Becoming a landlord involves more than just owning a rental property; it requires finding reliable tenants who will pay rent on time, take care of the unit, and follow the rules set forth in the lease agreement. This process is crucial because the right tenant can make property management smoother and more profitable, while the wrong tenant can lead to headaches and financial losses. This guide—based on information from Fannie Mae—outlines how to effectively screen and select tenants.
How to Look for Tenants
The method you choose will depend on factors like your budget, the property location, and how quickly you need to rent out the unit.
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Use a "For Rent" sign or post on local bulletin boards.
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List on online platforms and local publications.
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Consider hiring a real estate agent or property management company.
While looking for tenants, it's essential to comply with federal, state, and local laws regarding discrimination and fair housing. These regulations govern all aspects of tenant selection, from advertising to screening and final decision-making. Familiarize yourself with these laws, and if needed, seek guidance from an attorney to ensure you're following best practices.
Establishing Selection Criteria
Developing clear selection criteria will help you evaluate prospective tenants fairly and meet your own needs as a landlord. Generally, the key qualities to look for in a tenant include:
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Ability to Pay Rent: Verify that the tenant can afford the rent by checking their income sources, such as employment, Social Security, or child support. Reliable income verification is crucial to ensure they can meet the financial obligations of the lease.
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Adherence to Lease Terms: Assess whether the tenant is likely to follow the terms of the lease, including rules about pets, noise levels, and the use of common areas. Checking references from previous landlords can provide insight into their behavior as tenants.
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No Illegal Activities: Look for tenants who are unlikely to engage in illegal activities on the property. Background checks and references can help you assess this aspect.
Evaluating Income and Credit
When it comes to a tenant’s ability to pay rent, verifying their income is the first step. Contact their employer or request documentation of income sources. You may also want to review credit reports to understand their financial history. Credit reports can reveal information about unpaid debts, late payments, and overall creditworthiness. If a potential tenant doesn’t have a conventional credit history, consider alternative proofs of financial reliability, like consistent payment of utility bills or references from previous landlords.
Contacting Previous Landlords and References
Speaking with a prospective tenant's previous landlords can provide valuable information. Inquire about the tenant's behavior, whether they paid rent on time, followed lease terms, and were respectful of neighbors. This can give you a clearer picture of what kind of tenant they might be.
Using Screening Services
Using credit reporting agencies or tenant screening services can be an efficient way to gather necessary information about prospective tenants. The three major credit reporting agencies are:
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Equifax: equifax.com
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TransUnion: transunion.com
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Experian: experian.com
Be mindful of your obligations under the Fair Credit Reporting Act, and consult with an attorney to ensure compliance with all applicable laws regarding the use of consumer reports. For more information about your obligations under the Fair Credit Reporting Act, the Federal Trade Commission provides information here.
Final Steps in Tenant Selection
Once you've gathered all the necessary information, it's time to make your decision. Exclude any applicants who don't meet your criteria or have red flags, like unreliable income or a history of damaging rental properties. When you've made your choice, promptly inform the selected tenant to secure the rental agreement and finalize the lease. Make sure to review the lease terms with them to prevent any misunderstandings before they move in.
After finding the right tenants, the next step is onboarding them smoothly. This next step is important to make the onboarding experience seamless and set the stage for a positive landlord-tenant relationship.