Investing in real estate and allowing others to pay the mortgage for you is one of the soundest means of building wealth over the long haul. It’s been done for decades by savvy investors who’ve been able to use the power of leveraging.
But you don’t have to be a millionaire to make this happen, nor do you have to have a Masters degree in finance, real estate, or other related field.
What you do need is a sound plan of attack, and the diligence to find the right property, and the right tenant.
Aside from the property itself, the individual(s) that you allow to occupy your unit can make or break your investment. An excellent tenant will almost seem like there’s absolutely no work involved, while a horrible tenant can make your life miserable, and cost you a ton in profits.
So how do you go about finding the perfect tenant? While no plan is foolproof, there are certain vital questions to ask a prospective tenant to increase the odds of a positive experience.
1. Do you have references?
A great way to gauge what type of tenant an applicant would make is to ask for references from previous landlords. You could also speak with the current landlord about what the tenant is like; however, you should be careful with this approach. If the current landlord wants to get rid of the tenant, he or she might pretend that everything is fine.
You’ll likely get more accurate and honest information from previous landlords who no longer have any dealings with the tenant. If previous landlords have nothing good to say about the tenant, you might want to keep looking.
2. What is your credit like?
One of the biggest concerns that landlords have is whether or not their tenants are able to pay on time and in full each month. After all, it’s the incoming rental checks that are sustaining the investment’s profitability. Getting your hand on the prospective tenant’s credit report is a great way to determine how likely they are to make timely payments. These reports will show their credit scores, and any information about delinquencies in payments.
You can’t demand this report; instead, you will need to get permission from the tenant to get it. A person with good credit will be more likely to have no problems obtaining this report and handing it over, or at least providing you with the portion that shows the actual credit score. On the other hand, someone with something to hide may be a lot more hesitant to provide this information.
3. What is your income?
In addition to the potential tenant’s history of paying their debts on time, you also want to be sure that there income is sufficient enough to cover the rent, along with all of life’s other expenses. It’s standard protocol to ask for an income statement or two, as well as a letter directly from the employer verifying the individual’s position within the company and the yearly salary.
A good rule of thumb is to make sure that the tenant’s salary is around three times the rental cost. That way, there’s plenty of wiggle room with expenses, and little excuse not to be able to make each month’s rent.
4. Do you have any pets?
If you are not a fan of having pets living in your unit, specify that from the get-go. If you are fine with pets, you may want to consider asking for a damage deposit, but make sure the tenant agrees and it is put in writing. It’s important to note that landlords can’t legally prevent tenants from bringing pets into rental properties.
The only exception is if your unit is in a condominium, and the building declaration specifically states that pets are not permitted. Even if you are OK with a tenant bringing pets on board, your board’s declaration may not coincide.
5. May I have permission to run a background check?
A credit check is a great tool to make sure the tenant has a good history of making good on their debt payments. But having a background check run can provide even further insight into whether the tenant has run into any legal issues in the past. Again, you’ll need permission to run this background check from the tenant – if they grant such permission, make sure to get it in writing.
6. Will other people be living here?
When the tenant fills out the lease, he or she will have to list every single individual that will be living on the premises. But before you get to that point, be sure to ask the tenant how many people plan on calling your unit home. While you don’t want to discriminate against anyone, you also don’t want to rent out your 1-bedroom unit only to find out there are 8 college kids living there.
7. Have you been evicted before?
Hopefully you’ll be able to find out this answer from your phone calls to previous landlords. In any case, it’s helpful to ask. If the tenant admits to being evicted, find out why and be very cautious going forward. While there may be factors that led to the eviction that were out of the tenant’s control, you’ll still want to tread lightly.
Don’t rent out your unit to the first person who shows interest just to get the space filled. It’s worth the wait when you can find someone who meets all of you criteria and ends up being an ideal tenant.