Owning rental properties is one of the best ways to build wealth. Finding the best tenants is, therefore, crucial. This post will discuss how to select the best tenants for maximum prosperity and peace of mind.
If you don't put in the effort to find the best tenants, you may end up regretting your decision. Bad tenants can damage your property, not pay rent on time, nitpick at everything, disturb the neighbors, or even stop paying rent. Your faith in humanity could be tested with the wrong tenants.
It's worth putting in the extra effort to screen your tenants for at least more peace of mind. This way, you can own your rental property for longer, thereby creating more wealth for you and your family.
Attributes Of The Best Tenants
The best tenants have the following attributes:
- Always pays on time through auto electronic deposit.
- Doesn't damage the property. If they do damage it, they fix it on their own.
- Spends their own money to paint and upgrade the property where desired.
- Knows how to change lightbulbs, fix toilets, replace light switches, and maintain appliances.
- Never bothers the neighbors.
- Never throws parties.
- Never has anybody not on the lease living in the property.
- Never leaves despite rent hikes to cover the cost of rising property taxes, insurance fees, and HOA dues.
- Never contacts the landlord.
- Sends landlords gifts during the holidays.
Oh my! What a dream tenant! Too bad the real world of landlording doesn't work this way. Something always goes wrong. And it's your responsibility as a landlord to address the issues in as professional a manner possible.
I've always strived to be the “dream landlord” by quickly fixing anything that breaks and incentivizing tenants to stay long term with stable rents. I've also gifted great tenants bottles of wine during the holidays.
Luckily, I've never had a truly horrible tenant that required an eviction. The damages done to my rentals have been mostly cosmetic. Further, I was eventually paid all rent due.
To find the best tenants, you must gather the appropriate documents and analyze them with a fine tooth comb.
Required Rental Application Documents
A lot of landlords go with their gut feel about a tenant at the expense of requiring important documents during the application process. For example, landlords might get easily swayed by a charming or attractive person.
Instead, interview your potential tenants thoroughly. NEVER waive the documents you need to make an informed best choice.
Banks spend 1 – 4 months analyzing the financials of mortgage applicants. You should be as thorough as possible given your property takes up a larger percentage of your net worth.
Here are some documents and conditions you should consider asking for, starting with financials.
Financial Documents For Tenant Application
* Minimum last two paystubs. Your tenant should ideally be employed with a steady paycheck. Request the last two paystubs at a minimum. Consider asking for a paystub from the year prior as well.
* Minimum annual income. Shoot for a tenant who makes at least 40X the monthly rent e.g. $40,000 annual income for $1,000 a month in rent. This way, you won't have a tenant stretching to pay more than 40% of their after tax income on rent. $40,000 gross income equals $32,000 in net income after paying a 20% effective tax rate. $32,000 equals $2,667 a month. Paying $1,000 a month equals 37.5% of net monthly income.
* Financial assets. The more money in the bank, the better. Shoot for a minimum of six months of rent in savings so that in the event of a financial crisis or a job loss, the tenant will have a better ability to continue paying the rent. If the tenant is able bodied, it generally doesn't take more than six months to find a new job. It might not be the perfect job, but at least it'll be able to generate some income, especially with the gig economy allowing anybody with enough desire to make $22+/hour.
* Credit report and credit score: The higher the credit score, the better. Shoot for a minimum 720. Credit scores below 700 indicate late payments or past financial difficulties. You may encounter scenarios where a person has a poor credit score because of a recent graduation from university, high debt, or a short history of earnings. It will be up to you to decide what you are comfortable with. If you are willing to accept a lower score, ask for an explanation.
Employment Documents For Tenant Application
* Duration of employment: The longer a tenant is at the firm the better because it shows maturity and stability. Be wary of applicants who move around every year for a new job. It shows they are still finding themselves, don't know what they want, or like to pounce at every single new opportunity. All these attributes are not good for landlords who want less turnover.
* More proof of employment. You want to get a copy of the offer letter or a written statement from HR that the applicant is currently employed with the firm. Having HR write a letter is part of its job, so it's not a burden. If an applicant balks at this request, beware. It is also easy to forge employment documents, so request there is contact information for you to reach out and verify.
