By Dr. James M. Dahle, WCI Founder
Learning how to screen a tenant properly will boost your returns, reduce your hassle, preserve the value of your property, and allow you to reach your investing goals sooner with less risk.
Tenants Matter
When investing in real estate, you are not just investing in a property. You are also investing in tenants, those who either live or work in the property. Typically, the only, or at least the major, source of income for a rental property is the tenant. If the tenant does not pay the rent regularly, you are very unlikely to have a positive return. With many types of real estate investing, choosing the tenant is neither in your control nor your responsibility. Your REIT manager is not going to call you up to ask you what you think of the new tenant. The same goes if you are investing in private funds or syndications of 100-door apartment buildings.
But if you are going to invest directly in real estate, tenant selection is a critical aspect of the investment. Even if you hire a property manager, you are likely going to still want final approval of the tenants.
How to Attract the Best Tenants
One of the chief difficulties of getting great tenants is that there are not that many great tenants out there. Think about it. If you have someone who takes great care of a property, stays long-term, and earns a stable, high income, how long are they going to be a renter for? Not very long. They're eventually going to buy property themselves and move out of your property. So, you're left with a combination of people who are either not staying very long, don't have very stable income, don't have very high income, or don't manage money well. All of these factors create costs, hassle, and risk for you. Ideally, you get the best tenant possible. However, there are a couple of factors working against you.
The first is that the best tenants are highly desirable to other landlords, as well. They actually have negotiating power of their own. What do they want? They want a good landlord, a nice property, and low rent. If you want the pick of the litter as far as tenants, you are probably not also going to get top dollar when it comes to rent and a short search. Want more tenants to choose from? Charge a little less than market rent. When they see they can get 20% more house for the same price, you'll have a lot more applicants and you can get a qualified one sooner.
How much should you discount rent below the market price? As much as it takes to get a good tenant in there. Maybe 5% is enough. Maybe more. You can also offer other incentives to make the property more attractive to good tenants—a lower deposit, first month free, covered utilities, covered snow removal or lawn care, etc. When you renew the contract, you can likely raise the rent back up to market rates without losing that good tenant because they now have disincentives to move:
- It costs money to move
- It costs time to move
- Better to deal with the “devil you know”
- They now have friends in the neighborhood
- The kids are in school
The second factor is the cost of vacancy. Maybe if you spend six months looking for a tenant, you can find an incredible one. But it will cost you six months of rent. Which is worse: a mediocre tenant or a six-month vacancy?
Legalities of Tenant Screening
It is absolutely critical that you become an expert in tenant-landlord law in your state. Some states are more friendly to tenants while others are more friendly to landlords. This becomes especially important if you own rental properties directly in multiple states. Your state laws will tell you what you can and cannot discriminate against a tenant for. Violate these laws at your own peril.
In Utah , for example, a landlord must abide by the Utah Fair Housing Act or be liable for a $10,000 administrative fine plus civil damages. This act names 10 classes of people (seven protected federally, three protected by the state) that you cannot discriminate against (i.e. refuse to rent to or treat differently) just for that reason. These classes include:
- Race (Federal)
- Color (F)
- Sex (F)
- Religion (F)
- National Origin (F)
- Disability (F)
- Familial Status (F)
- Source of Income (State)
- Sexual Orientation (S)
- Gender Identity (S)
Interestingly, there are exceptions in Utah. You can discriminate against people in any of those classes IF you do not have a real estate license, you live in the property, AND the property has four units or less. These laws vary by state, but you had better have your state's laws down cold.
Note what is not on the list. For example, pets are not on the list. You can't discriminate against someone because they have a toddler, but you can if they have a dog. Smoking and drug use are also not on the list. In most states, you can actually require drug tests before renting to a client, but this can be a legal minefield. Remember that you cannot discriminate against a tenant for a disability, and both past drug abuse and addiction can be considered a disability. There are many states where marijuana is legal and frequently prescribed. Opiates, benzos, and stimulants are also frequently prescribed. Drug tests also have false positives and negatives.
