How to Vet a Prospective Tenant

The beauty of the buy-and-hold strategy is that if you find a reliable tenant, there is a steady, predictable flow of rental income. The challenge is how to identify whether a prospective tenant is going to prove to be “reliable.”

ome real estate investors have a short time horizon and focus on fix & flips—where they are purchasing a property, renovating it, and then selling it for a profit. Others prefer the “buy and hold” strategy where they purchase a property for the purpose of generating a steady flow of rental income. One of our popular short-term loan products is rental loans—loans extended for just this purpose—to allow the investor to purchase the property he intends to hold to generate rental income.

The beauty of the buy-and-hold strategy is that if you find a reliable tenant, there is a steady, predictable flow of rental income. The challenge is how to identify whether a prospective tenant is going to prove to be “reliable.” One need only to read the following article to see how wrong things can go if an investor gets mixed up with an unreliable tenant. The article features an infamous Newark, NJ man who fits the description of a “professional tenant.”
The challenge is how to identify whether a prospective tenant is going to prove to be “reliable.”

What is a “professional tenant”?

A professional tenant is one who enters into a rental agreement with the express purpose of using legal loopholes and technicalities to avoid payment of rent and to avoid eviction. That leaves the homeowner holding the bag—not only in terms of losing out on rent, but also in terms of being dragged through the court system, being forced to pay legal fees, potentially experiencing property damage, and potentially being slandered. You may be reading this and thinking, “I would never mistake a professional tenant for a reliable tenant.” Bear in mind, though, that a professional tenant is very practiced, deeply knowledgeable about the rental process, and very convincing. Any of the following may lead to a homeowner being taken in by a professional tenant:

How can you avoid being a professional tenant’s next landlord?

It is critical that you not take any shortcuts and not be taken in by any offer of cash in hand for an immediate move-in option. The next time rent is due, there will not be a payment. Either there will be a heartbreaking sob story about why he is short on cash with a promise of payment as soon as he “gets back on his feet.” Or there will be a claim that the living conditions are inadequate and/or unsafe (because the professional tenant will have caused that to happen or will have simply lied) and a refusal to pay on that basis.

The important steps to take are:

  • Monthly income of 3 times the monthly rent (there may be regional adjustments necessary to this general rule of thumb).
  • Disclosure of who will be living in the apartment and whether or not there will be pets (if you allow pets).
  • Contact information for current employer.
  • Contact information for current and past landlord along with rental locations.
  • Avoid yes/no questions as it is too easy for the applicant to discern the “right” answer.
  • State in the rental application that failure to complete all questions or provide an acceptable reason not to answer all questions will result in the application being denied.
  • What were the start and end dates of the lease? Did the tenant remain there for the duration of the lease?
  • Did you have any issues with complete and timely payments?
  • Were the any complaints lodged against the tenant or other disturbances?
  • In what condition did he leave the property?
  • Did he sue you?
  • Would you rent to him again?
  • Photograph all spaces within the unit before the tenant moves in and have him sign off that the photos are representative of the move-in condition of the unit.
  • Have a clause in the lease agreement that states that the tenant has been provided with an opportunity to inspect the unit before moving in and that by executing the lease agreement, he is agreeing that the condition of the unit (both interior and exterior) is acceptable to him.
  • Do a joint walk through inspection and have the tenant mark down anything in writing that he notices that requires repair (both interior and exterior) and sign the inspection document.