Once you have acquired a rental property, or converted real estate that you already own to a rental, the next action you have to take, assuming it is unoccupied, is finding tenants.
This may seem like one of the most daunting tasks you have to perform. Difficulty aside, it is definitely one of, if not the most important one you will undertake.
It’s about their qualifications
When I first was thinking about this topic, it was from the perspective of where would I look for good tenants. As I fleshed the idea out further, I realized it isn’t about where to find a tenant. That is the easy part. The trick is to qualify the prospects you find until you are left with a potentially high-quality tenant.
Given this, I’m going to approach this by discussing what I think are the most important qualification factors for prospective tenants, and end with a short discussion on where to advertise.
Here are the qualifications I will discuss:
- Monthly Income
- Credit Score/Credit History
- Rental History
- References
Please don’t sue me!!
This may be a tad overdramatic, but at the same time, I feel it is warranted. I am NOT a real estate professional, or an attorney. I am pulling from knowledge about the landlord/tenant laws in the states I operate in as well as rules regarding discrimination.
If you have questions related to what qualifying criteria are legal where your properties are located, I encourage you to investigate the landlord/tenant laws applicable to that country or state.
How much income does a prospect need?
This is probably the most important qualifier as it will overshadow any other issue. If you bring in a tenant who does not have enough income, their standard of living, and thus their stability will be negatively affected. This in turn, means that your rental income will be less stable. When a tenant is right on the edge of being able to pay their living expenses, then things start to get squirrelly.
The rule of thumb that I’ve always gone by has been that you should spend from 25-30% of your gross income on housing. Except for high incomes, the closer you are to the higher percentage, or exceeding it, the more likely it is that you will be house poor. In other words, you might be able to pay all of your expenses, but will not have much if any left over afterward.
Having said that, this ratio may be changing, and not necessarily for the better. The higher rents have risen in the past few years, the higher the percentage of one’s income is required to pay them. I heard a recent stat that said the percentage of income being put toward housing in places like San Francisco and New York is upwards of 40-50%.
Places like NYC and SF are outliers and present a unique rental situation that is not ideal for most investors. Most regions of the country are not like that. When I am looking for tenants, I look for gross income that is at least 3 times the rent. That will give a ratio of at most 33%. I have had no problem finding prospective tenants with this income level.
What does their credit look like?
I initially had Credit Score and Credit History listed as two separate topics, but they really need to be looked at in context of each other.
In general, the higher a persons credit score, the more responsible they are with money in general. If they routinely pay all of their bills on time, including any recurring bills like car payments, student loans, etc., it generally means they handle all of their finances the same way.
This topic gets more complicated when you look at credit history in combination with credit score. Someone may have a very low credit score, but it may because their credit history is not very long. This could mean that potentially negative items are having a disproportionate effect on their score. This is not to mean you should simply ignore a low credit score, but potentially ask questions to determine whether it is indicative of a larger issue, or a short-term problem.
This is one area that may be more dependent on the rent that is being asked. Higher rent is going to require higher income prospects, and in general, their credit scores are higher and histories are longer and more favorable.
What is their rental history?
The rental history of a prospective tenant gives a glimpse into their living habits. It may show if they have moved around a lot, and potentially the conditions under which they left their prior residences.
At the same time it is always important to find out the rental history, it may be somewhat unreliable. Depending on the circumstances under which someone left or is leaving their last residence, the landlord may say something positive simply in order to get the tenant out. I’ll leave it to you to decide the ethical bounds of this tactic, just know that it can happen.
It is also entirely possible that looking into the rental history may not yield much information other than confirmation that the prospect did live somewhere, and how much they paid for rent. This may be due to laws regarding disclosure of information or a fear of liability or slander if the tenants were described in a negative light which caused a denial of application.
What do people say about them?
Asking for references on an application is the final piece of the tenant-qualifying puzzle. As with the rental history, your mileage may vary. If you don’t ask, however, you’ll never find anything out.
References may shed a lot of light into people, depending on who they are. If it is a close friend, or relative, you will generally get a largely positive description. If it is a boss or some other person, you may receive more detailed information. Either way, you will need to take what you hear with some doubt, and just try to find the common thread running through the conversation.
If all you have to go on is a reference, then you need to find other ways to qualify tenants. If, however, you are on the fence either way about a prospect, then discussion with a reference may help you make the choice.
Where are these people?
Well, here you are. You have an application put together with questions about income, credit score, rental history, and references. The only problem left is you have no-one to show it to. Fortunately, there are a number of straight-forward options for finding prospective tenants. Let’s talk through a few of them here:
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Use friends/family network: Spread the word among friends and family that you are looking for a tenant. Give details about the unit that is available and who you are looking for. This can actually work fairly well as people will generally send good prospects along, assuming that your relationship with them is good.
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Free Online Service, eg. Craigslist: At least in the United States, most major cities and areas have a Craigslist page. You can post advertisements for your available unit and will be contacted by interested parties. This option does require some work as the listings are chronological and will need to be renewed every few days to bring to the top of the list. Also, when setting up appointments, you will have to deal with no-shows. That is the primary downside of this option. Upsides are that these pages get a lot of traffic, and have a wide range of viewers.
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Paid Online Service, eg. Apartments.com: This is exactly what it seems. You either pay to put a listing up, or you pay to contact people who express interest in your free listing. Either way, there is a cost. Your results may vary. I don’t think these sites get as much traffic as the free ones. Their prices can also be very high per month. My vote is to stick with the free sites.
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Advertise in Local News papers: Run an advertisement in the local paper. These will usually be a flat fee and will run either once or for a set number of issues. They are generally more costly than the online only services. In some cases, an online ad will be included as well. There are two main reasons to consider running an ad in the paper:
- Your property is in an area not well served by an online marketplace like Craigslist.
- The demographic in your area does not have computers or widespread internet access.
You should make the decision of whether to run an ad based on your knowledge of the area. You should be able to figure out if it is necessary by checking for a Craigslist page and seeing what traffic it has referencing your area. If you are out of the area, you will want to go on your property manager’s recommendations and local knowledge.
This should give you a good overview of what factors you need to consider when qualifying prospective tenants. The more information you can obtain about them, the better your decision-making will be. With that comes the caution of being aware of what factors you may not include in your process. These cover the general ones like race, religion, sexual orientation, etc. You definitely need to be aware of the relevant landlord/tenant laws in your area as they will give you specifics.
You should come up with a specific set of criteria that you will apply to all prospects. This will help avoid any perception of bias for or against a prospect.
Once you have this criteria outlined, start advertising using some or all of the methods listed above. My preferred method is Craigslist, as it receives the most consistent and varied traffic in my areas of interest.