References For Tenant Application
* References. Make sure you speak to or get a written letter of reference from the tenant's previous landlord or boss. Beware of landlords who secretly want to get the tenants out and will say anything positive to get them to leave. If you suspect this type of trickery, you need to pick up the phone and have a heart-to-heart with the reference writer. Consider asking for the contact information of a second landlord as well. The second landlord maybe able to give you additional feedback.
* Resume or LinkedIn profile: Every working professional should either have an updated resume or LinkedIn profile that gives a snapshot of education and professional history. You'll also be able to learn about the applicant's interests, which may or may not sway your decision. Ask if they have their own website. If they have, that may demonstrate extra initiative because most people can't be bothered to establish their own platform online.
All these documents are voluntary. You cannot force an applicant to give you anything. At the same time, applicants cannot force a landlord to rent them their property either. Make it clear to the applicants that all requested information is voluntary and will be kept private. The more information you can get, the better.
The Prospective Tenant Interview
To get the best tenants, you must also inteview them like you would interview a candidate for a job.
It's important to look in the applicant's eyes and have a normal conversation about life. It's much harder for people to ruin your place or not pay your rent after they've met you face-to-face.
You're essentially trying to build some rapport before and after you receive all the requested information. It feels good from both sides to work with someone you like.
Here are some interview questions to ask:
- Why are you moving?
- How long were you at your previous place?
- What did you like and dislike about your previous place?
- What is your current role?
- What do you think about the local economy?
- How long are you hoping to live here and what are your plans for the future?
- Ask about what their company is up to with the latest news e.g. what do you think about the $3.5B raised from the Saudi government by Uber?
- Ask them about the latest current events or local sports team e.g. how about them Warriors choking after being up 3-1?!
The best tenants will answer these questions candidly. Based on my experience interviewing over a thousand candidates during my time in finance and my experience interviewing tenants since 2005, I've found that people who can look you in the eye, naturally tell their story of why they're moving without hesitation, and share their thoughts about the future tend to be good tenants.
On the other hand, people who can't look you in the eye, have no opinion about the local economy, and can't intelligently discuss their interests might be more suspect.
If you want to make extra sure your tenants respect the lease, you can discuss your occupation if there is relevancy. For example, if you are a lawyer of any kind, your prospective tenants will probably think twice about screwing you over.
If you are a online media entrepreneur, journalist, or have a large social media following, your tenants probably won't want to upset you either. People tend to take advantage of others who are weak. Be nice, but show strength.
The Final Stage To Finding The Best Tenants
You should ask for a minimum one month rent as the rental deposit and the first month's rent up front. The rental deposit is there to cover for any damages. The rental deposit also encourages tenants to follow the lease terms, an example of which I've linked to below.
The largest rental deposit you can charge is usually 2-2.5X monthly rent. Please check with your local state/country. Personally, I try to ask for two months rent as a deposit. Something always gets damaged by renters for some reason. From chipped countertops to holes in walls, I'm not sure why tenants damage properties so much more than owners.
Before a tenant moves in you must write up a pre-move in checklist noting the condition of the property room-by-room. Both landlord and tenant must sign the document so that there will be less conflict during move out.
Often times you will not remember years later how your property was. Spend time taking pictures for documentation as well. Documentation is for both party's protection.
Money, Good Citizenship, And Duration Of Stay
When I was a younger landlord, I focused mostly on money, then good citizenship, and then duration of stay. After all, I had a mortgage to pay.
Now that I'm older and no longer have a mortgage for this particular property, I focus on Duration Of Stay, Good Citizenship, and then Money. My time and peace of mind is more important now. I suspect the same shift is true for many landlords as they age.
Make sure you rank what's most important to you each time you search for the best tenant possible.
After 20 years of being a landlord, I've also introduced an incentive structure based on a schedule of rent increases. This way, a tenant has more visibility and transparency about future costs. Tenants might also be more incentivized to stay. Meanwhile, as a landlord, you get more visibility on costs and potentially a higher occupancy rate.
