16 Jan How to choose good tenants for your real estate investment property
So you finally bought your real estate investment property and you need to find yourself some tenants. We’ve all heard the horror stories from friends of friends or on the news. If you do it right then you’ll have nothing to worry about. If there is one golden rule, it is be patient. Better to miss out on one month of rent than take in a sub par tenant willing to move in as soon as possible. Once again, I like to give it to you straight. You’ll get an idea of what the official rules are and then what happens in real life.
Here is an outline of what we will be looking at today:
- The rules
- Create an online application for a quick pre-visit screen
- What to look for in applications / during showings
- Does the tenant’s story flow?
What are the rules when selecting/denying tenants for your real estate investment property?
There are too many rules to learn and memorize. But you only really need to know a few. The biggest one you need to be aware of is that you cannot discriminate against race, age, finances, disability, kids etc. The usual stuff. This is the official lingo given to us by the government. Although I can respect why these rules are in place, the truth is you need to do what is in your best interest. You are letting a stranger live in your house. Tenants have all the rights. This is your first and last chance to get it right before it is nearly impossible to evict them. You can’t discriminate, but you have the right to deny anybody (more on this later).
Let’s go through a few of these discriminatory variables:
Age: You can’t deny someone because of their age. To me it isn’t really about age. It is about younger people who don’t have incomes, making more noise due to more friends coming over, lack of care/cleanliness. Most of my tenants (9/10) are actually in their late 20s and it works out perfectly since they text message instead of calling, they understand the online rent payment system and they have great taste when it comes to decor (this last one is just something I noticed. Not a big deal but it does make the place look much nicer when showing it to the next set of tenants). Older tenants are great since they have the income, but they are less likely to be able to promptly respond to inquiries (repair man coming shortly etc), understand the online rent payment system and might be more sensitive to things like sound (applies when you split a house into 2 units). To be quite honest though, I have not received a rental application from anybody older than 55 so I am unqualified to judge this age group.
Finances: This one surprises me. You can’t discriminate based on a percentage of income you have designated as a cut off. What do i mean by this? Well take for example banks. To assess if you qualify for a mortgage, a bank will take your mortgage payment, debts, condo fees etc and see what percentage of gross income it comes out to. This is called a debt service ratio. Usually your loans for the year/month can’t exceed 33% of your GROSS monthly/yearly income. So if you make $100k/year before taxes, your mortgage payments for the year cannot exceed $33k. You are not allowed to deny rent to someone based on this type of calculation.
To me this is crazy. If you cannot afford something then you need to look for a cheaper alternative. I once had someone apply for a unit that would come out to $20,000 a year (with utilities). Their income was $25,000 a year. How could you not take a look at this application and wonder how on earth they would afford to live. I can’t even go to Costco without dropping a few hundred dollars.
Disability: This one is a bit controversial and I will tread lightly. But I think it is important for people know. Someone having a disability is not the issue. I have never known what the actual disability was when people filled out my quick screening application. And I don’t really care because that is not what I look for. I personally can’t hear out of one ear and am considered disabled as well. There are many forms of disability and 90% of them are non visual. I don’t discriminate on disability, I discriminate on bad applications. But every single application that has had an ODSP (Ontario Disability Support Program) applicant in it has been horrible. There is a distinctive pattern: they smoke, they opt for the expensive upper level instead of a more affordable lower level even though their income cannot support the rent, they have big aggressive dogs when I mention only small pets allowed, they can’t string together a sentence and they are willing to say yes to any terms and move in ASAP.
I don’t care what the circumstances are, if an application resembles what I just described above, ODSP applicant or not, it is a hard no before I even get to the end of your application. Is it horrible to paint everybody with the same brush. Absolutely. But unfortunately this is life. You need to protect yourself BEFORE anybody gets into your house. If you go to court and win, you are not allowed to garnish any money from the ODSP program. It is a lost cause.
