Protect Your Investment Through Tenant Screening
The most common way to generate cash flow with real estate is through renting your property to a tenant. Good tenants are some of your most valuable assets, while a bad tenant can be your worst nightmare. So how do you get the good ones? The answer is tenant screening, and it applies whether you have properties for low-, moderate-, or upper-income tenants.
When you rent residential properties, the two primary types of tenants you’ll be dealing with are a traditional rental tenant and a tenant/buyer. Tenant/buyers are different from traditional tenants in that they have taken an option to purchase the property at some point in the future and the terms of their lease are usually somewhat different than the terms of a traditional rental agreement.
Screening is critical regardless of whether you’re looking for traditional tenants or tenant/buyers. Set effective policies and procedures, and follow them consistently. These tips will help you get started:
• Prescreen on the phone before you show the property. Don’t make it sound like you’re conducting an inquisition, but ask questions to get a sense of who you’re dealing with. Ask where the prospective tenant is living now, how long, and why he is moving. An answer such as needing a larger or smaller place, or wanting to be closer to work or family members is good—but if the caller has just been evicted, that’s certainly a red flag. Find out where he works, how long he’s been employed there, and what his total monthly household income is. Tell the caller that you conduct credit and criminal background checks on all tenants and see what kind of a reaction you get.
• Prospective tenants should complete and sign a written rental application that includes references, contact information for previous landlords, previous addresses, employment information, and consent for a credit and criminal background check. You may want to charge an application fee to cover the cost of pulling those reports.
• Log in every application, including the date and time it was received and whether it was hand-delivered or mailed.
• Provide prospective tenants with a copy of your rules and ask them to sign an acknowledgement that they have received and understand the rules and the consequences of violations. Rules can cover your policies on pets, parking, smoking, noise, use of common areas, access to the unit by management, maintenance issues, guests, occupancy standards, and more. Your rules should also be incorporated into your rental agreement.
• After prospective tenants pass your initial evaluation, conduct an in-depth screening. Contact references, verify employment, and conduct credit and criminal background checks.
• Be flexible in evaluating first-time renters. You may not have a rental history to check, but there are other ways to assess their trustworthiness and stability. Ask to see student transcripts; get references from teachers, counselors, or coaches; and find out why they are renting for the first time. Consider a policy of accepting cosigners on leases with first-time renters or other tenants who might not meet all of your financial requirements.
• Develop a consistent system for reviewing and evaluating applications. Make notes and document your decisions. Be prepared to demonstrate that your decisions were based on sound business practices, not on anything that may be construed as discrimination.
• Understand what constitutes illegal discrimination and set policies and procedures that are non-discriminatory. Remember that even innocent remarks can lead to discrimination charges; take the time to educate yourself so you can avoid problems.
• Protect confidential information provided by applicants. Use care when reviewing, storing, and disposing of applications and related documents, including credit reports and criminal background reports. Store these documents securely where only someone with a valid need can access them. When it’s time to dispose of them, they should be burned or shredded, according to the disposal rule of the Fair and Accurate Credit Transactions Act of 2003.
Be sure you comply with all local, state, and federal regulations regarding fair housing and landlord/tenant laws. Have an attorney review your documents, policies, and procedures. You can also get information from your local fair housing agency or the U.S. Department of Housing and Urban Development (HUD) at www.hud.gov.
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