Investing in income properties can be an amazing way to generate monthly income and ultimately contribute to a retirement plan. Along the way, however, we all experience multiple challenges – poor tenants being one of them. Some tenants will be obvious bad choices, but others know how to hide their secrets well enough that they often seep through the cracks of selection. So how do we learn to identify these not-so-obvious tenants from hell?
1. Conduct a thorough credit check. Review any credit-related information carefully, not just their score. Look at what outstanding debts they have, whether they make payments on time, and try to determine if they will have any upcoming debts (such as buying a new car). Some questions you simply can’t ask, so you’ll have to use your best logic.
2. Ensure their employment is sufficient to cover rent and additional tenant costs. Their monthly income should more than cover rent and other obligations. Request an employment letter from each tenant that states their employment status (e.g. full-time, part-time, contract, start date, annual salary). Have the employment letter printed on company letterhead and signed by their direct manager. For self-employed individuals, you’ll want proof that that the company exists and see income generated over the last six to 12 months.
3. Conduct a tenant “interview”. This is a good opportunity to learn if you can trust the potential tenants. After all, it’s your home that you’re lending to someone, so trust is an important component. Try to get an idea of their lifestyle – do they enjoy hosting parties, do they present themselves well (indicator of cleanliness), are they handy and capable of general home maintenance, etc? Simply having a non-threatening conversation with the potential tenants can yield a ton of information about them.
4. Follow up on references. More often than not references are never called. If they’ve rented before, ask specifically for past landlord references. Be sure to call and ask all pertinent questions regarding payment frequency, cleanliness, any complaints, etc. If they’ve never rented before then you’ll have to get creative when probing their friends and family.
5. Be wary of certain rental markets. The numbers may support a particular market for investment, but the renter pool may contain an extraordinary amount of tenants from hell. Either be prepared to have potentially longer tenant searches or avoid these types of markets all together. Poor tenants will always equal headaches and the potential for lost cash flow.
Even if you follow all of the above, the odd bad tenant may still get the best of you. In these cases, be sure to have a firm grasp of tenancy legislation so you fully understand your rights as a landlord and their rights as a tenant.
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