As a landlord in San Francisco for the past 13 years, I've hosted many open houses and interviewed a lot of prospective tenants. What's the best way to screen a renter? Here’s a list of qualifications and requirements I use when choosing a potential renter.
It’s important to evaluate carefully because a bad tenant can make your life a living hell. For example, just think about Michael Keaton's character in the movie Pacific Heights.
A fantastic renter who pays on time, takes care of your property, and follows the rules of the rental lease agreement is priceless. You will happily never raise the rent or keep the rent below market just so your renters can continue to rent from you.
How To Screen A Renter For Your Property
Here are some things to ask and look for as a landlord when you need to screen a renter for your investment property. If you are a prospective renter, you can use this list to best prepare and qualify for your next lease.
Income and Paystubs:
The general rule of thumb for a landlord is for renters to make at least 40X the monthly rent as annual income. In other words, if the rent is $2,000 a month, the minimum the tenant should make is $80,000 a year.
Prospective tenants should bring in their latest two paystubs and prior year’s W2 if you feel comfortable. If the tenant operates a business, have them highlight their income statement.
Duration of Employment:
When you screen a renter, look for a long duration of employment. The longer a renter is at one firm the better. If there’s a history of moving around every year, beware. The last thing you as a landlord want is to have to go through the entire tenant screening process again so soon.
Ask for a letter from a prospective tenants Human Resources department to verify employment and duration. Savvy landlords screen a renter on expected rental duration. I always look for ideal tenants who want to stay for two years or longer.
It is preferred to have six months of rent in liquid savings or semi-liquid investments or more. A landlord’s fear is that a tenant loses his or her job, runs out of money in several months, stops paying rent, turns into the psychopath from the movie Pacific Heights, and destroys the property!
When you screen a renter, ask them to bring a copy of a bank statement and brokerage accounts that show liquid assets. They don’t have to show everything, just enough to see they have assets to cover at least 6 months worth of rent.
If you're a renter and have tons of assets, feel free to show up to 36 months worth of rent but not much more. Having too much money makes a landlord think you’re only here for a pitstop until you find something better.
More Ways To Screen A Prospective Tenant
Letters of Reference:
Almost every single landlord will experience some type of problem tenant if they landlord long enough. Letters of reference are important to verify a tenant is worthy. When you screen a renter, make sure they provide the telephone number(s) of previous landlords so you can speak to them about their experiences with the prospective tenant.
Many times, letters/emails don’t mean anything because the landlord is just being nice so that you can hurry up and get out of their place! As a result, please also provide work references or outside activity references as well.
Credit Report and Credit Score:
The first thing landlords should check when screening a renter is their credit score. A credit score is always used for screening purposes if there are many applicants. Even if there are only a couple applicants, a credit score is still used to gauge the tenant’s ability to pay the rent on time.
It doesn’t matter how much a tenant makes or how much is in the bank if they aren’t a responsible payer. You need to see an actual score along with their credit report. Otherwise, be suspicious that something is wrong.
Additional Ways To Screen A Renter
Emphasis On Duration:
It should be deduced from a prospective tenant's rental and employment history whether they are a short-termer or a long-termer. A smart renter who wants to really want to increase her chances of snagging an apartment will write an explicit e-mail or letter stating her intentions of staying for the medium-to-long term.
The sweet spot is around 3-5 years. Any longer and a landlord might start wondering whether they’ll be able to keep up with market rents and get their units back in case something doesn’t work out, or if they want to move back in.
As a landlord, you can screen as many renters as you want. At the end of the day, choosing the right tenant is a leap of faith. It’s the same for hiring someone for a job or admitting them to a school.
You never know how the person will turn out until after they settle in. Tenants should consider bringing a friend as a good sounding board for the property they are considering.
Landlords should also bring a friend to meet with prospective tenants as well. We are often blinded by our unconscious biases about people. Thus, it is always good to have a different perspective.
Real Estate Investing Recommendation
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Please screen your renters like the CIA. IF something feels off, don't settle. Once you get a bad tenant in, it may be very difficult to get them out. They could among the property, pay rent late, and cause a nightmare.
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