Owning rental properties is one of the best ways to build wealth. Finding the best tenants is, therefore, crucial. This post will discuss how to select the best tenants for maximum prosperity and peace of mind.
The Best Tenants
The best tenants have the following attributes:
- Always pays on time through auto electronic deposit.
- Doesn’t damage the property.
- Spends their own money to paint and upgrade the property where desired.
- Knows how to change lightbulbs, fix toilets, replace light switches, and maintain appliances.
- Never bothers the neighbors.
- Never throws parties.
- Never has anybody not on the lease living in the property.
- Never leaves despite rent hikes to cover the cost of rising property taxes, insurance fees, and HOA dues.
- Never contacts the landlord.
- Sends landlords gifts during the holidays.
Oh my! What a dream tenant! Too bad the real world of landlording doesn’t work this way. Something always goes wrong. And it’s your responsibility as a landlord to address the issues in as professional a manner possible.
I’ve always strived to be the “dream landlord” by quickly fixing anything that breaks and incentivizing tenants to stay long term with stable rents. I’ve also gifted great tenants bottles of wine during the holidays.
Luckily, I’ve never had a truly horrible tenant that required an eviction. The damages done to my rentals have been mostly cosmetic. Further, I was eventually paid all rent due.
To find the best tenants, you must gather the appropriate documents and analyze them with a fine tooth comb.
Required Application Documents
A lot of landlords go with their gut feel about a tenant at the expense of requiring important documents during the application process. For example, landlords might get easily swayed by a charming or attractive person.
Instead, interview your potential tenants thoroughly. NEVER waive the documents you need to make an informed best choice.
Banks spend 1 – 4 months analyzing the financials of mortgage applicants. You should be as thorough as possible given your property takes up a larger percentage of your net worth.
Here are some documents and conditions you should consider asking for:
* Minimum last two paystubs. Your tenant should ideally be employed with a steady paycheck. Request the last two paystubs at a minimum. Consider asking for a paystub from the year prior as well.
* Minimum annual income. Shoot for a tenant who makes at least 40X the monthly rent e.g. $40,000 annual income for $1,000 a month in rent. This way, you won’t have a tenant stretching to pay more than 40% of their after tax income on rent. $40,000 gross income equals $32,000 in net income after paying a 20% effective tax rate. $32,000 equals $2,667 a month. Paying $1,000 a month equals 37.5% of net monthly income.
* Duration of employment: The longer a tenant is at the firm the better because it shows maturity and stability. Be wary of applicants who move around every year for a new job. It shows they are still finding themselves, don’t know what they want, or like to pounce at every single new opportunity. All these attributes are not good for landlords who want less turnover.
* More proof of employment. You want to get a copy of the offer letter or a written statement from HR that the applicant is currently employed with the firm. Having HR write a letter is part of its job, so it’s not a burden. If an applicant balks at this request, beware. It is also easy to forge employment documents, so request there is contact information for you to reach out and verify.
* Financial assets. The more money in the bank, the better. Shoot for a minimum of six months of rent in savings so that in the event of a financial crisis or a job loss, the tenant will have a better ability to continue paying the rent. If the tenant is able bodied, it generally doesn’t take more than six months to find a new job. It might not be the perfect job, but at least it’ll be able to generate some income, especially with the gig economy allowing anybody with enough desire to make $20+/hour.
* References. Make sure you speak to or get a written letter of reference from the tenant’s previous landlord or boss. Beware of landlords who secretly want to get the tenants out and will say anything positive to get them to leave. If you suspect this type of trickery, you need to pick up the phone and have a heart-to-heart with the reference writer. Consider asking for the contact information of a second landlord as well. The second landlord maybe able to give you additional feedback.
* Credit report and credit score: The higher the credit score, the better. Shoot for a minimum 720. Credit scores below 700 indicate late payments or past financial difficulties. You may encounter scenarios where a person has a poor credit score because of a recent graduation from university, high debt, or a short history of earnings. It will be up to you to decide what you are comfortable with. If you are willing to accept a lower score, ask for an explanation. You can check your Experian credit report here for a buck.
* Resume or LinkedIn profile: Every working professional should either have an updated resume or LinkedIn profile that gives a snapshot of education and professional history. You’ll also be able to learn about the applicant’s interests, which may or may not sway your decision. Ask if they have their own website. If they have, that may demonstrate extra initiative because most people can’t be bothered to establish their own platform online.
All these documents are voluntary. You cannot force an applicant to give you anything. At the same time, applicants cannot force a landlord to rent them their property either. Make it clear to the applicants that all requested information is voluntary and will be kept private. The more information you can get, the better.
