You probably aren’t in the business of owning rental properties for the joy and excitement it offers. Though there may be some level of fulfillment in knowing you’re connecting people with quality housing in your region, it’s ultimately about dollars and cents.
You’re trying to pay your own bills and turn a bit of a profit. But in order to make it work, you need tenants who pay on time and in full.
Simple Ways to Evaluate a Prospective Tenant’s Finances
There are few guarantees with tenants. You simply aren’t allowed by law to consider certain factors when you evaluate potential tenants (for discriminatory reasons), but there are other facets you can look into during the screening process.
A tenant’s financial situation is a detail you’re allowed to investigate (to an extent). You have a right to know whether a tenant can reasonably afford to pay the rent … though you may have to do some digging to find the answer.
Here are seven simple ways you can evaluate a prospective tenant’s finances in a smart and proactive manner.
1. Use a Thorough Lease Application
A thorough lease application will save you a lot of trouble as a landlord. Within the context of this discussion, a suitable application form gives you the chance to screen tenants and figure out their financial situation fairly swiftly and easily.
Be sure to ask tenants about their income. You want to focus on net pay — that is, the paycheck they bring home each month — not gross income.
You should also have a place to list references. Require at least one former landlord and the person’s current employer.
2. Verify Income
Don’t assume that what your applicant reports about his or her income is true. It’s worthwhile to verify the applicant’s income so you can be fairly certain.
“An important part of verifying a prospective tenant’s income and employment involves submitting an employment verification request,” real estate investor Erin Eberlin writes. “This request allows the employer to know that you have a legitimate reason for requesting the information — you are considering renting to this person — and it allows you to verify that the tenant works at the company and to verify their salary.”
3. Pull a Credit Report
If you want even more insights and protection, you can request a credit report on the applicant. This will show you the individual’s credit history and how much debt he or she currently carries. It may also let you know whether the person’s been evicted in the past.
4. Run Some Calculations
Once you have some numbers in hand, you should pull up that trusty calculator on your phone and run a few computations.
Begin by taking the monthly rent and dividing it by the prospective tenant’s monthly net income. This will give you a percentage.
Ideally, the tenant shouldn’t spend any more than 25 to 30 percent of the paycheck on housing. Any more could be cause for concern: Will your payment be a priority over other bills?
If you run a credit check, you’ll also know how much debt the person carries. Running a simple debt-to-income calculation will help you see how much of the monthly paycheck has to go toward debt payments. You want to be sure there will be enough left over to cover the rent.
These calculations aren’t foolproof — and the tenant still has to practice smart financial behavior — but they do provide some insight into how the future could shake out. They’re well worth exploring!
5. Call References
You asked for references on the application; now use them! It’s especially helpful to call past landlords and have a little one-on-one chat about your prospective renter.
Landlords are usually fairly honest with one another and won’t recommend someone who has a history of missing payments. Getting an endorsement from a past landlord will go a long way toward setting your mind at ease.
6. Ask Questions
It’s wise to go beyond the application and speak with the applicant in person. You may learn a lot more by asking questions over the phone than you will on a paper form.
In order to uncover potential financial issues or weaknesses, you could try several clever questions. For example, you might ask, “Do you have the money to cover the security deposit today?”
If the individual says no, this could be a sign the prospective tenant isn’t as financially responsible as he or she has been trying to appear.
7. Don’t Discriminate
Although there are certain questions you should ask, there are also a number of questions you can’t ask legally without risking the charge of discrimination.
You have every right to ask about income. And you can even verify that the income figures the person quotes are realistic. But where the income originates? That’s a different matter.
“If you are on welfare, receive food stamps, and get other kinds of benefits or public assistance, you can keep that information to yourself,” personal finance expert Paul Michael tells renters. “The landlord cannot pry, and cannot deny anyone tenancy based on that information. If he or she does, it’s cause for an investigation by the local authorities.”
Just use common sense. Put yourself in the shoes of a renter and think about how a particular question would make you feel. You have a right to know certain concrete information, but not necessarily the “why” behind those facts.
Screen Your Tenants With Green Residential
Tenant screening is one of the crucial procedures for a landlord to secure renters. If you’re hasty about it, you could end up with a tenant who doesn’t pay on time or who tears up your property.
If you’re too nosy, you could get yourself in legal trouble with the local housing authority. There’s a fine line you don’t want to cross.
At Green Residential, we provide strategic tenant screening services to all our property management and leasing clients. If you’re interested in learning more about these services and how we can help you manage your Houston rental properties, please give us a call!