Owning and operating a rental property is similar to owning any other business. Like a commercial business, your rental property can either make or lose money, and increase or decrease in value. One of the biggest factors that can impact whether your rental property is profitable is who you choose as a tenant. Tenants who pay their rent on time, adhere to the lease agreement, and take care of your rental property can be the key to success.
So how do you find quality tenants to take care of your investment and pay rent on time? While there isn’t a formula for finding the perfect tenant, there are steps you can take as a landlord to help increase your rental property’s chances of success and profitability. Keep reading to learn how to create a tenant screening process while complying with Fair Housing laws.
Creating a Tenant Screening Process
It can be tempting to skip the tenant screening process in order to minimize apartment turnover time. However, not thoroughly screening your applicants could result in costly, time-consuming problems down the road. By implementing tenant screening criteria, you can make informed decisions while renting out your property.
Set Your Tenant Requirements
You likely depend on your tenants’ consistent rent payments to cover your rental property’s mortgage, insurance, and other costs. Screening applicants for the following requirements can help ensure they have the means to be stable tenants:
Income: In general, your tenants should have about 25% of their monthly income available for paying rent. So, if you charge $2,500 in monthly rent, your tenant should make at least $10,000 of take-home pay a month to afford your rental property. If your tenant doesn’t meet this benchmark, they may struggle to pay their rent.
Credit score: A credit score can help you evaluate an applicant’s ability to pay rent on time by giving you an idea of how well they’ve handled and paid off other debts. While any score above a 670 is typically considered very good for rentals, most landlords accept scores between 600 and 650, especially since renters often don’t have mortgage payments in their credit history to boost their credit score.
Criminal history: In some states, you are able to check a prospective tenant’s criminal history, which can help you avoid putting your property or neighborhood at risk. When reviewing records, it’s important to assess whether or not a prior conviction is relevant to how they might be as a tenant.
Pet limitations: As the landlord, it’s up to you whether you allow pets in your rental property or not. If you choose to allow pets, you must also decide if you want to implement breed restrictions, limit how many pets are allowed, and whether to charge pet fees. Keep in mind that some insurance policies won’t cover pets or certain breeds, so be sure to review your insurance policy before making your decision.
Number of occupants: It’s important to communicate with applicants about the number of adults allowed to live as permanent residents at your rental property. Fair Housing laws state that two people per bedroom is a reasonable standard for landlords to follow. However, laws regarding occupancy limits vary by city and state, so be sure to contact your city’s local code enforcement agency before setting any occupancy limits.
Provide a Rental Application
After determining which criteria is important to you, you can require prospective tenants to fill out a rental application. You can also choose to charge an application fee to help increase the chances of more qualified tenants applying. A comprehensive application can gather essential information, including personal details, employment history, income verification, references and rental verification, and consent for background and credit checks. Be sure to let prospective tenants know all of your requirements up front for transparency and to ensure they consent to any background checks.
Verify Income and Employment
You can verify an applicant’s income and employment by contacting employers, requesting pay stubs and employment contracts, or using professional verification services. If an applicant submits a fraudulent pay stub, you can deny their application and pursue legal action.
Run a Credit Report and Background Check
After receiving an applicant’s completed rental application, you can run a credit and background check. These reports can help you assess an applicant’s ability to meet financial obligations and gain insight into their payment history.
Check Previous Address, Landlord, and Eviction History
Asking for information about a prospective tenant’s rental history can uncover important information, including eviction history and former landlord relationship status. You can contact an applicant’s former landlord to discuss payment history, adherence to lease terms, property maintenance, behavior as a tenant, and any issues or disputes during tenancy.
Once an applicant has met your initial requirements and passed your credit, criminal history, and background checks, you should contact the applicant to:
Verify information on the rental application
Discuss any discrepancies between the information they provided and the information you received from employers and previous landlords
Allow them to ask questions about the rental property and tenant expectations
Discuss the timeline for the application process and when a decision will be made
To avoid breaking Fair Housing laws, make sure the tenant screening questions you ask during the interview are legal, objective, and directly related to the applicant’s qualifications as a tenant. For example, you can ask if the applicant has any pets, but not if they have any medical conditions.
Review All Applicants and Make a Decision
After vetting each potential tenant, you might have more than one qualified applicant to choose from. In these instances, it’s important to base your decision on objective criteria—such as credit score and median household income—to choose a tenant fairly. Using a “first come, first leased” approach can ensure no qualified applicant is subject to discriminatory practices, and protect you from any legal action by denied applicants.
Complying With Fair Housing Laws
The Fair Housing Act was enacted in 1968 to prohibit discrimination against those renting or buying a home, getting a mortgage, seeking housing assistance, or engaging in housing-related activities. Under the Fair Housing Act, you cannot screen or deny tenants based on the following protected classes:
Sex (including gender identity and sexual orientation)
Some state housing laws preclude the use of additional criteria such as:
Number of dependents
Prior convictions/criminal record
Age higher than the state’s age of legal adulthood
In addition to restricting the use of certain criteria in screening, the Fair Housing Act also forbids the use of discriminatory practices during the screening process. The following could be considered discriminatory practices:
Refusing to show an available unit to a particular candidate
Requiring different rules for identical units
Telling a prospective tenant a unit “isn’t right” for them
Telling a prospective tenant a unit is not available while it’s still on the market
Harassing or intimidating prospective or current tenants
Steering certain tenants into a particular unit or neighborhood based on gender, race, or any other protected class
Asking excessive or inappropriate questions during the tenant screening process
When creating your tenant screening process, it’s important to take all the protected classes into consideration to ensure you don’t violate the Fair Housing Act.
An essential aspect of owning and operating a rental property is taking the time to find qualified tenants. Whether you take on that responsibility or trust a property management company to do so, having a screening process in place for prospective tenants while being aware of and complying with Fair Housing laws can help ensure that your rental property is occupied by quality tenants.
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