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Tammy Vitale’s Real Estate Investing: How Do You Qualify Good Tenants?

Wylde Women's Wisdom, Peace

My girlfriend, Conni James, is my inspiration and font of information for buy-and-hold investing (rentals).  She has amassed a portfolio of 11 houses and manages them all herself while also managing her own graphics business.  So it is to her I turned when a colleague of mine asked, “How do you qualify good tenants?”

My own rentals are either to my adult children (in which instance, I am simply holding on to the houses for them.  I consider the houses their houses not mine), or, in the case of sober houses I have in Florida, managed by my son, who is in the recovery community.

A slow market at home (i.e., my last personal residence sitting on the market since November with only one showing), has me thinking about taking on the task of managing a rental myself.  I have done this before with my cottage, but that didn’t seem as daunting as renting out my home – maybe because fixing up 434 square feet  is much less intimidating than fixing up 2100 square feet plus full basement, garage, and large shed.

Conni has shared all of this with me before but was kind enough to get on the phone with me to share again while I typed it down.

Conni notes that all of this information is available on-line and really doesn’t take much digging.  She suggests the Landlord Protection Agency as a great place to start if you are not an agent (they do require proof that you own multiple properties and are, indeed, a landlord).  She isn’t an agent.  I wasn’t when she first gave me that information for renting my cottage.  (I am an agent now and so I have access to forms through my brokerage which I prefer to use).  There are lots of free samples of forms on the LPA website, and a forum where landlords chat with landlords.  Caution:  every state has its own set of rules for rentals.  If you are doing this on your own, be sure to visit your state level agency (on line is fine) and your local planning and zoning to make sure you have covered all of your own bases as a Landlord.

Another great place for information on buy-and-hold real estate is Bigger Pockets with tons of blogs and podcasts for just about any *general* information you might need.

Here are the top items to consider when reviewing applications for potential tenants.

Credit Information for Prospective Tenants

You are looking not just for the credit report, but also for “credit worthiness.”  Do debt to income ratios.  Conni suggest that the prospect’s income should be 2.5 times their debt to make sure they have room to cover the rent on a regular basis.  She has her own range for credit score, but generally anything over 650 and no criminal record is a good basis to start consideration.  Think about looking at lower scores if they are able to put down first and last month’s rent plus a security deposit, and have no criminal record (it will be up to you to decide on your own parameters, but this provides a starting guideline).

Another device Conni has used is their willingness to set up direct deposit of rental to her account from their paycheck not from their bank account; this can offset the risk of lower credit scores.  While they can stop that automatic payment any time, they don’t tend to after having gone to the trouble of setting it up.

Prospective tenants much be employed with a track record of employment.  If someone has just come to the area for a job, ask for a copy their employment letter.

Criminal Information for Prospective Tenants

You can look this up on line in Maryland.  Check and see if you can in your state.

Conni notes that everyone has some kind of record:  traffic stops, changing names, child support, married, divorced (unless they’re 18 and then you just have to dig harder).  She says that if you can’t find anything, there may be something wrong – make sure you have a correct name.

Google searches, linked in and FaceBook can also yield information.

Tell the prospective tenant that you are going to run a criminal background check and ask if there is anything the prospect would like to say before that is done.  Conni says that sometimes she gets things from prospective tenants that don’t come up on the investigation.  Then she shares this story:  One woman told her that she was at a Dashin with a friend.  Her friend went inside while she pumped gas.  Each thought the other paid.  When she got home, there was a police car waiting for her.  Dashin filed a police report and she immediately paid.

References from Prospective Tenants

Always get references – professional, not personal – on the application, including the current landlord.  Conni has caught folks giving friends as professional references several times.  Once she looked up who owned the house after a questionable conversation (the guy on the other end was a “bad liar – sounded guilty”) and found out that the name given as “landlord” did not match the name of the owner.

Then there was the landlady who told her the story of the “tenant from hell.”  The woman said that as much as she wanted to get rid of the tenant, she couldn’t lie to a prospective landlord.

When you interview the current landlord, you can also ask to see the premisis as part of your background investigation (you might want to add permission from the tenant to do that on your application form).

Evictions can be found in court records.  Only a court can evict a tenant.  Sometimes the LL decides she wants to sell and gives notice.  The tenant may consider that the same as an eviction.  Ask if they have been evicted (and also have it on the application), and ask for details.  For Conni (and you have to decide for yourself), eviction, guns or drugs are an absolute “no.”

Applications from Prospective Tenants

Be sure your application spells out permission to run credit checks and police reports – and have the prospective client specifically sign those permissions.  After everything is signed, ask again if the tenant has anything they want to say before the checks are run.

Some Final Advice When Managing Your Own Rental

Do your homework before you let the tenants into your rental.  Don’t skip any of the steps.  Don’t put yourself in a position where you have to take the first person who puts in an application, willing to sign anything to get into the rental (that in itself can be a red flag).

Finally, how you upgrade and maintain your rental will have an effect on the amount you can charge for it.  Plus, a well-maintained home have a better chance of attracting people who like to live in and keep a well -maintained home.

 

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