How do you know when to give the green line to someone that wants to rent your property?
I’m going to share what I know. This is, again, not a cookie-cutter strategy. Everyone has their style, but I followed a strategy when I first started investing in real estate. How do you do the qualification process for a tenant? First, you do an open house. You show them the premises, and typically, I use that time to interact with them. I want to see what the dynamic is going to be like. Remember, real estate is a relationship business.
Whether you’re in a relationship business with your banker, with your real estate agent, it’s the same thing with the tenant. This will be a marriage for a year, sometimes even two years, depending on how long you sign the lease. You want to make sure that your relationship, the interaction with them, will be pleasant. I interview them just like they’re interviewing me, and I start making small chat to see if this person is a good fit for me, for my rental.
I observe what they say about the house. I don’t necessarily tell them or follow them around, but you get their body language. They take a look at it, they look happy, that they look this happy. For example, to share a little bit about my first engagement when I was doing an open house, I had this couple come in, and this person was trying to find anything wrong with the property. There must be something wrong with this property because there’s no way that they’re running so cheap around here. Or I had this one person who came in, who picked on every single little thing and started asking a question, “Why is this like this? Why is this like that?”
You don’t want to make yourself miserable trying to rent to someone like that or having somebody come in and demand everything. I think this should be this way, and I think you can paint the walls this way. I’m like, “No. This is my property, and you’re here interested in my unit because you want to rent it. Why are you so complicated now?” You start judging the character, and obviously, the pool will start getting smaller and smaller until you find the person that it’s right for you, but that’s only step number one.
Some people do great in interviews. Now you need to test to see if that relationship is going to be sustainable. You’re going to go ahead and you’re going to grab one of those rental applications. There’s a lot of them that you can find online. Zillow actually has one of them. Here’s the link down below that you can use to check it out, but it typically asks questions like what’s your name, your source of security, your birthday, your employment history, how long have you been in your current job? If it’s less than six months, how long have you been in your last job? Pretty standard questions, pretty similar.
Once you gather, you collect that information. That’s when you’re going to go, and you’re going to do a background check. Some companies specialize in doing that. You don’t need to go crazy about it. I’m going to give you the links down below, and all you got to do is create your account, your profile, and pay for the background information about this person. First, you want to check, number one, they don’t have a criminal record, two, that they don’t have an eviction in their rental history.
Evictions are big no-no’s. You do not want to rent to someone who had been evicted before because if it happened once, it could happen again. I don’t care what the excuses are. You do not rent to someone who has an eviction. Third, credit. Also, I think I mentioned that in prior posts, but to me, credit is not a deal-breaker. Yes, you want someone who has excellent credit because it shows that they’re responsible for managing money, but you, in reality, don’t know what their circumstance is.
Maybe they went through a divorce, or perhaps they’re just out of college, or maybe they just moved to this country. Anyone who has been here any less than six months can’t even build the credit because they’re still waiting for their Social Security number. Those are the things that you might want to consider. Maybe this person is a recent graduate, and they have a lot of debt because of school. That doesn’t necessarily mean they’re wrong or poor in managing their money. They’re just trying to establish themselves together.
If this person is mean to you and it’s a headache to deal with, on top of that they have bad credit, yes, don’t rent it to them because why would you want to do that to yourself? But if everything checks in, they did everything possible to provide you with the documents you requested, landlord letters, job letters, bank statements, and everything you will typically require in a rental application. Why let that be a determining factor in killing the person from possibly being a great tenant? You want to consider that, but that I’m not saying now allows everyone with bad credit to apply for your rental property, but that’s something that you want to keep in mind.
Sometimes the area doesn’t allow you even to demand good credit. Let’s say, for example, if you have rentals in the middle to low-income properties, maybe those families, those renters are not going to have the best credit because they don’t make enough money in the first place, and sometimes, they have to make sacrifices. Sometimes they get into a lot of debt, which doesn’t mean they’re irresponsible. It’s just the way things are. That’s why I don’t go by it too much. Yes, it is nice to have, but I try to look at their behavior overall to see if that will qualify for something like that. Then in terms of everything else, I look at their bank statements. I want to make sure they have enough savings.
Not so much in the savings, I want to make sure that whatever they claim they’re making is accurate and true. I need to make sure that they have sufficient income to cover the rent expenses. Typically, when I get the bank statements, the first thing I check is, does this person makes what they claim they’re making? Do they get paid twice a month, once a month? Depending on the circumstances and how often they produce, the golden rule is the rent should not exceed 30% to 40% of your income. Make sure that that applies to you as well.
If you’re around, let’s say, it is $1,000, this person has to make at least three, four times so that this person can pay for your rent. Some of the rental applications already say that you have to credit this much. You have to make three, four times the annual rent or something like that. You get to ask that as well. The next thing you typically check is reference letters. You want to get a letter from their employers saying that this person works there. If it’s less than six months, then I’ll leave that up to you.
Some people don’t want to do that because when you’re in a job for less than six months, you’re still in the test period, they need to see whether you can stay there long-term or not. I don’t pay too much attention to that because if I see that there’s a record that the person was responsible in the past, let’s say, five years in a prior job, seven years in the prior one, hey, this is a step up for this person. Maybe they were offered more money. Why would I hold that against them? I’ll leave it up to your discretion, but definitely, it’s some of the things that I want to look into.
They also have landlord reference letters, although I don’t go by it too much because, hey, maybe this person was a pain to deal with for the previous landlord, and they just got to get rid of this person. By all means, of course, they’re going to give you a nice reference letter because they’re trying to get rid of this person. I focus on the items that I already shared with you, whether they can turn around, and whether they can provide me the required time. I look at their spending habits, their income streams to see if it’s something that comes in their way, whether they have money to pay the rent or not.
That’s how I qualify that and if everything checks in, you go ahead, and you ask for your rent deposit and your month advance, whatever your local laws and regulations are. Voila, that’s it, you go ahead, and you sign the lease, whether it’s for a year or two years and happy renting.