Tenant applications with Families/Kids: Young kids make noise, they are a bit more destructive and they cost money. To be quite honest, any tenant will be somewhat destructive to a property. If you left your own place right now, I’m sure you would have holes in the wall, scuffs, paint chips around the house etc. To me the destructive part of it isn’t the issue. The noise unfortunately is somewhat of an issue since I split my properties in 2. More running around, footsteps and in and outs because of school can cause noise issues. If you are renting the whole house or there can only be 1 family living in the property then there is absolutely no issue. Take into account the cost of kids. If the income is already cutting it close then affordability will be an issues if they have kids. Sounds discriminatory? I don’t think so. Everybody wants to drive a $100k car. But you may only be able to afford 15-25k. Everybody wants to own a million dollar home, but they may only be able to afford 400k. The bank assesses your financial situation then gives you a yes or no. It is no different when renting to someone. It is your house therefore you get to choose.
Create a quick screening application for viewings and then a full application after viewings.
I’ve mentioned before that I use rentapplication.net to create online rental applications. It is free and is very easy to use. It is clean, mobile friendly and is crucial to screening tenants. I have 2 applications. A quick application that takes less than a minute to fill out where I ask rough income, how many people, do they smoke, move in date etc. If someone wants to come see the place they need to fill it out. No exceptions. It is very rough information. Those are are opposed to filling it out unfortunately do not get to come see the place. 99% of them will. It literally takes less than a minute to fill out. It saves both parties time should something not mesh properly. Move in dates are sometimes too far apart, someone smokes etc. It also takes me 45 minutes to drive down, so I don’t want to waste time on someone I know is a definite no. Also, people want what they cannot afford or don’t took a good look at the their situation before they apply. This allows me to rip off the bandaid quickly and let them know they do not qualify.
What to look for in rental applications when selecting tenants for your real estate investment property.
Are the applicants “with it”:
You don’t want an air-head who can’t figure anything out as a renter. You will get a lot of calls for little things that normal people would take care of on their own. You also need them to be able to figure out your automatic withdrawal and utilities payment system (It isn’t hard I promise. Just a few clicks of the mouse). Someone who is intimidated by that simple process will be intimidated by other simple tasks in your rental house. You can usually sense from initial emails if the applicant isn’t the sharpest tool in the shed.
For example I clearly state in big letters at the beginning of the ad that if interested, please fill out the quick viewing application at the bottom of the ad if you would like to come take a look. I know someone is a real winner when they fill it out and then get in touch. But then there are the ones who just email and say “i want to come see it”. Then I mention to please fill out the quick viewing application(takes under a minute to fill out and very general) by following the link in the ad. The link is clearly visible at the top of the ad with an explanation beside it. They get back to me saying they can’t find it. I email them the link then they tell me they can’t figure it out. Already in my head I have written this person off. Could they be older and not as savvy with computers? Sure. And I would take that into account. But most are not. If I need to hold their hand through something so easy I know I am going to have problems later on.
You will also be able to feel out an applicant by the way they send messages or emails. Take for example an email I got today, while writing this article. The email said “can i set up a viewing”. I then politely mentioned to fill out the quick viewing application. Then she responded:
“okay will have filled out by tonught after diner sometime sodry just in my last college class and then kids n dinner but will hce sent back tonight thank yiu again…hce a great day.”
I am all for shortening words in texts and emails. I do it all the time. This is different. She cannot string together a sentence. Is this the first impression you want to give a landlord? As mentioned before, casual is fine. Something like “sure I’ll fill it out tonight thanks” is perfect. But I can 100% guarantee you that the above candidate will be a NO. She didn’t bother reading the first line stating she had to fill out the quick application. She is in college and has kids which means the income will most likely not support the upper level of $1500 + $200 utilities. And lastly she can’t write. Could I be discriminating against a hard working mother with kids putting herself through college? Could her husband make enough by himself to afford the rent? Absolutely. And I will take a look at the application if it comes through. Just know that 99% of the time these types of applicants will be a no go.
Can the applicants comfortably afford the rent?
You don’t want someone who is barely making rent. Life is tough. We all know. Unexpected surprises come from left field all the time. How much of a buffer? it is up to you. For something that costs $12,000 a year I’d like to see a 40k Salary. For something around $22k I’d like to see around 60k a year. Would I go slightly lower? Maybe. Remember these are gross incomes not net incomes.
