How I Underwrite Rental Applications to Mitigate High-Risk Tenants

by | BiggerPockets.com

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. 

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

Leave your comments below!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record.

19 Comments

  1. Nicolas Chambers

    Hi Sterling, Curious, would you ever take on tenant(s) who were interested in your property as being their first rental outside of living with their parents? Combined they make 3x the rent (earlier in their careers) and have above a 600 credit score?

  2. Deryk Harper

    Hi Sterling,
    You may want to check the recent HUD comments on criminal background checks for tenants. We have had to adjust our application guidelines to be a little more detailed vs just the blanket ” no felonies in last 7 years” type statement . I agree proper screening is one of the most important processes in our business. I also have the final say in our screening process. Thanks for all the useful posts too.

  3. Huiping Sheng

    The requirement of 700 will filter lots poor money management renters. It is very high standard but I believe a candidate can meet your standard will good enough.
    Could you please share a little your knowledge about bankruptcy candidate: present job income is fine with wife and one child, and he has a present job manager’s letter (assume the letter is real) but he filed a bankruptcy in 2015 and the credit score is 530.

  4. JL Hut

    Sterling, I agree with you. To me this is the most important part of the business, tenant screening. You can do you work now or pay for it latter with time, lost money, damages and headaches. If they are young and have no landlord reference or something is not quite up to par ask for a cosigner, not just any cosigner but one with a 700+ credit score. I make cosigners fill out a application just like they were moving in and check their references, source of income and credit and make sure they know I expect them to pay for any rent, late fees and damage the primary tenant does not. You wont get many takers but if you do you wont have many worries. Also, make each adult have separate references, not using the same ones. You want at least 3 individual points of view on each person. Why do you think the police talk to as many people as they can that witnessed a crime? not everyone sees everything that takes place. Its the same with a tenant, I want to have no unanswered questions and feel comfortable with them before they move in. I want no surprises. Always communicate clearly what your expectations are before they move in. This will save a lot of work when they move out. No one cares more about your investment than you do, so be careful who you let fill this pair of shoes.

  5. Jeff Pitzer

    Great article Sterling.. my wife and I have 7 doors so far.. she “was” a “softy” feeling sorry for “unfortunate” circumstances… $6k in unpaid rent and financed deposits cured her of this.. we recently had an issue with a family who’s daughter and son in law, who were qualified and on the lease were unable to make their portion of the rent . The father was working out of state and asked to be taken off the lease.. we said no way and informed them that we would begin the eviction process the following Monday. .. the rent “magically” appeared and we haven’t had any problems with them since. Guess that’s what Brando means by “training your tenets”.

  6. Steven Bonfante

    This post is very timely and informative. We just put an offer on our first deal, a 4 plex that we will be house hacking.

    As far as existing tenants are concerned, the obvious things for me are getting a new lease signed, getting the existing background checks if available, and verifying rentals.

    Should I implement my own application process and verify financials, backgrounds, other criteria, etc…?

    I have been reading and learning a lot but I don’t know what I don’t know at this point.

    I have no problem taking a “there’s a new sheriff in town” approach.

  7. Art Veal

    Very interesting article Sterling.

    I have used bank data to screen tenants along with criminal and eviction history. I noticed you said you only ask for bank statements when they are self-employed. Why don’t you get bank statements to verify income and make sure the pay dates on the pay stubs coincide with pay dates on the bank statement. It makes proving if the pay stubs are fraudulent very easy.

    I have been doing that for years and I have not had an eviction in years and only 1 slow paying tenant. I find bank data can give much better insight into a tenant than credit reporting (at least for lower end properties like some of the ones I own). I even built a web app that creates a report on the bank data.

    What do you look for when looking at bank statements, just income?

  8. Rick Rapant

    Hi Sterling,
    Great article and comments. Just wondering what yours and others rental criteria would be in D market area rentals for those who invest in that type of market. I’m investing in the Detroit area where the markets are turning around slowly but steady. Your advice would be appreciated.

    • Sterling White

      Great question. I do not have experience investing in D properties. With that being said I will be unable to provide the best insight. I recommend posting your comment in the forums to get feedback from others who invest in that class, Rick.

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