To get the best tenants, you must also inteview them like you would interview a candidate for a job.
It’s important to look in the applicant’s eyes and have a normal conversation about life. It’s much harder for people to ruin your place or not pay your rent after they’ve met you face-to-face.
You’re essentially trying to build some rapport before and after you receive all the requested information. It feels good from both sides to work with someone you like.
Here are some interview questions to ask:
- Why are you moving?
- How long were you at your previous place?
- What did you like and dislike about your previous place?
- What is your current role?
- What do you think about the local economy?
- How long are you hoping to live here and what are your plans for the future?
- Ask about what their company is up to with the latest news e.g. what do you think about the $3.5B raised from the Saudi government by Uber?
- Ask them about the latest current events or local sports team e.g. how about them Warriors choking after being up 3-1?!
The best tenants will answer these questions candidly. Based on my experience interviewing over a thousand candidates during my time in finance and my experience interviewing tenants since 2005, I’ve found that people who can look you in the eye, naturally tell their story of why they’re moving without hesitation, and share their thoughts about the future tend to be good tenants.
On the other hand, people who can’t look you in the eye, have no opinion about the local economy, and can’t intelligently discuss their interests might be more suspect.
If you want to make extra sure your tenants respect the lease, you can discuss your occupation if there is relevancy. For example, if you are a lawyer of any kind, your prospective tenants will probably think twice about screwing you over.
If you are a online media entrepreneur, journalist, or have a large social media following, your tenants probably won’t want to upset you either. People tend to take advantage of others who are weak. Be nice, but show strength.
The Final Stage To Finding The Best Tenants
You should ask for a minimum one month rent as the rental deposit and the first month’s rent up front. The rental deposit is there to cover for any damages. The rental deposit also encourages tenants to follow the lease terms, an example of which I’ve linked to below.
The largest rental deposit you can charge is usually 2-2.5X monthly rent. Please check with your local state/country.
Finally, before a tenant moves in you must write up a pre-move in checklist noting the condition of the property room-by-room. Both landlord and tenant must sign the document so that there will be less conflict during move out.
Often times you will not remember years later how your property was. Spend time taking pictures for documentation as well.
Money, Good Citizenship, And Duration Of Stay
When I was a younger landlord, I focused mostly on money, then good citizenship, and then duration of stay. After all, I had a mortgage to pay.
Now that I’m older and no longer have a mortgage for this particular property, I focus on Duration Of Stay, Good Citizenship, and then Money. My time and peace of mind is more important now. I suspect the same shift is true for many landlords as they age.
Make sure you rank what’s most important to you each time you search for the best tenant possible.
Reviewing A Tenant Search
My latest tenant hunt involved renting my 2/2 condo in Pacific Heights, San Francisco. Previous rental arrangements included two roommates, a single woman, and multiple couples.
The most recent tenants were two roommates paying $3,950 a month. The master tenant had three roommates during her three years there which was a larger than expected hassle.
After a month of searching, I was lucky enough to find a couple living separately who wanted to take the next step and live together. Every couple who has rented from me ended up getting married.
This couple completed the application and submitted all documentation requested. I could tell they loved the place. The only problem was they weren’t willing to move in for one month, leaving me with $4,200 in lost rent if I chose them.
Yes, I decided to raise my rent by $250, or 6.3%. I first tested the waters out at $4,400 and $4,300 for the first three weeks and couldn’t find anybody interested. Therefore, I logically lowered the price to meet demand.
A Decision To Make
Two days after the couple filled out the application, a couple 25 year old guys showed interest in my place. They were ready to move in within a week. The main problem was that one of the guys seemed a little strange.
They didn’t send any documentation. They said their analyst programs ended in 1 and 1.5 years respectively. Finally, one of the guys brought his girlfriend, which may indicate there would really be three people living in my place instead of two.
In the end, I decided to go with the couple and forgo a month’s worth of rent. I’d much rather have tenants who will stay for 2 – 4 years than tenants who will only stay for 1-1.5 years and potentially do more damage to the place.
The HOA makes the move-in/move-out process trying, and I truly believe they’ll like staying at my place for the long term. I explicitly asked the couple how long they think they’d want to live in my place. He said at least two years because he was getting a promotion in four months. His new role would require him to be in San Francisco for at least two years.
No matter who you choose as tenants, before you sign the lease, make sure you get all their documents and speak to them at least twice, once before and once after they apply.
You’ll never truly know until they move in whether you’ve gotten great tenants. But if you follow my suggestions, I’m confident you’ll have fewer headaches in the future.
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Updated for 2021 and beyond.