I also don’t like seeing two 30k jobs add up to 60k. I prefer salary jobs that start at 40k. Why? I look at it as minimum wage is $11 an hour. If you work 38 hours full time you are taking in $22k a year. At 30k you are not too far off and are most likely on an hourly wage. There is nothing wrong with this. But the truth is that this person will be clinging to every single penny they own. Again nothing wrong with this but it means they are less likely to change a lightbulb by themselves or buy a garbage or a snow shovel for $15 if they need it. If they don’t work the hours, they don’t get paid. With a salary you usually get paid when you miss work. There is also more turnover in lower paying hourly wage jobs. I know it sounds harsh, but this is the reality. You need to make sound decisions and take emotions out of it. This is also about comparing applications. Should you not be able to choose between 2 applicants, this is one way to dig deeper into the applications.
What is their credit rating?
The one thing that does not lie is someone’s credit rating. Always do the check yourself. Don’t let them hand you over a credit check they’ve done themselves. It can always be altered. I can alter a pdf on my mac in a few minutes and make everything look great. Nobody can hide from their credit. It is really the one piece of information that will always be accurate and tell the whole picture. And we are human beings. We are flawed and we always end up reverting to our old mistakes. Someone who owes money will surely owe it again. The only time I allow for credit bumps is in divorces when the applicant has a strong income.
Does the tenant’s story add up?
Everything the tenant says must flow somehow. Does the story make sense or is something fishy? Usually when someone wants to move in ASAP it is a red flag. It means they are a poor tenant and everybody is denying them. But I had a wonderful tenant the other year who was moving from Burlington and needed a place ASAP because she was starting work on January 5th or so. She was younger, her age matched with someone who was just coming out of school, her previous address was a school residence so there was no landlord reference, she didn’t have much on her credit report but it was great, her employment letter matched with what she said and she had her masters. So usually I would be weary of someone who is younger and who left it to the last minute to search for a place. But everything checked out and her story made sense. She ended up being an A+ tenant.
Another time I broke one of my rules and accepted someone who had bad credit. She was going to have her sister co-sign so I allowed it. Her story was that she was going through a divorce because her husband abused their finances. They were selling their home and she was looking for a place to rent. She came with her sister to view the place. They had good questions for me. Her sister did all the talking and this applicant was a bit more quiet. She was a nurse and had a great salary. The story made sense. Her income checked out, her house had just sold and I could tell that she was a great person in an unfortunate situation. She has also been an A+ tenant to this day.
The little things you notice are important. Go with your gut.
If someone books a showing then doesn’t show up then it is a no going forward. If someone drives a 60k car but makes $30k a year and wants to rent your basement apartment, then their priorities aren’t quite there. It would be a no for me. If your tenant says they don’t smoke but then smell like a chimney when they come for the showing, it is a no. If your tenant’s car is a mess inside, chances are your place will become a disaster as well. Trust your gut. If it doesn’t feel right there is most likely a reason.
You have the right to refuse any applicant you want.
But wait? Isn’t this going against everything I just said? You can say no to anybody, as long as you don’t disclose why. Just say “sorry, unfortunately your application has not been approved”. Thats it. Not a word more. As long as there is no reason for this rejection you are in the clear. Easier said than done. If you are a nice person, it will kill you to not tell the ones who are so close why. Chances are nobody is going to put in the time to complain to the landlord and tenant board. But you never know. I find it almost easier to ignore someone’s application or email, but in the end they’ve taken the time to fill it out so I make sure I tell them they have not been approved.
I’ve always felt bad for some of the applicants that have come close and have to admit I’ve told a handful of them why i couldn’t accept them. But I don’t feel bad for the horrible applications. When you are an adult, nobody is going to hold your hand and spoon feed you. Take a look in the mirror and self evaluate yourself. I’ve also written an article on “how your rental application needs to be perfect” should you be someone who is constantly being rejected by landlords.
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