great cash flow, but they had ample cash reserves. If you win the lottery, you may quit your job, but you still have millions in the bank to pay your mortgage and monthly bills. You do need to be careful because if a tenant decides not to pay the lease, you don’t get to take their money from them. They have the same rights as the person without a penny in the bank.
- Rental History – If possible, find out how the experience their last landlord had with them. But beware, the previous landlord might give your applicant glowing reviews just to get rid of them. They just want them out of their property.
- What’s the Story? – You have the right to ask them why they want to rent your property. No matter how nice your rental, I suspect the prospective tenant’s dream home is located on the beach in Newport; everything else is a compromise. We have found that every tenant has a story, and it should align with the timing of your rental.
Finding the best tenant is both science and common sense. You should both accept or deny a tenant for the right reasons.