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.”

Watch out for inherited tenants.

After reading about the prevalence of “professional tenants” online, we discovered that one of the ways in which landlords become ensnared by professional tenants is by inheriting them. That is, they purchase a rental property that already has a tenant. Unbeknownst to the purchaser, the tenant is a nightmare and that is why the property is being sold. It is absolutely critical that if a real estate investor is purchasing a rental property that is occupied, that he undertakes sufficient due diligence to be fully confident that the existing tenant is not a bad apple. This means that the seller will need to provide proof that the tenant has been paying on time, and in full, for the duration of his tenancy. The buyer would also need to have a background check run on the existing tenant, would need to verify his employment, etc. Some view purchasing a rental property with an existing tenant as a “bonus.” It is only a bonus if the tenant is not one the existing landlord is desperate to be rid of.

What other steps can be taken to avoid tenant issues?

There is discussion in some online forums about the efficacy of purchasing “rent default insurance.” This is a risk management product that protects landlords for a set period of time if the tenant defaults on payment of their monthly rent. The default may arise on account of a tenant simply skipping out on a lease agreement, refusal to pay, military deployment, or untimely death.

There is also discussion in some online forums about sharing of information between landlords regarding their experience with tenants. Such information is available through various websites. It is essential, though, that no prospective tenant be denied tenancy on the basis of any class that is protected under the Fair Housing Act. These types of sites have been under fire in the past about the need to review their business practices to ensure that they are not violating any federal laws.

Final Words

Finally, it is important to stick to your criteria/process. Don’t skip something out of sympathy for a prospective tenant or a mistaken assumption about his/her circumstances. For example, just because the person has a government job, don’t assume that means the job is secure and skip the credit check. As another example, don’t skip a credit check because the person hands you a copy of his credit report. And don’t skip any steps because the person is ready to give you cash to move in immediately.