Landlords: How to Select Tenants

Back in early 2010 I wrote about my favorite spot to find prospective tenants.  Can you tell I am not very creative in finding them?

I am still renting 80% of my properties via the For Rent sign in the front yard.

But the important question is, once you an application or applications how do you decide if you should rent to the tenant or not?

We are flexible with most aspects, but here are the most important factors:

1. Income Qualifications

If monthly rent is $1,200 and the tenant only makes $2,000 per month, the process is over.  They are never going to be able to pay.  Their credit score or the rest of the story doesn’t really matter.  As a general rule of thumb, we hope for 3x rent (which would be $3,600) but will settle for 2.5x.  I do take into account all income for this calculation.

2. Criminal Background / Eviction Check

I always prepare a criminal check and eviction check (the criminal charge is called an unlawful detainer).  San Bernardino County, where most of my rentals are in, offer this search for free.    Evictions, hard drugs and theft usually will completely eliminate the tenant.  If we see domestic disputes and other crimes this is a red-flag and we usually discuss them with the tenant.

3. Security Deposit

Our typical deposit is $100 above rent.  Again, if rent is $1,200 our requested deposit would be $1,300.  Very rarely are we flexible on the deposit.

 Other Factors to Consider

  • Length of Previous Residency: we are looking for tenants to stay at our house for a long time, if they move every year that is a red-flag
  • Rental History: we are looking tenants that have experience renting/owning a house before versus apartment
  • Length of Employment: the longer the better
  • Ready to Move in Quickly: a tenant that is willing to move-in within two weeks is a definite positive
  • Pets: we prefer no pets, we do take them and charge a bigger deposit
  • Previous Rent Amount: if a tenant is currently paying $800 and applying for $1,200 that is a concern we usually discuss
  • Number of Occupants: many of our houses have quite a few occupants, our max is 2 per bedroom, but we like fewer

As you may have noticed a high credit score is not on this list.  We rarely check credit… typically only when something else on the application seems fishy.  Most of our tenants have credit scores in the 500’s anyways, how does knowing that help us?

What we do if we see Red Flags

Many tenants meet criteria 1 through 3 but the one or multiple other factors bring up some red flags.  We will still extend an offer to rent to the tenant but we will ask for an increased deposit.  By California Law you can collect a maximum of 2x rent for a security deposit.  This has worked out with great success for us, if the tenant is unsure about their ability to pay the rent they probably won’t be willing to hand over additional funds.

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6 Responses to “ Landlords: How to Select Tenants ”

  1. Horseshoes says:

    Hi Steve

    You have an incredible website that is extremely informative.

    I am a home flipper as well and am looking to purchase some single family homes as rentals. Unfortunatley the numbers of the houses in any area within 45 minutes of where i live don’t pencil as well as yours do. The best I can do in a non war zone area is purchase and rehab= 135,000 and rents at 1,500. The houses would be bought with a similar discount to the houses that I flip though and I think I will be able to qualify for financing in the 5% range. Are these acceptable returns for the headaches associated with being a landlord? Would you invest further away(hour and fifteen minutes) where the returns are greater?

    Thanks so much for your time.

  2. Steve says:

    If that means you can buy 4 to 10 houses worth $180-200k each with a 135k total cost, with $736 PITI payment (assuming a 108k loan). I would be pretty excited to do that, you’d only get about a 10% cash on cash, but you would be protecting major equity, have a pretty good product, and achieve maximum principle pay down and depreciation.

    Once you have to start paying 8-12% to borrow money I would probably move farther away to chase higher yields. Then you can sell those and pay off the good ones if you want to be done!

  3. Horseshoes says:

    I would be buying the properties cash or with hard money and then refinancing at around 5% after they’re rehabbed and rented. I’m not sure how much I would have to put down. Do you think with the equity I get from buying at a discount and rehabbing that I could conceivably get most of my money out of the deal?

    Thanks for the response

  4. Steve says:

    If you buy it (or have some one buy it) in entity A (that you have no affiliation with) and sell it to you entity B you can get all your money out. Otherwise, probably not.

  5. JC says:

    Hi, Steve,

    Regarding the income qualification, how do you evaluate if the prospective renter is a gardener who has irregular income, or accepting cash only? I knew some people they paid cash don’t put money in the bank.

    Should I avoid these people all together?

  6. Steve says:

    Tax returns. Bigger deposit. A list of invoices. I am pretty flexible, if it sounds legitimate. At that point I will also place bigger weight on other items (how long they stayed at previous residences, etc).

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