The other advantage a landlord has in the legal space is that the laws state that you cannot discriminate against a protected person solely for that reason. If there is some other reason you didn't like that tenant besides the fact that they're in a protected class, you're good to go. Maybe their credit report didn't look awesome or you didn't like the way they interviewed or what one of their references said. Just realize they could come after you if they think you're discriminating against them. Better not to even ask or know about their protected status as much as possible. None of it should be on your application or advertisements, and they should not be subjects discussed with the tenant at all.
It is also critical to have “rental criteria” and then to follow the “First Qualified Tenant” rule. This way you are not comparing tenants one to another. You are comparing tenants to your pre-set list of qualifications. Those qualifications might include:
- Paid application fees and security deposits
- Photo ID
- Employed for a certain period of time
- Income requirement (must be reasonable for the rent you are charging)
- Provides a rental history of a certain length (five years?)
- Has renter's insurance
- Credit history: All accounts current, certain score, no evictions, defaults, foreclosures, bankruptcies, etc.
- Criminal history: No convictions for a certain period of time
- Maximum occupancy: You can set reasonable rules like two people per bedroom plus one more. So three in a one-bedroom, 5 in a two-bedroom, etc.
- Pets: No pets or pets with a good reference from a prior landlord and current veterinarian or pets of a certain size, breed, or species, etc. Can also specify an additional pet deposit or pet rent. Be aware that assistance animals are not pets legally. This includes service, assistance, and companion animals. You cannot discriminate against them or charge more for them. However, you can require their doctor to sign off that they are handicapped AND that the animal is medically necessary and verify that signature. Best to call the doctor yourself to make sure they understand their obligations. Lots of people try to get around pet policies and costs using this tactic.
The First Qualified Tenant rule suggests you take the first applicant who meets your specified requirements rather than the “best tenant.” So, write your requirements carefully and be sure to give them to prospective tenants and follow them. If you are in the screening process already with a tenant, it is OK to take an application from another tenant, but let them know there is someone ahead of them in line, so they do not think you are discriminating against them.
How to Screen a Tenant
Your goals of screening tenants are to find a tenant who will:
- Pay on time and in full
- Not commit crime
- Not bother the neighbors
- Not damage the property
- Honor the lease agreement
Your rental criteria and your screening should all be geared toward those five factors.
The Application
The first and easiest thing to do to begin screening your tenant is to have an application. Get as much of the information you need as possible from the application. The remainder of the process is mostly verifying the information. Certainly not renting to someone who provides false information on the application is reasonable. You can ask about their credit, prior landlord issues, employment issues, criminal issues, drug use, etc. If that all looks good, then all you have to do is make sure they're not a liar.
Do a Credit Check
Remember to get consent to check credit, but don't rent to someone who does not give it. If someone has paid everyone else they owe money to for the last five or 10 years, chances are very good they are going to pay you, too. On the credit check, you are looking for delinquent accounts (especially utilities if you want them to put the utilities in their name), repossessions, judgments, foreclosures, bankruptcies, and a history of paying late.
Do a Background Check
You already asked them if they have a criminal history. Now. you are simply checking their honesty.
Call the Employer
Verify the length of employment and income. Ask if the income is variable and, if so, what the range has been.
Drug Test
You already asked if they use drugs; now you are simply checking their honesty. Remember if you decide to do drug tests, you should be prepared to accept them if they can provide a physician's or pharmacist's note about prescribed controlled substances. You cannot use the urine sample to screen for medical problems, and you must specify exactly which drugs are disqualifying before administering the test. You probably can't draw blood due to unreasonable search laws.
Call Prior Landlords
You need to also call the tenant's prior landlords. This might be the most important part of the whole process. If they were good tenants before, they probably still are. Be careful not to violate your state's Fair Housing Act and the tenant's rights when talking to prior landlords. But ask about:
- On-time payments
- Pets
- Lease violations
- Number of occupants
- Proper notice given when leaving
- Did they leave on time?
- Do they owe money?
- Neighbor complaints
- Police incidents
- Damage to property
Be careful here. Tenants sometimes give you the number of a friend or family member rather than the landlord. If you are suspicious, you can request the address and look up the owner and number yourself. You can also ask questions about landlording to establish that this person is actually a landlord. Ask about the local landlording association or their own rent-setting practices.
