Property managers deal with many kinds of tenants and issues on a daily basis. Let's face it - some tenants are easier than others to work with. As a landlord or a property manager, you want to ensure that you find the right tenant who:
- keeps the place clean
- pays you on time
- leaves the place the same or as better than they found it
In reality, this happens only sometimes and you get lucky. It's very hard to find tenants that check all the boxes and that's where your due diligence comes in.
You already know that tenant screening is important. Despite your best efforts, shit happens. So how do you limit this? Use proper screening techniques. Screening is not just about running a credit check or looking at the paystubs. You should consider a thorough process like the one recommended by HomeKasa below to improve your odds of finding an ideal tenant.
Look at the numbers##
Paystubs: What is their income? What are the different sources of income? One person could have many sources. Different people in the household could earn, contributing to the total income. You want the total income number. This is their topline.
Fixed expenses: Ask them about loans and debts. This includes student loans, car payments, other monthly dues. These are their recurring monthly expenses or fixed commitments that they need to meet.
Credit check: Run a credit check to find out their historical behavior. Have they paid back loans on time? Ask them why they missed payments? Without the 'why', you miss the context and can potentially miss out on otherwise trustworthy tenants. Perhaps they didn't get the bill on time or at the right address and this one small error could ding their credit score. Or, they could make a pattern of not paying most of their lenders. While the former is understandable, the latter screams trouble. At HomeKasa we have seen both and everything in between.
Also, ask them what you should know about their credit before running the check. Most tenants will volunteer information and also give you their reason.
Let's do the math##
Total post-tax monthly income = Sum of all income streams for each person in the household
Known fixed expenses = total monthly debt payments for all loans for each person in the household + any known fixed spend (child support, etc.)
Total available income = Total post-tax monthly income - Known fixed expenses
Now that you know how much the tenant has available, you can calculate:
Living income = Total available income - monthly rent
This tells you how much the tenant will have to live on every month after paying you. This will cover their other expenses such as food, gas, TV, internet, phone bills, etc. Based on the cost of living in your location, you will be able to roughly calculate whether the tenant has enough living income after they have paid-off their debt and rent.
This approach is different from the industry norm, which is to just divide the monthly rent by total monthly gross income. Depending on the cost of living of the location, the accepted ratio is anywhere between 30 to 50%. This does not provide you with the full picture. What if the tenant is living beyond their means and leases a fancy car? HomeKasa rather focuses on getting a holistic financial picture.
The above analysis also helps individuals to calculate 'how much rent can you afford to pay'. It gives you a framework to look at your income and expenses and essentially do a mini financial report. Rather than just use a random and rent to income ratio, HomeKasa's method helps to think about different buckets of expense.
Criminal background check: This is a time-consuming process but allows you to see if there are any issues. For most people, this background check comes clean. Also, depending on where the tenant works, it is possible to assume that this background check was done. For instance, in Silicon Valley Bay Area, most high-tech companies conduct background check before hiring employees. But this is just one segment of the tenants. There are so many people who may not have gone through this. Do your due diligence.
Meet the people Meeting people face to face helps to learn more about them. It gives you a chance to observe who they are, how the family interacts, how they approach cleanliness, etc. Part of this comes with experience and learning how to read people.
Reference checks Conduct reference checks with past landlords about everything listed above. It gives you a good idea on:
- how the tenants were with on-time rent payment
- how they maintained the property when they lived and
- how they left the property when they moved
Just doing one of these alone doesn't paint the whole picture. You need different data points to make an informed decision. The more information you have, the better your decision will be. Even with all of this in information, sometimes mistakes happen in the tenant selection process. If that happens, how do you quickly rectify the situation?