Note, Brandon Turner wrote a thorough, step by step guide on Tenant Screening. This blog post will be the polar opposite. Rather than preach what-to-do, this blog post will be what NOT to do. Essentially, please read and learn from my mistakes.
I was listening to a class on negotiation last week, titled, “How to Negotiate, when you have to do the deal.”
In the first part of the class, the guest speaker stated that they only used that title to fill-up the seats. His advice was to never put yourself in the position where “you have to do the deal.”
This reminded me a lot of my first multi-family purchase. I bought it for $85,250 in late October and put $15K into it. The triplex was in a great part of town and I was expecting each unit to rent for around $650/month. The renovations were finished the day before Thanksgiving.
Want to take a guess at how many people move between Thanksgiving and New Years Eve?
Yea, not many.
The first three months of the loan were interest only, so needless to say I was getting a little antsy when December rolled around and the place was still empty on Christmas. I finally got a serious inquiry the day after Christmas from a woman named Kelly –- and for as long as I live –- I will never forget Kelly.
I decided to not charge an application fee, because let’s be honest — who likes paying application fees? Instead, I just told this applicant to print off her free credit report from annualcreditreport.com. She emails me back and said she is having problems getting the credit report but she knows it’s not good. I ask for a phone number so we could talk, and she emails me back to say that Verizon won’t let her have a cell phone because of her credit score.
I asked what her credit score was, and she was right -– her credit score was 480.
By way of reference, I’ve seen people go through bankruptcy with a credit score of 550.
Here was Kelly’s summary:
- No Job
- Bad Credit
- Not enough money for a deposit
But here’s the deal – she had the first month’s rent and I needed someone in this place months ago.
So I let her have the place. She promised she would get me the deposit within a month.
Shocking as it will be for some of you, she didn’t pay rent on time and I had to evict her.
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
A Different Type of Lease
My friend Jeff, who owns several multifamily properties gave me a great tip for protecting yourself against this. Write the first lease for three months. This ensures that both you and the renter are on the same page, with things like paying rent on-time, not destroying the place, not being a nuisance to other renters, and so on. If you aren’t on the same page, then don’t renew their lease three months later. If they don’t move out they are legally trespassing, which makes it far easier to kick someone out. On the other hand, if they turn-out to be a great renter, then after three months write a one-year lease. This way, you get a great renter for 15 months.
Top 7 Things I Would Have Never Seen If I Wasn’t a Landlord
- A credit report with a score of 480.
- Heroin Needles
- A grown man, with a go-tee that goes down to his belly button
- On a rent application: How long do you plan on renting? “Indefinite!”
- Almost 1,000 VHS tapes in one bedroom
- All 4 Windows Duct-taped on a Car
- A marijuana plant taller than me (I’m 6 ft)
In summary, please learn from my mistakes. If a tenant doesn’t have enough money for a deposit and first month’s rent, they will not have enough margin in their budget to pay you rent. ALWAYS take a DEPOSIT!
If you are wondering about the current state of the triplex, it’s doing great, with annual rents around $20K.
A Great Free Resource BiggerPockets offers is this Tenant Screening Checklist. Use it!
Do you have any horror stories of bad tenants due to poor screening? Share your comments below!
Note from the Editor: Anytime you put a tenant in your property, you want to thoroughly screen them, take a security deposit, and make sure they have the resources to pay the rent. If you take someone on because you’re desperate to fill a unit and drop your standards, the odds of you needed to evict are drastically higher. Always do your due diligence.