Check all the references they give you. Some unscrupulous landlords might give you an awesome reference just to get this problem tenant out of their unit.
Denials
If you deny an applicant, be sure to follow all required laws and best practices. Give back the deposit collected with the application immediately. Tell them why they were denied, using your rental criteria. You may have to give a written letter if the denial was due to their credit. You may have to give them a chance to appeal if the denial was due to criminal history. Wish them well in finding another place.
Screening tenants properly is a critical aspect of being a successful direct real estate investor. Doing it correctly up front (and having a solid contract in place) will prevent a lot of problems on the back-end and help you to have a more pleasant and profitable experience with your investment. Experienced landlords do this routinely. You should, too, even if are just an “accidental landlord.” If you feel ready to learn more about real estate and how to be a landlord, I recommend checking out WCI's No Hype Real Estate Investing course. It will give you the foundation you need to learn about all the different methods of real estate investing.
What do you think? How do you screen your tenants? Do you do criminal background checks? Drug tests? Have you ever been sued for discrimination? What happened? Comment below!
Selecting the right tenants is absolutely such a huge part of successfully running your rental real estate business!
Even if you are using a property management company, I think it’s best practice to have an active role in choosing tenants. That’s why my wife and I actually show our own units. No better way to get a sense of someone than to meet them in person. We also run credit and background checks.
Another good tip is to call not the current landlord but the one before that. If they are a bad tenant, the current landlord may lie because they want to get rid of them!
I find this article somewhat agitating. And discriminatory. Due to the fear that is generated
By these guidelines. Possibly on both sides. Since I’ve been a renter since 1980. What about bad landlords? Good luck finding your perfect tenant.
I’ve been lucky these last 15 or so years. I’ve had great landpeople. And life has been relatively ok for me. My life has not always been so. Im the guy that offers to mow the lawn or take it apone myself to do so. I also shovel snow if has not been done.
Or brings in everybody’s garbage cans. Or helps all night long keeping the generators going because the power was down and all the ice cream in the ice cream store would go bad. On 2 separate occasions. Or gives you a text cause work gave me cases of vegetables or fruits and I don’t use it.
Or cleans the slippery wax on the plastic on stairs
That someone’s going to break there neck on.
I still have a bad or nonexistence of credit .
But I always pay the rent. And my utilitys. I have disputes with some phone company’s games. As well as some fraudulent medical billing . I frankly don’t care if my credit history is bad. That could mean several things about a person. Not that im a bad tenant. Or don’t pay the rent. Or what about the people who have hardships beyond there control. Covid? So now your labeled unworthy of having a place to live. I understand your not here for the benefit of free housing.
Or maybe this is one of those feel good articles.
Make sure you squeeze the melons before buying it for the tenderness sweetest melon.
Also in a perfect world there won’t be any people making profit from others basic needs.
. a life long tenant..
So you don’t think a landlord should use a credit score as one of their tenant screens? I guess you’re entitled to that opinion. Maybe if a landlord can’t fill their unit they would consider dropping that requirement. But if you can get someone that is otherwise awesome AND has a decent credit score, why wouldn’t you take that tenant over someone that is otherwise awesome and doesn’t have a good credit score? If you don’t pay me for my doctoring work, I’ve got to wonder if you’ll pay me for my landlording work. If your medical bills are fraudulent, go get them cleaned up and fix your credit score. If they’re not fraudulent, pay what you owe or arrange a settlement if you can’t afford to do so.
I’m VERY curious how you envision this perfect world where nobody makes a profit from basic needs like food (grocery stores, restaurants), utilities (energy companies, telephone companies, water companies), medical care (doctors, hospitals), clothing (department stores, clothing manufacturers, shippers), and shelter (landlords, developers).
Would you work if you weren’t paid? How do you think landlords get paid for their work if not by profit from the properties?
Good article. Can you recommend which service you use for credit and background checks?
“When you renew the contract, you can likely raise the rent back up to market rates without losing that good tenant because they now have disincentives to move”
AKA how to be a jerk as a landlord. Do not do this.