Example Of Finding The Best Tenants
My latest tenant hunt involved renting my 2/2 condo in Pacific Heights, San Francisco. Previous rental arrangements included two roommates, a single woman, and multiple couples.
The most recent tenants were two roommates paying $3,950 a month. The master tenant had three roommates during her three years there which was a larger than expected hassle.
After a month of searching, I was lucky enough to find a couple living separately who wanted to take the next step and live together. Every couple who has rented from me ended up getting married.
This couple completed the application and submitted all documentation requested. I could tell they loved the place. The only problem was they weren't willing to move in for one month, leaving me with $4,200 in lost rent if I chose them.
Yes, I decided to raise my rent by $250, or 6.3%. I first tested the waters out at $4,400 and $4,300 for the first three weeks and couldn't find anybody interested. Therefore, I logically lowered the price to meet demand.
A Decision To Make On Finding The Right Tenants
Two days after the couple filled out the application, a couple 25 year old guys showed interest in my place. They were ready to move in within a week. The main problem was that one of the guys seemed a little strange.
They didn't send any documentation. They said their analyst programs ended in 1 and 1.5 years respectively. Finally, one of the guys brought his girlfriend, which may indicate there would really be three people living in my place instead of two.
In the end, I decided to go with the couple and forgo a month's worth of rent. I'd much rather have tenants who will stay for 2 – 4 years than tenants who will only stay for 1-1.5 years and potentially do more damage to the place.
The HOA makes the move-in/move-out process trying, and I truly believe they'll like staying at my place for the long term. I explicitly asked the couple how long they think they'd want to live in my place. He said at least two years because he was getting a promotion in four months. His new role would require him to be in San Francisco for at least two years.
No matter who you choose as tenants, before you sign the lease, make sure you get all their documents and speak to them at least twice, once before and once after they apply.
You'll never truly know until they move in whether you've gotten great tenants. But if you follow my suggestions, I'm confident you'll have fewer headaches in the future.
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I’m one of those ‘ideal tenants’ always looking for a decent landlord… single, professional engineer, stable job, high income to rent ratio, no pets, no kids, non-smoking, quiet, great references, neat freak, etc. etc. I’ve moved every 2-4 years (during rent, not home owner years) either based on work relo (which will make the landlord whole) or because the rent goes up ABOVE market rate. I pay early or on time, fix minor issues myself, leave my place *clean*, and have never lost a dime of a security deposit. I’m not an angel, but I was raised to treat other people’s property with respect. Ok, ok, I don’t give birthday presents to my landlord, but other than that…
One area I will contest is that whilst I have a safety stash of cash, I don’t usually keep 6mo liquid vs invested, so I push back on that requirement.
We need someone in the FI sphere to start a ‘dating app’ for matching landlords and tenants… I’ve had some very high maintenance landlords (!)
Advice to landlords on how to get tenants that will stay for a long long time? Don’t charge rent! THAT will get a tenant to stay forever!
Here’s a serious question for you and any commercial landlords on here though: What sort of screening process do you have or recommend for a commercial tenant?
Sincerely,
ARB–Angry Retail Banker
Any thoughts on having a rental applicant provide a (legitimate) copy of his credit report? I can quickly and easily get a free copy of my credit report and credit score as a feature of my Citi Bank Mastercard; and anyone get get their own credit report from annualcreditreport.com.
I plan to use TransUnion’s SmartMove feature to get a credit information when I next seek a tenant. The feature doesn’t give the applicant’s credit score, but gives a good summary and recommendation based on the applicant’s credit score. As I understand, it’s not possible for the individual small-time landlord to get access to credit scores, unless one is in the real estate or property management business with an established firm.
I purchased my first rental unit a year ago as a forclosure – a very nice waterfront Florida condo – for cash. I intended to advertise and recruit a tenant myself, but got busy at work and doing some small repairs on the unit getting it ready for rental. I even wrote an ad, posted it on Zillow, and quickly got half a dozen calls. But I decided to hire a well-established, local property management firm. As a real estate firm, the property manager can advertise on the MLS; as an individual landlord, I cannot. At least that’s how it is in my Florida county.
