One of the greatest factors in determining whether a real estate investor will succeed or fail is the screening process used when rental applications are received. The key areas an investor will want to evaluate are: credit report and score, employment history, rental history, criminal background, and driver’s license verification.
Credit Report/Score: Having the entire credit report is just as important as having the score. A false reading that may inflate a score is when an applicant has deferred student loans. The loans will show that the debt is current and in good standing, even though a payment hasn’t been made on it yet. If the applicant has a poor credit report, that student loan debt could bump their score to make them appear to be an attractive candidate, when in fact they are not. An applicant with a strong credit score (720+), its an indication that the rest of their life will be in order and will not require as much scrutiny.
Employment History: This helps determine the stability a person has in their life. Simply having a job with sufficient income to pay the rent is less important than the length of time at their current job or within their field. You want a tenant with a solid history of generating income. Beware of applicants who job-hop every six months.
Rental History: Stability is key here, too. An ideal candidate has been renting from the same landlord for several years. Watch out for those who have been living with a friend for the past few months and for gaps in rental history. Our experience is that someone moving out from mom and dad’s house will often make good tenants, but you have to be clear with the rules and expectations, as this is a new experience for them. We always charge an automatic double-security deposit for no rental history. The rule of thumb is to contact not only the current landlord, but the previous landlord. Be aware, the current landlord may say anything positive to get the tenant to move out!
Criminal Background: Our property management software includes a national criminal background check with our screening, but double-checking the history is strongly recommended. For Pennsylvania, we use the following site: https://ujsportal.pacourts.us/CaseSearch. This site will also show landlord/tenant complaints. Be careful, landlords are not required to include a tenant’s birthdate when filing for eviction. Therefore, if you include the birthdate in your search criteria, you may miss any landlord/tenant complaints. These will not show up in a criminal background check, so this step is very important. It’s helpful if your research shows that the person has lived within York and Adams counties for over the past 10 years. If this is the case, you can limit your search to the applicant’s name and those two counties.
Driver’s License: This one is not so important, but we like to know that their driver’s license is active and not suspended. If the applicant has a suspended license, they are either dependent on a ride to get to work or are they still driving and hoping to not get caught? There goes their income!
As part of your application, make sure the applicant is signing a separate document allowing previous landlords and employers to release information to you. Today, employers and previous management companies will only give out limited information which is obtained through an HR department. We require the applicant to provide 2 recent paystubs which will show their position and pay rate. The only information I need beyond that is the length of employment, which a supervisor will usually provide, once he knows you have their paystub that shows title and pay rate.
Above all, the most important part of screening potential tenants is having a repeatable system in place that gets applied consistently with each applicant. Gut feelings are for people who don’t know what they are doing but need to make a decision anyway. If a disgruntled, denied applicant files a lawsuit for discrimination, a good history of gut feelings will not win your case. You need to show that you used a system based on facts alone to make your decision.
Investing in income-producing real estate is one of the best ways to generate wealth in America. But placing a bad tenant who stops paying rent can lead to anxiety, frustration, sleepless nights, health concerns, and arguments with your spouse. Paying too much for a property or having expensive repairs can be overcome with time, but the emotional toll that a bad tenant takes on an investor could devastate them for life. If you own investment real estate, make sure to have a solid screening system in place to allow the cream to rise to the top. This will ensure you will be placing the best possible candidate in your property, which will ultimately contribute to a sound sleep at night and a profitable future.