Consider if the tenant decides they don’t want to stay after all. Now you’ll have to find a new tenant. Would you lower the rent below the going rate again? How would that look to the previous tenant if they see that you weren’t actually raising the rent to market rate? More importantly, how would YOU want to be treated as a tenant?
So you think you should leave your rents below market rate forever? If that’s the case, why invest in real estate at all?
Just as you have a disincentive to have to go find a new tenant, they have a disincentive to move. So you work out a deal that is mutually acceptable where you don’t have to find a new tenant and they don’t have to move. It’s no different than having a promotional deal to sign up for something to get people in the door. Business 101.
“Why invest in real estate at all?” That’s a tad dramatic don’t you think? If you can’t successfully make a good return charging 95% of market rates for rent, I highly doubt you would be able to make a good return charging 100%.
If you want to have your pick of tenants (not a bad idea at all) and one of your strategies of doing so is to charge below-market rental rates, then yes, I absolutely do think you should leave your rates below market. I’m not saying you should never raise the rent, just that it should stay in line with the initial ratio to market rate.
If I sign up for a new internet provider and they are having a promotional rate, I know going into it that it’s going to increase after 6 months or a year. If you tell the tenant up front (i.e. before they apply) that the rental rate will be increasing substantially after the initial contract, then I have no problems with it. Of course, that will certainly deter some likely desirable tenants, but you can’t have it both ways. If you don’t want scummy tenants, don’t be a scummy landlord.
I agree a permanent discount does give you a larger selection of tenants to choose from long term.
It’s your property. You get to do with it what you want. Personally, I don’t feel like raising rent at the end of a contract is a “scummy” move. I raise rates on my advertisers all the time. I give them plenty of notice, I abide by the terms of our contracts, and I treat them the way I would want to be treated. If your tenants want to lock in their rent for a longer period of time, they should ask you for a longer contract and be willing to pay more for it.
If you feel badly about raising rent to market rates after offering a below market rent, format it differently. Give them the first month free. It’s the same thing in the end.
Why should the renters pay more for a longer contract when it guarantees you income during the length of that contract? I’ve been renting apartments for years because I’m not ready to purchase a house yet, and the longer contracts are almost always less expensive per month than the shorter-term contracts because the landlord knows that they risk having the apartment sit empty once the contract is up.
FWIW–I’ve had rent modestly increased almost every year. Usually less than 5%. On my current lease, rent wasn’t increased at all because there are apartments sitting empty due to COVID and the landlord would rather keep me in place than risk me moving.
Because it locks their rent in place and ensures they don’t have to move. The contract benefits both parties. I agree that short term contracts also have costs. How they all balance out determines which one costs more. But as a landlord, I’m not going to give you a 10 year contract at the same rate I would give you a 1 year contract. Within a year or two I’ll be locked into a submarket rental rate.
I would agree on raising rent on good tenants. It may depend on the rental market, but I rented a variety of condos and houses from 2010-2020 (Chicago and S.F. Bay Area) and no one ever raised my rent (or any of my friends rents) by more than a fraction of a percent despite staying in places for years. We’re a dual income physician family who always paid on time etc. In July, the landlord tried to raise our rent 5 percent after being in the place for year. We said screw you and bought a house (we were planning to wait another 12-24 months). As you said, good tenants have options and are likely not used to having their rents raised – you’ll probably lose a fair amount of good tenants by raising the rent by any significant amount (or the tenant may start reporting a variety of potential code violations to the city – good tenants generally know their rights). From a tenant perspective, better to price it correctly the first time.
Same thing happened to us in SoCal. After one year, landlord wanted to increase rent by 7-8% (always paid on time, had zero maintenance requests, etc) when the place seemed fairly priced to begin with. Yeah no. Told him we wouldn’t re-sign the next day. Wondered if it was because they wanted to sell it or something but they listed it for rent at the new higher price, it sat empty for months and they lowered it again. Ha!
Yep, I’m sure it happens all the time. As tenants we knew that the landlords knew our income and financials and knew that we could easily afford the rent increase (assuming we wouldn’t want to pay to move or deal with the hassle of moving). It’s easy to feel taken advantage of. My family owns rental properties too, and when we get a good tenant the rent stays basically the same until they move – because we’d rather keep them there. Good tenants who feel taken advantage of by sudden 5-10 percent rate increases to return to “market rate” are likely to just get angry and move (living situations are much more personal then online ad revenue). Or one of my friends got even by reporting a heating code violation that cost around 20 k for the landlord to fix – don’t think the rent increase quite covered that.