Anyway, the property manager had three applicants w/i 48 hours, and I selected the recently retired couple, both collecting social security and government pensions. I had to pay the property manager 50% of the first month’s rent plus 10% each subsequent month.
By choice, I ended up being a hands-on landlord, so the property manager never earned their 10%. The first few months, I had a few calls and repairs to do, but haven’t heard from my tenants in six months. The rent check gets auto-deposited on the 1st of each month w/o fail. I just cancelled my agreement with the property manager and just renewed my tenant’s lease w/ 0% increase.
My tenant has expressed an interest in buying a similar waterfront condo in the area, and has even advised that he’d by mine if I ever thought about selling. Though, the market value is up 25% in one year!
Hello Sam, I am also a property investor with a SFR and duplex in FL. I noticed your 2/2 Condo was purchased in 2005 and paid off in 2015. What was your reason for this?
I debated if I should pay off my SFR early but my conventional loan is at 3.5% 30 year fixed and I figure I could earn more on the extra principle payments by investing in mutual funds. My PITI is $1200 and it can rent for $1800/mo.
Thank you for sharing!
I’m pretty bearish on the stock market. 3.5% interest is 2% higher than the current risk free rate. After Great Britain voted to leave the EU, global markets crashed by 4% to 12%. I’m happy to invest my money in a sure thing these next couple of years because I don’t think things will be good. I also have two other mortgages so I’m all about paying down debt.
Thank you for the reply. This helps me focus on my investment properties and not worry too much about the market. I think it also depends on how old you are and how much longer until FIRE. For me, I’m 26, so I still have a long way to go. I diversify in the market through my Roth IRA and Roth TSP. I think for the extra cash I may pay down my SFR similar to you.
Was in similar situation year back, where I had to choose between a below par tenant who was ready to move in within a week or loose 1 month rent and wait for a above average to move in after 1.5 Month. Being in Chicago in middle of winter we decided to not loose rent and accepted the below par tenant. We had a bad gut feeling but made a practical decision.
Today those tenants have filed a case in court against us for co-mingling Security deposit. I deposited the check in my checking account and within 4 days moved it a savings account. They did not pay full deposit and even illegally sublet the property. They were always late on rent. When the left I paid them the deposit with interest back (in 2015)
In April 2016 they still took me to courts, and now I am looking at a 15K + attorney fees in lawsuit. My attorney says my case is good but Chicago laws are so bad that Landlord never wins. And eventually attorney fees it what kills you, so settle. Even though I have done almost everything correct, just having that deposit in my checking account for 4 days is going to cost me.
The worst part is these tenants will repeat the same thing with someone else and there is no way to flag them and inform my fellow landlords.
Oh my, I’m very sorry for this. I do hope these tenants do good, but you just never know.
What is the rule for co-minging the security deposit? As far as I know, if you pay them back based on the interest rate stated by the local government after you do the walk-through checklist and damage deductions, things are fine.
How did they know where you deposited the money in your account? I don’t get it. Please elaborate.
Even I had the same thought, how does all this matter if I paid them the interest. Chicago mandates giving SD receipt with bank account details. So their lawyer subpoenaed our bank account and figured it out. Their lawyer is just pushing the trial so he can rake up his hours and create a big potential bill for me.
Tenant lawyers take the case for free and make money from % payout. Its just as bad as it gets. Landlord is so handicapped and all this leaves such a bad taste that one truly thinks is it worth being a landlord.
Landlords are perceived as the evil rich guy who should pay for everything. Dont get the notion of why average american (in this capitalist country) always wants to penalize/tax the person trying to making more money. Isnt this opposite of capitalism.
