It's probably the number 1 question I get asked all the time when I talk to new property owners venturing into real estate investing. So let me give you the "book" answer then my real answer!
- We look for 3 things in a tenant:
1. The ability to pay is very important. Our guideline is rent is not greater than 31-35% of their gross monthly income. The standard rule of thumb for many is income is 3 times rent. If their income is non-taxable income then we can give a little on this since we compute based on gross taxable income and not take home pay and if they pay no tax their take home is a bit higher.
2. Rental history is checked and very important. They need to have no evictions in the past 5 years, and have at least one good landlord reference in the past 24 months. Word of caution: Check who owns the property that the tenant rented last as many bad tenants will have their friends pretend to be the landlord and give them a good reference. If they fake this, it is easy with a few questions to trip them up.
3. Last, and not least, we check credit. We are not looking for good credit, as we understand many times the difference between tenant and homeowners is credit history. What we are looking for is collections from landlords, collections recently, and recent good or bad pay to see if they are trending up or down.
So what really matters? Rental history! They can be great on paper but a really bad tenant, or they can be bad on paper and a really good tenant. I tell my clients the way they treat their landlord is the way they will treat you! So the key is to get an honest landlord evaluation and beware of the landlord who wants them gone and gives good recommendation. Figure out a reason to visit them at home, a form you want to drop off or something, and see how they live there. If its a mess, then yours will be a mess. If they live good and treat the landlord good, they will treat you well.
Good luck to you and let me know if I can help!
Dennis, really good points and it makes a lot of sense. It is so true to actually make sure the reference is the owner and not a friend or family member.
Cal
So true. Sometimes no matter what it says on paper, your intuition tells you something else. I have a home now for sale that tenants devalued by thousands. They got behind on the rent during the winter, never removed their trash, and let pets do damage to the property. The tenants were evicted-but the property is disgusting. On the other side of the coin are tenants who take better care of the property than the owner and help it sell. I like to check the landlord before the current landlord! Strangley enough, the sloppy people who were evicted are in a new rental and we never got a reference call!
I GOOGLE and I Fb FIRST before I get to the application. For new-hires to the area, I request a copy of their New Hire letter for my files and I want to note their social networks!
Great points.
Great advice everyone in the business of real estate should follow. A mistake investors often make is hurrying to fill a vacancy and not completing their due dilegence.