You let your properties sit with a heating code violation and you think a landlord who raises rent to market rates is bad?
A good landlord provides a fair deal and good service. Market rents, fixes broken stuff, and abides by the contract. That’s much better in my opinion than a landlord that ignores the property and doesn’t abide by his contract and hopes you won’t mind because you’ve got cheap rent.
Huh? Adam said his friend reported a heating code violation that cost his landlord a considerable sum to fix. He said nothing about it being his own property.
Sorry, got confused with the 50 different conversations I’ve been involved in today. I read these comments on a different screen/part of the website than you do. I don’t have the previous comments in front of me when I reply.
It’s one thing to raise it to market price. It’s entirely different to raise it above market price. If you raise it to market price, they go look around and see that they can’t get anything better and come back, sign the contract, and pay the rent.
If you raise it 8% above market price, they go look around, find something just as good for cheaper, calculate how much it will cost to move, and probably make the move.
Tires … The front tires … Are the rotated … Are they balanced …. Are they clean … If they are you have a 99% chance of getting a good tenant … There are a few who fell through the cracks …. 1% matters …
Funny, but possibly quite effective.
As accidental landlords, my wife and I rented our house to fellow military officers at a just below market rate. They were acquaintances and military income is publicly available. The contract was one year, we kept the rent the same for the 2nd year, and then wanted to raise it the next. The tenant balked. Neighborhood rental rates had gone up, and he had been promoted, which in this case came with higher income and higher housing allowance. I was wanting 7.7% rent increase, which according to the comments here is scandalous. We compromised at 4% increase.
My conclusion is that those who expect fixed rent for several years have a fundamental misunderstanding of how the world works. If you go to the same barber for years, you expect to pay the same as when you had your first haircut?
Any time a business doesn’t pass on their own increases costs to customers, it reduces profit. The utilities don’t care what you paid for electricity or water 5 years ago. If you aren’t a huge business, your supplies cost more every January.
Accidental landlords, and probably plenty of those in residential real estate for portfolio diversification, don’t make any profit. They have no obligation to subsidize your lifestyle.
I would recommend that landlord explicitly state in a housing contract that rent will increase 3-4 percent yearly. You could even list conditions where this increase could be waived, such as meticulous care of landscaping or property.
To save time, I ask a potential renter to bring his/her last 2 months of pay stubs . This verifies employment and gross income easily.
I also tell the potential renter to bring a blank check or enough cash to cover the deposit and the first month’s rent.
The potential tenant does not have to show anything. If the client likes the property and I would consider renting to him/her, then I ask to see the pay stubs , cash or check.
I also ask the client to bring a copy of his/her
credit score if they have one. Presently they usually can get their credit score for free online. That is not a requirement for me but a good credit score is certainly a plus.
So true. You can have the best property in the world, but with bad or no tenants what is that property really worth? Thanks for sharing.
Personally, I would say that trying to use a honeypot of below market rent to capture great tenants is a genuinely AWFUL idea. The supposed benefits here are all counteracted by the same issues on the landlords end likely on a larger scale to boot.
1. It costs money to move –> It costs money to renovate/update a home for a new tenant. Even if your property is well-kept and not in disrepair there are ALWAYS cosmetic improvements that need to be made before a building turns over. Your existing tenants know these problems and have been comfortable enough living with them for a period of time. Local moving costs are not that extreme until you’re getting into the 4-5 bedroom home range. Our last local move cost ~$450 for a truck and 3 hours of moving support. So the rent increase would need to be less than $37.50/month to net out that staying is better than leaving.
2. It costs time to move –> It costs time to show your property. The internet has made finding new housing incredibly simple. You can view 4-5 properties within a week with little effort.
3. Better to deal with the “devil you know” –> The exact same thing is true for the landlord. Your next tenant could be a total nightmare. The probability of landing a terrible landlord is significantly lower than the probability of landing an awful tenant. I’ve rented from 8 different landlords since 2007 and all were completely fine. I’ve lived in 4 multi-unit buildings. Awful neighbors drove me away from 2 of them.
