9 Ways to Avoid High-Risk Tenants
We all know that finding good tenants is key to a steady cash flow and to keeping your blood pressure under control. Landlords are in the business of maximizing return on their rental investment and we want the predictability of collecting a rent cheque each month to pay down our mortgages.
I’m sure that most self-managed landlords would agree that there’s nothing more stressful than having a vacancy or dealing with a tenant from hell. For most of us, we are marginally making money on each property so one month of vacancy can put a strain on our personal finances.
So reduce your exposure to bad tenants by making sure you screen potential tenants thoroughly with these 9 tips:
1. Create a detailed and polished ad
When posting your rental ad, present your property in the best way possible so you attract the right tenant.
Indicate that you will require credit check, criminal background check and past references. If you have a criteria (ie. no pets or no smoking or minimum one year lease), list them in your ad.
By providing a thorough list of what you are looking for, you will be more likely to attract the right tenant. Just be careful that your criteria is not discriminatory (ie. chooses tenants based on sexual orientation, ethnicity, race, religion, familial status or disability status) or violates any state laws.
2. Set your rent to a competitive market rate
When setting your monthly rent, ensure your rate is competitive with similar properties in your area. Rental rates that are too high may scare away potentially good tenants who feel they can get better rates for similar properties in your area. If too low, good tenants may be suspicious.
Get the average rental rate for your market and set a rate that is just slightly lower or add some value. Five dollars a month less than the average may be enough to entice the right tenant. To get average rental rates, you can visit padmapper.com in Canada or visit Zillow.com in the US.
3. Don’t show signs of long term vacancy
Make sure you don’t show signs of long-term vacancy because this puts the landlord at a disadvantaged and vulnerable position. Some tenants know how to work the system in their favor and will prey on desperate landlords willing to relax their guidelines just to get their vacancy filled.
If a potential tenant asks how long the suite has been vacant, let them know it has not been long and what’s important is finding the right individual that meets your criteria.
4. Maintain good curb appeal
You will be far more likely to attract the right tenant with a neat and tidy home. An unkept lawn, signs of wear and tear on the building exterior, broken signs and hints of hoarding activities will send the wrong signals to potentially good tenants. Keeping your property tidy will not only make a good first impression, but also ensure safety for those potentially living in your rental.
5. Prequalify your potential tenants by email then by phone
When you start to get enquiries, follow it up with some email questions. From personal experience, I like to ask the interested candidates the following questions by email first before calling them:
- Are you fully employed?
- Do you have pets or are you a smoker? (Even though I already state this on my ad, I confirm this again on an email)
- What attracted you to this location?
- What is your current situation?
- What is your plan for the next year or two?
- I would like to chat with you by phone first before showing the place. When are you available to chat on the phone?
Talking on the phone is an optional second step to your filtering process. I like to ask the same questions for consistency in their stories. Tenants may have forgotten which places they have applied to so its good to double check that the story they gave you on email is accurate and honest. Some additional questions to ask over the phone:
- Are you currently renting?
- Are you leaving a current lease agreement?
- If so, why?
- Why are you moving?
- Do you have past landlord references and employment references I would be able to speak to if I choose you?
- I will be performing a thorough background check, you will be required to provide some personal information after a face-to-face meeting if you are chosen, do you have any objections?
The important things to listen to are hesitation, inconsistencies or illogical explanation to any of the questions you pose above. Often times, I challenge them on their decisions to get clarity and confirmation that they will be committed to the full term of the lease.
6. Meet face-to-face and read body language
When you book the showing, you will have an opportunity to make your judgment about the individual. Are they presentable? Do they speak articulately? Do they seem to have it together? Is there consistency and confidence in their voice? What is their body language telling you?
If you are uncertain about them after meeting with them, cut the tour short and don’t give them an application. Let them know that you are considering other applicants at this point and that you will get back to them.
I had a family who booked a showing at one of my homes. They brought a family of 10 people including the girlfriends and boyfriends of their adult kids, their pets (after stating on the ad “No pets”) and then they started to tell me a story about how they have just gotten out of rehab for alcoholism. I thought they planned on having all the girlfriends and boyfriends lived there as well. Obviously, I was a little nervous. I was honest with them and said that if I didn’t find the right tenants, I would sell my house, which I ended up doing. I didn’t give them an application form. I was clearly aware that it would have been extremely costly for me if I chose the wrong tenants.
7. Watch for the bait and switch
This is a situation where a likeable and trustworthy person, couple or family are paid to pose as tenants by the real applicant. There are those whose intentions to rent property is to operate illegal activities so they get their friends or relatives to fill out the application form on their behalf.
The best way to prevent this from happening is to let them know that you will do regular inspections, you will require a criminal background check and that false information will be reported to the police. As a landlord, you can report any alleged crimes can be reported for records and information purposes only. This will show up on future criminal background checks on the individual.
Bottomline is.. trust your intuition.
8. Don’t fall for the pity story
Remember that you are running a business and not a charity. You will regret falling for the sob story when a tenant fails to pay your rent. So remember your criteria. If your potential tenant does not meet it, they don’t qualify. The question to keep in mind is “how will you pay rent?”
9. Check their credit score and call their references
A credit score below 600 is not good and you may want to seriously consider whether this tenant will have the ability to pay rent monthly. An R-8 or R-9 means they have missed payments. If there are more than 3 – 4 enquiries per year, this is more than the typical number of credit applications per year. Check that the institutions or organizations that are enquiring on credit information are granting credit. If not, you will want to question why the enquirer is not approving credit to the applicant. Collections or bankruptcies will be noted if there are any. Blank indicates there is nothing on file and this is a good sign.
Some additional tips to consider:
- If a tenant is self-employed, they must be able to produce a T4
- Ensure you warn your potential tenants about regular inspections.
- If you are being paid rent by cash and your tenant doesn’t have a bank account, ask questions. Often times, it’s not a good sign to be paying in cash and not have an established bank account.
What steps do you take to avoid high risk tenants?