How to Avoid Renting to Poor Quality Tenants

Cash flow projections can look good on paper, but in the final analysis cash flow will be dependent on the quality of your tenant, vacancy factor for the area, and ongoing maintenance of your property. The time you spend on property selection and managing your property manager will pay you big dividends in the future. During a vacancy, don’t settle for a poor quality tenant just to get it rented quickly. Take your time to understand the tenant screening process and choose wisely because although the property manager handles the applications, it’s up to you at the end of the day to decide who lives in your property.

Screening is the Most Important Part of the Tenant Selection Process

Some neighborhoods attract lower quality tenants based on the price and quality of the homes. Purchasing in median-priced, well-maintained neighborhoods will help attract higher quality tenants. It is said that your tenant will look like your house and your house will look like your tenant. If you are having trouble attracting quality tenants, you may have to begin buying in more upscale A-class neighborhoods.

The quality of the tenant you select is critical to the stability and profitability of your investment. The screening and selection process is best left to a professional property manager; however, it is your job as the landlord to give the ultimate approval. The most common mistake owners make when screening tenants themselves are not doing an adequate background check and verifying income and employment. Placing a call to the present employer and 1-2 previous landlords is a must. You need to verify that they work where they say they do, are in good standing at their company, and that their current employment is not temporary. When contacting previous landlords, you or ideally your property manager will need to ask what condition they left the property (or properties) in, if they would rent to that person again, and if they continuously paid on time.

Simply Running a Credit Check is not Enough to Ensure a Good Quality Tenant

Requesting a copy of the last two pay stubs has become a common screening requirement. Having eviction and criminal background checks run is also important when screening. Most applicants will have some credit blemishes, and that’s fine so long as there haven’t been any recent evictions. There are exceptions to every rule, but people with high FICO scores are usually home buyers, not home renters.

The screening process is important but in some markets and neighborhoods, low-quality renters are almost inevitable. If you don’t want to rent to poor quality tenants, you need to be buying in a higher price range in more affluent markets with a stronger economy. Cash flow is great on paper but remember, there is always a tradeoff. If you want low maintenance and/or you are a new investor, don’t go for the highest possible cash flow because it will come with more inherent risk. Stick to hitting consistent doubles and triples which eventually leads to winning the game.