4. They now have friends in the neighborhood –> There are other properties in this neighborhood. There are other properties in the adjacent neighborhoods. If the person is not from that region originally they might actually have greater preference for a new neighborhood but inertia is keeping them in place.
5. The kids are in school –> This is the only one that might compel a great tenant to stay. Really depends on the school and the kids.
The biggest reason is that tenants have a lot more avenues to dissuade future renters. As soon as your listing hits the market is would be incredibly easy for a renter to hop onto Reddit, Facebook, Twitter, Nextdoor etc. and comment on their current lease, the offered lease and the new listing. I’ve seen these type of posts frequently on my local subreddit. Tenant says “avoid XYZ landlord” and then posts their story. Beyond the internet, the tenant can actually sabotage your ability to rent the place when showing it to prospective tenants. Pretty easy for the tenant to be there while you are showing the property. I’ve had several situations where I’ve looked at properties and the current tenant was in the unit and there was obviously a frosty relationship with the landlord. Immediate red flag as a renter without ever getting the details.
The other thing that this article misses is the fact that by its own professed standard the current tenant could easily pass the “First Qualified Tenant” test laid out. What do you do when they reapply?
Anyway, the best way to handle a rate increase is to do so as transparently as possible. One large management company I rented from cited “increased cost of labor” to justify a $10-15/month increase every year. Others have cited increased cost of water utility for a small monthly increase. The only time a rate increase drove me to move was when the rate jumped 15% in a year with no explanation. If your tenant asks why the rate is going up you should have a reasonable explanation that is more than “I was trying to trick you with the initial pricing.”
Last comment is that a GREAT landlord realizes that a great tenant is worth their weight in gold. The type of person that makes a great tenant likely associates with similar high-character people. If you treat them with respect and don’t mess around with silly games you can actually leverage them to find the next great renter. The last two places we’ve rented have been the direct result of friends giving up their lease/recruiting us. The first we moved into the duplex next door to our friends when the prior tenant left. The second another couple gave up their lease to move to a new city and we were ready for a single-family home. Both times the landlord was able to secure a new tenant with literally 0 added effort.
You guys have certainly convinced me that the better avenue is a first month free sort of discount. It’s really the same dollars in the end of course.
You’ve also made me very glad to primarily be a passive real estate investor. Who needs to deal with these sorts of tenant issues? Life’s too short.
Great article. My wife and I have decided to never, ever own rental property directly, but as former renters (lo, those many years ago) it’s still interesting to hear some of the landlord challenges.
Curious to get your readers’ opinions on whether there should be exceptions to these generally good rules. For example, my wife and I aspire to eventually travel as early retirees, while living off our multi-million-dollar portfolio. However, we would be violating a lot of these rules of thumb – we would not have a prior landlord to contact for a referral (we have owned for decades), nor would be have any significant regular income other than just investment dividends.
Would any landlords reading this rent to us? Wondering what your readers think about exceptions to some of these rules.
We rented in residency after owning in medical school (both the wrong move when viewed retrospectively incidentally), but our landlord really had to think about it when we said “We can give you the number to our mortgage lender.”
As far as no income, worst case they simply ask you to pre-pay for the year!
So yes, there can always be exceptions.
I am a landlord and I would certainly consider renting to you!
If you don’t have any references because you have owned a property for a while, then that is quite easy to verify. It does create a little more work for my property manager as they’d need to verify it as well as ring a few other character references, but that is certainly not a dealbreaker.
As for your income, if you are receiving dividends from your stock investments, I’d treat that similar to how I’d treat a wage (i.e. is the rent less than 30-50% of your after-tax income? If not, how can I be confident that you would be able to pay it?). I might even be a little more lenient as I don’t need to worry about you losing your job and I’d probably assume that if you started having difficulty paying the rent, you’d be able to sell down some of your portfolio.
I think there are always exceptions to the rule. I try and make an effort to get the full picture, rather than just seeing if they tick all the boxes (I obviously have boxes to tick, but I’m willing to look past them if I think the situation warrants it).