It can be a nerve-wracking time when your rental property undergoes a tenant change. You may have had a fantastic tenant who paid on time, took care of the property, and was responsive to necessary communication. Now, who knows?
This is why qualifying tenants is one of the most important aspects of owning a rental property. If this were carpentry, it is the very definition of "measure twice, cut once."
Many of us do not want to define people by their past mistakes. But track records are of the utmost importance when qualifying tenants. Remember, this is a business decision. You are not looking for a friend or extending a hand to someone in need. You are looking for a responsible person that you can rely on to pay on time and properly maintain one of your most significant investments.
Think about it in terms of a bank that is considering loaning someone money or extending a line of credit. The bank relies on the applicant's credit history and current income in making its decision. It runs credit checks, requires recent pay stubs, and looks at other financial records when considering applicants' eligibility.
With an investment property, you must use some of the same tools on the financial side in determining if an applicant may be the right, or wrong, tenant for you.
Here are some tips for qualifying tenants to occupy your investment property.
Getting an applicant's credit history is an absolute must when considering allowing them to rent your property. A quick online search will give you several options for checking someone's credit history. Nearly all options are fee-based, and the right applicant should have no issue paying the fee as part of their application process.
Let's face it. If someone does not make enough money to pay the rent your property commands, they will not be the right tenant. A good formula to use when considering an applicant's income is a 3:1 ratio – rent should be one-third (or less) of their monthly income. So, if you are renting your property for $1,200 per month, look for applicants making $3,600 or more per month when considering your next tenant.
Checking an applicant's eviction history is another essential element when considering a person to become your next tenant. Obviously, a person with an eviction in their past did, at one point, become an unreliable tenant. Therefore, look for applicants without prior evictions when considering your next tenant.
Verify Employment / Source of Income
Verifying your prospective tenant’s employment and source(s) of income is a vital step in the screening process. The typical method of this step in the vetting process is to request their two most recent pay stubs. If a prospective tenant receives income from sources other than consistent employment – i.e., family, alimony / child support, etc. – and cannot produce two recent, consistent pay stubs, then you will need to request other documentation of income. Also, Or maybe a person is self-employed and pays themselves on a varying schedule. You may want to request an updated P & L (profit and loss) statement, which most self-employed or small business owners should be able to easily produce and provide.
Don't Be Afraid to Deny
Just as with any investment consideration, every property owner will have a different level of risk tolerance. But, whatever your level of risk tolerance, do not be afraid to deny an applicant that does not meet your screening criteria. You will have no one to blame but yourself if you bend your guidelines for selecting the right applicant.
When determining your screening criteria, you will want to make sure you comply with local fair housing laws, as well as the U.S. Fair Housing Act. North Carolina's Fair Housing Act is available here. In short, applicants cannot be denied based on race, color, nationality, religion, sex, gender identity, sexual orientation, familial status or disability.
Some reasons you may choose to deny an applicant are:
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