Landlording & Rental Properties

How I Underwrite Rental Applications to Mitigate High-Risk Tenants

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
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My partner and I have acquired and leased hundreds of rental units. As co-owner at my organization, I still have the final say on approving rental applicants. As much as I want to delegate the task, I am aware it is of pretty high value. Having a great tenant in your property is crucial. A troubled one who is constantly late on payments and complaining about dings on the refrigerator can be a headache. A troubled tenant can eat up your cash flow if they’re not paying and you have to evict and replace them.

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Leasing Agent

I have an in-house leasing agent who handles collecting the paperwork and necessary documentation from rental applicants. The needed documents include the most recent three pay stubs or current lease and bank statements (if self employed). Once all this is submitted, the agent starts the underwriting process. Be sure to obtain all the necessary documentation from the prospect. It is important that you have a clear picture of the prospect’s history to verify they are qualified to pay rent your properly. If they are not willing to provide all the information, then move on.  

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Related: 7 Types of Tenants I’ll Never Rent to

Our Criteria

Criteria for screening tenants can vary depending on what class of property you’re in. For example, with a C class property, you may allow 600 credit score tenants, and with an A class require a minimum score of 700. I am mostly dealing with the working class. These professionals tend to have just an OK credit score. That is the reason why they are paying $700 to $800 in rent. I run their credit through the software Propertyware to make sure there are no outstanding balances from utility companies or judgements from landlords.

My tenants must produce gross 3x the monthly rent. This is by far the most important factor in approving a tenant. If they don’t have that, they must have a co-signor who does. Additional criteria include having no prior evictions within seven years of the date they’re applying for the home, having at least one year on the job (or proof of prior job stability), and having no felonies within the past five years.

Stick to It

It is always best to remain objective when underwriting rental applicants. If they do not make enough income or have been at their job only two months, then you simply have to move on. You want to stick to your criteria because you want to treat every applicant the same. 

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Related: The 11 Most Common Questions Asked by Tenants—Answered

Final Approval

I am an optimistic person, but I’ve seen some interesting stuff in my days of underwriting tenants. I was almost fooled by tenants having a friend pose as their landlord and submitting fraudulent pay stubs. When I get the file from the leasing agent, I look for red flags that may have been missed, such as fraudulent pay stubs. Then I start taking a look at income, landlord references, income, etc.

To date, I have not had to evict a single tenant I placed, and I plan to keep it that way. 

[Editor’s Note: We are republishing this article to help out our newer readers.]

What is your underwriting criteria? Has it changed over the years?

Leave your comments below!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling w...
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    Karl B. Rental Property Investor from Columbia, MO
    Replied over 2 years ago
    Good article, Sterling. I would like to know – what do you look out for when it comes to fake pay stubs?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied almost 2 years ago
    ensure the YTD amounts align on the consecutive pay periods. that is one way
    Luis Ortega Rental Property Investor from Fontana, CA
    Replied almost 2 years ago
    Hello Sterling, love the article, lots of good information especially for newbies like myself. Two questions for you or anybody that can give input. Do co-signers have to live in the unit? What are the pros & cons of having more than one person/signee on the rental/lease agreement? Thanks
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied almost 2 years ago
    no co-signors do not need to live in unit. and pros of more than one person on lease is you generally have more people who contribute money to paying rent.
    Luis Ortega Rental Property Investor from Fontana, CA
    Replied almost 2 years ago
    You’re awesome! Thanks
    Jason Barnett Flipper/Rehabber from Memphis TN
    Replied almost 2 years ago
    Thanks for the helpful advice Sterling. I always appreciate your articles.