The Right Tenant Can Help Your Investment Real Estate Business

The Wrong Tenant Can Cost You Thousands

Years ago it was enough peace of mind for a real estate investor or property manager to just meet someone to get a “feel” for them as a person.  A “what does my gut say” way of screening a potential tenant…

Sadly in this day and age this is no longer a viable way to determine if the ones signing the lease are going to take care of your investment real estate, or put another way if they will take care of your “business asset”.  And really when you look at it, the people you pick are going to be in charge of a substantial investment.

When things go wrong, you had better hope the person in charge of this valuable asset does the right things to deal with the problem, or at very least calls you or the property manager right away because if they don’t it could cost you thousands.  Imagine the damage an unattended water leak can do, or a broken window in the dead of winter.  Think of the potential damage.

To put it in perspective, would you hand over the keys to your brand new $40,000 car to just anybody to take off on a test drive without you there based on a quick gut feel?  Doubtful.  If you weren’t going to go with them then at the very least you would ask lots of questions, verify their identity, maybe take a picture of them and their drivers license before you ever let them get behind the wheel.  Even then I would guess if you are anything like me there will only be a select few who will be given the opportunity to take your baby for a spin.  So why would we hand over the keys to an investment that might be worth 10x that value?

A gut check is an important PART of to the process but let me be clear it is just the start.

First Impressions Are Important Too

Early on in my investing career I met a potential tenant at the bungalow I had just purchased.  It didn’t start well as they didn’t arrive until 20 minutes after our scheduled appointment time when I was getting ready to leave.  I stood in the living room window looking out and watched vehicles as they drove by with none of them stopping or even slowing down.  Just when I was ready to turn the lights out and lock up I see three boys on bikes.  To my surprise they rode onto the sidewalk to come to the front door… now I’m stunned… did I mention it was a snow storm?  And when I say they pulled up on bikes I mean pedal bikes.  And by pedal bikes I mean BMX bikes.

After a brief roll of my eyes, I pull myself together and convince myself I shouldn’t judge a book by its cover.  Just because it is snowing and they are on pedal bikes doesn’t mean they aren’t responsible young men who just happen to enjoy riding bikes in the snow…

The doorbell rings.  I open the door and introduce myself and invite them in.  As they pass me I see the back of their jackets are soaking wet from the spray coming from the rear tire of the bikes and I realize they are even younger than I first thought.  It goes downhill from here.

I follow them around the house and listen to them rave about the beer fridge, the room for the insanely loud sound system and the firepit big enough to fit “everyone from work”.  At the end of the tour they informed me (very politely) that the three of them were representing themselves and three others who intended to share the house.  I thanked them and told them I would be in touch.

As they pedaled away, no doubt arguing over who got the master bedroom and planning their first big house party, I vowed to ask more questions up front next time.

I learned to ask more questions before I book an appointment and that just because someone wants to see the house doesn’t mean I need to take the time to show it to everyone.  A few well worded questions up front could have saved me a lot of time, but then again I guess I wouldn’t of had this story to share with you.

Check And Double Check

But back to the business at hand.  A gut check is an important part of the process but I now never stop here.  If they are good enough to show up (on time) and pass the gut check when I meet them, they move onto step 3.  For me step 3 is getting a rental application filled out.  I don’t use my own rental application but instead use one from Tenant Verification Services.  I like this one because it asks all of the regular questions like full name, employment history and references but it also asks for drivers license and social insurance number and has them to sign that they are authorizing me to do a credit check.  I always take a few minutes to go thru this part and make sure they understand what I will be doing.

This is a very important step as I have found it to often be the tipping point.  If I am on the fence about someone this is generally where the scales lean one way or the other fairly quickly.  You would be surprised how many people panic and start spilling all of the dark secrets – the unpaid phone bills, the furniture from the Brick they bought on the “don’t pay for 18 months” plan and then sold 12 months later and forgot about paying for, the notices from cable companies, and so on.

At this point I need to make a decision are these people still in the running to rent my home or have I learned enough to determine they are not a good fit?  If at this point there are no giant red flags and I am still thinking they could be the ones to rent the house I go back to the office and pick up the phone.

I call the employers past and present, former landlords and references.  If I am still happy at this point then and only then will I do a credit check.  I use Transunion but Equifax is also available and both are great.  You may be wondering why I haven’t done this as soon as I left the house, well it is because this is the step that costs me money.  It is money that is well spent and worth its weight in gold, but I won’t spend it until the free stuff has been gone through.

Once you get the report make sure that you read it and with all of the information in front of you it is time to make an informed decision and get a lease signed.  While you can’t take all of the risk away that you can have a bad experience taking these steps will help to minimize the risk.

Tenants can either keep your real estate asset in good shape or they can cost you thousands.  It’s important to do a proper screening of tenants and that includes references and credit checks.