How to Find the Best Tenants for Your Rental Property
We’re going to talk about finding the best tenants for your rental properties.
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So, what is a great tenant?
That’s the first question before I even talk about the three steps to finding great tenants. Let’s talk about what is a great tenant.
What Type of Person Makes a Great Tenant?
A great tenant is someone who pays our rent on time, takes good care of the property (meaning keeps it clean), isn’t hoarding a bunch of stuff on the property. They just take good care of it. Maybe they’ve got a little garden going on, and they just treat it like a home.
And the next thing a great tenant does is they are good neighbors to those around them. If you’ve got a small multifamily, a great tenant is not someone who’s having parties every Friday night or has lots of friends come over. Great tenants aren’t making lots of noise and disrupting the quiet enjoyment of their neighbors.
So, a great tenant is someone who does those three things: pays the rent on time, treats the property like a home, and respects their neighbors.
How Do You Find Great Tenants?
The question here is: how do you find more of those people? I’m going to give you three steps.
We’ve been landlords for over 14 years. I’ve done a lot of it myself. And we also have third party-property managers that manage our properties well.
These are the three steps that I’ve seen be super successful in finding—not good—great tenants.
1. Make sure that they earn enough to afford to live in your property.
Now, a lot of what I’m going to talk about for this does not apply to folks who are on any type of subsidies or anything like that. We’re here to talk about how much money they earn.
If they’re on subsidies, that’s fine. I have several great tenants on some sort of subsidy program. But you can move on to the other two steps.
If you’ve got a market rate unit that has no subsidies attached to it, then this is what you want to do. You want to look at how much money they earn. This sounds simple but you need to verify it. Don’t overlook it, and don’t change your term on this.
You want to look to see their earned income in a monthly period by checking their pay stubs. Don’t just let them tell you how much they make. Confirm it with a pay stub. There are some folks who don’t get pay stubs. They get a letter from their boss; then, call their boss and confirm it.
What I have found is the best tenants for us earn three times the rent.
It’s up to you if you want to be super stringent on this, but you could say three times the rent. That could be their net income after they pay their income tax or their gross income before they pay their income tax. We use gross income. So, if the rent is $1,000 a month, that means you’re bringing home before taxes $3,000.
There’s a reason this works well. There are other expenses outside of rent that it takes to live. You also have to pay your groceries. You’ve got to make your car payment. You have to put gas in that car. And you need to be able to afford to do other things like buy Christmas presents for your friends and your kids and just ancillary expenses. Things come up.
If somebody is earning just above what your rent is, or earning only two times the rent or two-and-a-half times the rent, there may be hiccups because of those other things. What if their car breaks down? What if some unforeseen expense shows up like a trip to the E.R.?
It will eat into their ability to pay your rent. So, you want to make sure they’ve got enough earned income coming in so they can afford several times (we go for three or more times) of the rent payment. We do not flex on that standard.
Related: Seven Tenants I’d Never Rent To…
2. Gauge how well they are paying their other financial obligations.
Are they paying their utility company on time? Are they paying their cable bill or their cell phone bill? Are they making their car payment on time?
The way it’s really easy to determine if they’re making those payments in a timely manner is to—not just get a copy of their credit score—get a full-on copy of their credit report, and review it. Look at the credit report.
Say we see tenants have a problem paying their utility bills on time. That means that they are willing to forego their living expenses in exchange for other things that might show up.
What else is a living expense? Rent. People tend to lump their living expenses together in their head. So their utility bill and their rent. Those things tend to go together psychologically.
Other things like cable and cell phone are other costs of living expenses we pay attention to, as well. Look for maybe a car repossession or something like that, because that means they weren’t able to make a car payment on time.
You can look at the credit score and have a standard threshold for it. For us, it depends on the market we’re in.
Some markets our credit score limit is 650; for other market, it’s 580. Depends on the market. You need to determine what the actual credit score threshold is for your market.
But I’ve seen a lot of landlords stop at that credit score threshold. You want to go beyond that and review an actual credit report. Go line by line through there, and see what’s pulling their credit score down.
Is it because they had medical concern that came up years and years ago that's behind them now? Is it because they missed a couple of payments on a student loan that they've now paid off? Or is it because they owe several thousand dollars to the local utility company? You know, that's a concern.
And the last item for their ability to pay their bills on time is you want to look back to see if they had any landlord claims (aka evictions or landlord-tenant claims against them). If the landlord has taken them to court for not paying their rent before, then you may have a standard as we do. If they have evictions, our standard is it can’t have been filed on them within the last three years.
Now, we know people grow. I’m not the same person I was several years ago. So, maybe they’ve grown and become more financially sound over the last couple of years. But if you’ve got a pending eviction—and we’ve had people apply for our properties who are currently being evicted at the time that they were applying—I obviously can’t accept that. You’re in the middle of something that they’re working their way through. We don’t want to be a part of that.
Some landlords are super stringent about that and say zero evictions ever. But we like to say within the last three to five years, if we don’t see them, then we’ll consider that to be OK. Because that’s all I can gauge. How good they are at taking care of their financial matters.
3. Determine who potential tenants are interacting with.
Step number three goes back to determining how good of a neighbor they’re going to be and how if they’re going to respect the property. Are they going to treat the property like a home?
There’s an adage out there that you are the average of the five people you hang out with—or you are the average of your entire network. That’s a personal notation to take for yourself. Meaning all the people that you spend time with, they kind of rub off on you.
Personalities and habits are contagious. Your network tends to put some of the personalities and habits on you. You do the favor of transposing those things on them, as well. So, if your tenant is running around with people who are not the best folks in the world—those who have bad financial habits or are not living in standard situations that you would be open to having in your property—they’re likely going to be bringing that stuff to your property to live there.
That said, people who have good habits, people who are going to treat properties like a home, probably hang out with other people who treat property like a home. It’s because of that life rule that habits are contagious. So, the way that you gauge someone’s network is by getting references from them.
This is another thing that a lot of landlords overlook. But we don’t. And we think it’s important to ask for references—a couple of character references. You want to call someone in their network and call their employer and get a rundown from them. Or ask your property manager to do a quick reference check.
Another great reference check is if someone comes to us as a referral from one of our tenants, I check to see if that tenant is somebody I want more of. If my tenant has a garden out front and keeps their property super clean and is a phenomenal tenant for our property, and they give us a referral, then yeah. And that’s a big plus, because it’s likely going to be someone who maybe has a lot of the same habits that they do. The current tenant is kind of vouching for them in that way.
But if I’ve got a referral from a tenant who is a big time hoarder who pays rent late all the time and has lots of loud, crazy parties—someone I have to constantly deal with and reprimand—then, I might not want to take that referral.
Related: Tenant Screening: The Ultimate Guide
The Bottom Line
To sum it up, the three steps of selecting the best tenants are to gauge their financial ability to pay the rent (three times or more of your rent as earned income); gauge their ability to pay their financial obligations by doing a hardcore review of their credit report (not just their credit score); and make sure that they’re going to be a good neighbor and treat your property like a home by checking their network through your tenants or other referrals that they give you.
You do those three things, and you’re going to have a property that people treat like a home. It’s not going to happen overnight. But if you have standards and rules over and over and over again, you’re going to slowly increase the caliber of your tenant base and increase the caliber of your property financially.
Have a great profitable week!
Do you have any tips to add to this list with regard to finding great tenants?
Leave them in the comment section below.