I have been a landlord for 5 properties (3 condos & 2 single family homes), for over 18 years and I used to interview and ask for all sorts of proof of income for the first few years. Then about 15 years ago I switched to a simple 1/2 page application and have them sign to authorize & pay ($29.95) for a Landlord credit check request that is sent directly to my email and I haven’t had a problem yet. First of all, if they agee to complete the application & authorize a credit check and pay for it, then I know they are serious about wanting to rent the property. Secondly, I really don’t care where they work, how long they worked, or how much they get paid. I care that they are responsible and pay off their bills on time. This is shown on their credit report to include their credit score, & how much they owe to all creditors (car payments, mortgages, student loans, i.e.). So many people have great jobs, make tons of money, and have great personalities (seem like the perfect tenant in person), but they are horrible with money and are truly self-centered, who make the worst tenant. So basically, I rely on the numbers and not the information that the applicant is giving me. People lie.
Sam, love the blog, although I don’t post much, I recommend it to folks who want to learn more about personal finance but don’t know where to start. I have a couple questions that I would be curious to get your take on, have you ever used a real estate agent to rent out a property? I have a condo in West LA that I rented out myself about a year ago and it was pretty easy to do as the rental market is super tight right now, but I now think I am way undermarket, and maybe an agent could have targeted that better for me. Which brings me to my second question, which is, what is your approach on raising rents on your tenants? The guy I have in there right now hits all your points and is super low maintenance, but at the same time, I think he might be $300-500/mo. below market at this point. I don’t want him to leave obviously, because turning it over would cost several thousand dollars in lost rent alone and I honestly have other things to worry about.
Hi Dean, we just have to run the numbers and assess percentages for various scenarios. If he truly is $300-$500 a month below market rate, and perhaps raise the rent by only $150-$250. He should appreciate that you haven’t jacked it up to full market. But if he is unaware of market rate then he may likely b he should appreciate that you haven’t jacked it up to full market. But if he is unaware of market rate then he may likely balk, but will alternately realize that your run increase is below market rate once he starts looking. so it is up to you to have conviction and what the real market rate is by doing your homework.
I tested out the market for $450 higher for one week, then $350 higher for the second week and then settled on $250. If I had settled on $250 higher from the very beginning, I might’ve been able to get some tenants in sooner and not lose a month of rent. Therefore, I miss calculated the real market.
What if the building you own is subject to rent control in such cities as San Francisco, New York, or DC? Then you would want a good tenant who meets all of the above criteria, but you don’t want them to stay there forever with only minimal annual increases. You’d want a tenant who is likely to leave voluntarily after maybe 2-5 years, so you can raise the rent back up to the prevailing rate?
Although it’s usually illegal to discriminate based on things like age and family status, many landlords in such a situation will prefer to rent to young upwardly-mobile professionals who will move out as their career advances or as they start a family.
In San Francisco, I believe rent control applies to multi-unit buildings built prior to 1979, which by one estimate is about 3/4 of the rental properties in the city.
Yes, rent control has been very good to landlords because it restricts supply overall and increases pricing for those increasing amount of people who do not get to live in rent controlled units. There is much less turnover when you’re in a rent controlled apartment, therefore restricting the natural rate of vacancy.
Given my rental properties are not under rent control, I basically tried to find the market rent whenever there’s turn over every 2 to 4 years. With this latest rental, the market rate is 6% higher than where I was previously renting my place for.
It was just last month that I tried to research for steps I should be taking to get the best tenants but didn’t come up with anything useful. It’s so great that FS has nurtured a community that shares sage advice. I’m heading into my fifth year renting out a condo so I’m still relatively new at being a landlord but this information should keep me out of trouble.
I hope everything goes well with your new tenants! It’s gotta be tough whenever there’s turnover, then finding new tenants and developing trust with them. Although I don’t have kids I imagine that’s kinda what property feels like. You love your property like it’s a part of you and want the best for it and naturally worry that the people in its life, aka tenants, will respect and care for it as much as you do.
In a cheaper market, you’ll be waiting for months looking for the perfect tenant, but they are out there. My best tenants were a retired couple (age 67+) who just sold their business and didn’t want to deal with home ownership. I imagine if you don’t have a mortgage it makes it much easier to hold out.
Unfortunately, perfect tenants tend to become homeowners after a short while, leaving you with a vacant property again. Perhaps in limited or expensive markets that may not be the case since the barrier is so high.
