Landlording & Rental Properties

How to Find the Best Tenants for Your Rental Property

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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.

nicely decorated bedroom with big windows and open curtains

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.

landlord, rental, homeowner, realtor

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.

4 Tax Tips for Rental Property Owners

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. 

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, i...
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    Larry Brown Investor from Liverpool, New York
    Replied 12 months ago
    Could you provide some more specifics for Point #3 regarding how to determine if the potential tenant is going to be a "good neighbor"? What questions do you ask their employer? What questions do you ask their personal references? Do you ask for specific types of personal references (family, friends, etc)? Do you search their social media footprint? Do you do an inspection of their current residence? Thanks for the article.
    Wenda Kennedy JD from Nikiski, Alaska
    Replied 12 months ago
    If possible, I try to driveby where they are living when they apply. It's amazing how much you learn.
    Liza Calef
    Replied 12 months ago
    I'm a tenant in the San Francisco Bay Area. I'm the ideal tenant according to YOUR criteria. Almost no one here can pay 3 times the rent because the rents here are insane. Most of us are paying half or more of our income for housing. Landlords don't care. They will evict you because they want more money and they can. Being a great tenant doesn't matter. I've been through this three times and so have thousands of others here. I wish I could run a check on a prospective landlord's rental practices, history and moral character before signing a lease. Many of them shouldn't be landlords at all. Signed, Liza Calef Just another abused tenant
    Brian Ploszay Investor from Chicago, ILLINOIS
    Replied 12 months ago
    There are some sophisticated algorithms that try to be predictive of tenant behavior. Many of us who operate in class B and C areas will routinely find tenants who apply and are sub-par. Screening is crucial. I can't overestimate the importance of doing this correctly.
    Mark JOhnson Investor
    Replied 12 months ago
    Put your qualifications in writing. Screen screen screen. Do it consistently, fairly, and exactly the same for all applicants. Never get desperate. If you're not getting qualified applications review your marketing techniques.
    Craig Anderson
    Replied 12 months ago
    I don't know how you can find out if someone is a illegal drug user,other than looking at the postiongs of the Secretary of Stae in whatever state the temant has previously lived in. Drugs and tenants who behave in a prudent logical manner: these 2 things don't usually exist in one tenant. And drinking is another destroyer of what is human. Something that Land-lords migh consider doing is logging in all DUI tickets, as posted in the local newspaper, which also gives the name of the individual so cited. This way the datat=base of who has a problem, will be bigger than who the Secretary of State posts as convicted. Another caution in names as so posted in newspapers, is making sure which person with a name is a possible prospective tenant. For instance you'd think that I having the personal name of Craig, would limit the no. of people with my both 1st and last name. But, no, there are several people with my 1st and last name just in the immediate region I live in. Sincerely, Craig Anderson
    Dan Maegli Rental Property Investor from Watertown Wisconsin
    Replied 12 months ago
    Here I've got a horror story for you. I've been a landlord for 7 years now and have four duplexes two of which purchased in the last year. On my first one I inherited tenants in both units and one left a couple months after purchase so I could move in. The rents were initially very low and although my remaining tenant in the lower unit was a good tenant he di not like that I was slowly raising the rent and did not mesh well with me in the upstairs unit being I was half his age and a bit more social. At the time he left maybe a year and a half in I was nervous about finding a new tenant and did what many first time landlords do I rented to friends of a friend who I became close with. Get 6 months in and turns out they are pill addicts. The one loses his job for getting into some violent drama with others over pills. Everything goes down hill from there. Soon, unbeknownst to me they let a very unsavory neighbor move in with them in trade for pills. My friends know my unit, my schedule and that I had a roommate who frequently left our door unlocked. Sure enough I come home one day and I have been burglarized, only a few things worth around $1000-$1500. Turned my world upside down being violated like that and they did it again over a month later and this time they got a lot more stuff and cash from me totaling over $10,000 my life savings basically. The local police treated me like a criminal for being burglarized by my pill addicted tenants who now we're routinely harassing me, threatening violence, reporting for code violations, suing me, you name it. I was broke, living in sheer terror in my own home from the scumbags I could not get to leave, my car had broken down, my work vehicle had problem down, my girl was leaving me, getting fired from work and the double burglary which also resulted in my full identity being stolen from credit card to tax fraud and everything in-between. It was pure hell and something I hope to never go through again. I did eventually have to file for eviction and thankfully they left voluntarily by the date put in place by the judge without too much damage to the property or further gruff. The take away, be very strict about who you rent to, do a full background check, character references, work references, and look for drug use and personality flaws. Furthermore don't get close to your tenants, don't let them know your personal life. Make sure they understand this is a business arrangement and although you may be a nice person you are not their friend and you have personal boundaries.
    Katie Rogers from Santa Barbara, California
    Replied 12 months ago
    "What I have found is the best tenants for us earn three times the rent." This is turning the traditional guidance upside-down. Decades ago, a real estate investor (whose name escapes me now) wrote a book wherein one of the topics he addressed was appropriate rent. When underwriting a property, the investor should pay no more than what will create a cash flow when the rent is about 1/4 to 1/3 the typical tenant income for that neighborhood. In a healthy market with proper competition as indicated by the vacancy rate, the difference will be a wash because if a landlord charges too much, the tenant will choose a landlord who charges less for a similar unit. In communities like mine which are decidedly unhealthy, investors tend to spend too much for the property, and then charge too much rent , and hope they can get it by requiring that tenants earn three times the rent. When vacancy rates are too low, tenants will pay the rent because there is nowhere else to go. In my town, lots of tenants do not make more than three times the asking rent.
    Nathan Gomes from Livonia, MI
    Replied 11 months ago
    So checking income, credit and references.