Leasing to a Qualified Tenant
In a perfect world, there are never tenant/landlord issues, and the gears of a rental property shift smoothly between tenants. There are never leaky pipes, late rental payments, or issues. In a perfect world, you have a large pool of applicants to choose from, and every tenant passes their background check. Although a perfect world doesn’t exist, with the right process you can get as close to perfect as possible.
Do you see yourself working well with this tenant?
Many investors develop respectful, profitable, and long-lasting, professional relationships with their tenants. It all starts with ensuring that the tenant you select is a good fit, and is the type of individual you’d like to work with. Your tenant-landlord relationship is essentially a business partnership, where you’re making the money, and the tenant benefits with a stable living arrangement. Ensuring that the tenant has respect for your investment, and the ability to afford the cost of living is crucial to your profitability, and their well being.
Utilizing a variety of marketing strategies will assist in bringing in a pool of tenants to choose from, and advertising the quality and reputation of your home will help in attracting a quality tenant. If your investment property is located in a neighborhood with high rental demand, you will have the opportunity to be more selective when it comes to approving a tenant.
How do I know that the tenant can afford the monthly rent?
Just because your tenant has signed an official document stating that they will pay every month on time, and in full, doesn’t guarantee that it’s going to happen. If the tenant fails to make rental payments, this constitutes a failure on both ends of the contract. Although sometimes people make bad judgment calls, as a landlord one of your primary responsibilities is to ensure that you do not set your tenant (or yourself) for failure.
Ensuring that your tenant has proof of income, amounting to at least three times the monthly rent is a step in the right direction. Setting realistic expectations is important when trying to decide if the individual applying to live in your home will be able to make payments on time, and in full. If you find yourself in a situation where the tenant seems to be in a financial rut, but they’re promising that they will be able to make future payments, you are most likely just setting yourself up for an unnecessary gamble.
Individuals may apply with a partner to live in your property, and this could complicate things in the future. If a couple applies to live in your home, but their relationship goes south midway through the lease-term, there may be a dispute as to who pays the rent moving forward. Therefore, these types of issues should always be addressed.
If a tenant is reluctant to pay the security deposit, cannot afford it, or asks for a discount on the upfront payment, this should raise red flags. While it’s not uncommon for a tenant to bargain the rent price, they shouldn’t try to avoid the security deposit, as their financial stability may be reflected in the ability to have enough cash to pay this fee.
Taking the cost of one and a half month’s rent (security deposit) at the lease signing, plus the first month’s rent is important to establish financial trust with your tenant. The security deposit is often refunded at the end of the lease, so most tenants don’t have a problem paying it. In the case that your tenant starts to fall behind on rent, or damages the home, the security deposit will help you in financing any home repairs that may be necessary.
History tends to repeat itself
Ensuring that your potential tenant does not have a history of evictions is important. Unless there is some great excuse for the past eviction, and it is truly an isolated incident, the likelihood of reoccurrence is real. Reaching out to references, including past landlords and employers will help get an idea of how your potential tenant may deal with you in the future. Criminal history is also a factor to look into, as you wouldn’t want a tenant with a history of vandalism and destruction of property living in your investment home. Again, exceptions can be made on a case-by-case basis, but using common sense when looking over a criminal history report is necessary. The last thing as a landlord that you ever want to deal with is an eviction.
The recipe for success
Setting up a tenant for failure hurts all parties involved, and should always be avoided. As an investor in rental home properties, your primary focus is income, and building wealth. The tenant’s monthly rent provides a good chunk of that income, so adequate consideration into making sure rent is coming in every month should be taken. Choosing the right tenant goes further than just financial stability, but their personality and history of relationships with previous landlords should also be looked into.
An ideal tenant will stay in your investment home for years, and provide you with the monthly payments to bring your returns up. Using the right verification system during your tenant screening process, along with showing your tenants the respect they deserve will be some of the major factors in the success of your rental property. With the right amount of due diligence, your real estate investment can be a very profitable enterprise.