The ideal tenant for me (Texas) therefore is someone who earns a great W-2 income but insufficient credit to obtain a mortgage. As long as they understand rent comes first, these tenants can stay in your home for a very long time as they are trying to rebuild their credit to one day move on.
Very comprehensive advice, not only in the post, but in the comments, as well. Like many other commenters, I think I was the perfect tenant back in the day. I painted the entire main floor of the condo, found a contractor to remodel the master bathroom for my landlord for a very low price, and discovered a gas dryer ventilation problem and alerted my landlord before it became a costly fix.
As for application fees, I charge these to cover the cost of background and credit checks. I don’t try to make any money on the application process. (Long-time reader, first-time commenter). Love your blog!
Will be bookmarking this post for future reference. Fantastic article (even though I don’t think Warriors chocked up but just that Lebron brought a better performance). I had no idea the documents requested by the landlord were voluntary.. I submitted a lot more information than was needed then!
Sam,
If you advertise your place I am sure you get multiple applications. How do you then select among the various applicants? Do you do credit and background checks for all applicants or only the finalist cause I assume that is critical information to decide.
Hi Sam, great insight here! I suppose the first step would be effective marketing to get quality and promising tenants in the door to view your property. Can you share how and where you market your property?
Craigslist. So easy. So efficient. I’ve been using CL since 2005. And now there is Zillow, Padmapper, and a whole bunch of other sites. CL is always #1 for me.
I read somewhere that landlords put too much emphasis on the financial wherewithal of the prospective tenant and not enough on their occupation. Some occupations are very volatile and if someone loses their job, all hell breaks loose. The example was renting out a place to a famous rock band. Yes, financially they can afford it – but occupationally, they will probably trash the place!
Yes. No to famous rock bands or other tenants that might cause a ruckus.
Some landlords here in the Bay Area also asks for your bank account balance information. That is too much to ask for in my opinion. Glad that you found a tenant and are able to raise the rent. Rent goes down way more slowly compared to the real estate sales price in a market downturn.
From my observation, the Bay Area real estate has cooled down a bit, at least for the residential real estate market. The residential real property sales price has only experienced a single digit increase this year, compared to the double digits increase in the past few years. In my neighborhood (Oakland) there are a few rental properties that have been vacant for a few weeks. I am sure SF rental market is still going strong.
I ask for proof of funds, and leave it up to the tenant to provide or not. I tell them everything I ask is voluntary.
Everything is cooling. I’m experiencing it first hand when I tried to find tenants and half-heartedly tried to sell my condo for 30 days.
Add this experience with what I see in terms of what people search for online (FS datapoints) along with observing corporate profits intently due to my public and private equity investment portfolios and there is NO DOUBT in my mind we are going to see a 2-3 year softening in real estate.
Given my tenant was in my unit for 3 years, her rent was flat the 2nd year and only went up by 3% the third year. During this time, rents went up more like 5-8% a year for the two years after her first year lease was up, so I’m just playing catch up. Always a little tricky finding the market.
I include a weekley cleaner priced in with the rent so I can get weekley updates on my tenants
Regards
Michael
This is great information Samurai. I have always considering real estate but was always unsure how to find good tenants.
Thanks,
DFG
Great article on tenant screening Sam.
We always do a background check and get as much documentation as possible. We also have a minimum criteria that a tenant has to meet and share it with the prospective tenants before they fill out the application for back ground check.
I agree with you that length of tenancy and good Citizenship are very important. Our rentals are in a very good school district so most tenants move in because of school and tend to stay long. We have a couple of tenants who tell us they will be here until there kids are done with high school (both tenants have kids are in middle school now).
A good trick I used when I was renting property was to call the prospective tenant’s landlord from not his current place, but the place before that – for the very reason you said. If he’s a crappy tenant, his current landlord might lie to foist him off on some other chump. But if you call his landlord from his residence before that, there’s no reason for that guy to lie.
Ah, good advice calling the tenant prior to the last one for a reference check. Will add to the post!
Sounds like I was the ideal tenant! We now own a single family house in which we currently live, and we are working to become landlords in next year or so, maybe even renting out our current home in case we move in a few years. I will bookmark this post!