Since housing is a basic human need, owning an investment property can be a lucrative business. If managed correctly, investment properties are a great source of passive income. However, even the best investments aren’t without their risks, and in housing, your biggest risk is your tenant. 

By taking the time to thoroughly screen tenants, you can increase the chances of finding responsible renters. In doing so, you minimize the risk of financial loss. Responsible renters will take good care of your property and pay rent on time. 

The ideal tenant has no criminal history, a perfect payment record, and good credit. Credit and income requirements may vary depending on the value of the property, but a score of 670 or higher is generally considered “good.” Tenants are typically expected to earn two-and-a-half or three times the monthly rent. 

The first thing to do is to draft your lease agreement.

Determining Rent

Rent is typically determined by amenities, location, size, and age of investment properties. Before putting out a listing for your investment property, determine the minimum criteria for applicants. This includes income requirements, credit score, and criminal history. 

The amount you should charge for rent will vary depending on several factors, including the location, size, and amenities of the property. However, current market conditions will play the biggest role in determining rent prices. In the US, rent prices rose 14.07% year-over-year in 2022. It all depends on your rental property, your relationship with tenants, and their income. List your property on trusted sites like Zillow or apartments.com. 

Leasing Q&A

The first thing to do is to draft your lease agreement. It should be a clear and comprehensive summary including the rent amount, due date, late fees, and security deposit. The lease agreement also needs to outline the tenant’s responsibilities. They need to maintain the property, treat it with respect, and not cause disturbances. It should also include a clause allowing the landlord to terminate the tenancy in case of a violation of the lease agreement. 

Schedule a property visit with prospective tenants to show them around and answer questions.  This will allow you to observe the tenant’s behavior and attitude toward the property. Take note of any concerns you may have, to gain a better understanding of how they will treat your investment property once they move in.

In the application process, tenants need to provide a variety of materials. You’ll need their photo ID, pay stubs, social security number, vehicle registration, references, and more.

Applications

There are a few online services that you can use to screen and host tenants. Be sure to create an online rental application form hosted by a trusted service, such as TurboTenant or SparkRental. Choose carefully because it is cost-effective to use the same platform throughout the application process. These all-inclusive sites offer free rental applications and background checks. Once you have selected a tenant, they also run resident portals to collect payments and manage maintenance requests.

In the application process, tenants need to provide a variety of materials. You’ll need their photo ID, pay stubs, social security number, vehicle registration, references, and more. At the end of the application, charge a $35-55 application fee per tenant. You will need this money to run credit and background checks. Most background check providers also require a tenant’s written consent before the check can be conducted. 

During interviews with tenants, you can ask them specific questions you couldn’t on the application. During this interview, allow tenants to explain any anomalies in their background checks.

Background Checks

There are several types of background checks, but only three are important to landlords. They include criminal checks, credit checks, and renter’s checks. The online resource you used to create the application should highlight any red flags but be sure to review the information on your own. 

Be sure to comply with fair housing laws when evaluating criminal history. Having a criminal record isn’t a reason to deny tenants housing.  A tenant having a criminal record, doesn’t always mean they will be a bad tenant. However, it’s important to consider the nature and severity of the crime, as well as how long ago it occurred, before deciding.

A credit check provides information on the tenant’s creditworthiness and ability to pay rent on time. A credit check will also reveal any outstanding debts or financial problems that the tenant may have.

Renter’s checks are arguably the most important background information about a tenant. This information includes payment history, evictions, and payment ability. When reviewing the tenant’s background check, look for red flags, such as a history of evictions, unemployment, or unpaid rent. This will help you identify any potential issues that may arise during their tenancy and make an informed decision on their rental application. 

By taking the time to thoroughly screen tenants, you can increase the chances of finding responsible, reliable renters.

Next Steps

The next step in the screening process is to verify that the tenant’s income is sufficient to cover the rent. During the application process, they should have provided income verification documents. Look over them to ensure that the tenant can afford the rent and will be less likely to fall behind on payments. Contact the tenant’s employer to verify their information. 

After reviewing the rental application, contact the tenant’s current and past landlords to get an idea of their rental history. Ask about their payment history, whether they caused any property damage, and if they had any complaints from neighbors. This will give you a good sense of the tenant’s reliability and responsibility as a renter. If you need more information from the tenant, you can even schedule an interview with them. 

During interviews with tenants, you can ask them specific questions you couldn’t on the application. During this interview, allow tenants to explain any anomalies in their background checks. You should take this opportunity to allow the tenant to ask you questions, too. Be transparent about your investment property, the amenities offered, and the application process. 

Selecting a Tenant

Once you have completed the screening process, it is important to go over the lease with your chosen tenant. Make sure they understand and agree to all the terms before they sign. Once the lease is signed and any security deposit or first month’s rent is collected, the tenant can move in and the tenancy begins. 

Screening tenants for your investment property is an essential step in protecting your investment. By taking the time to thoroughly screen tenants, you can increase the chances of finding responsible, reliable renters. As a landlord, it is always better to be safe than sorry, so be diligent and thorough in your tenant screening process. Trust your instincts and be sure to communicate clearly with your new tenant. Ensure they know how to use your portal, and you are all set.