How Effective Tenant Screening Can Lead to Higher Profitability

detective-311684_1280-PDHave you ever wondered how how effective tenant screening can lead to higher profitability?  This is my first post as an author at BiggerPockets.com and will explain effective tenant screening.

I have 24 renters, in two duplexes and five 4-plexes.  I also screen for a large (120 unit) apartment complex, and approve or reject tenants.  I make the call as to when a tenant is no longer an asset to our HOA community, and force other landlords to get rid of their tenants.

Through these experiences, I have seen many tenants’ backgrounds, and see how a background report can predict future tenant behaviors.

The following post contains a few random thoughts; I will focus in more detail on tenant screening topics in future articles.  Be sure to follow my articles to get solid, no nonsense information on getting and keeping great tenants.

Effective Tenant Screening

Know Your Tenant Goals

If you are considering buying a rental property, or have some of your own already, you need to know what to look for in a tenant to predict their behaviors, and risks of non-payment.  You need to know what a tenant looks like on paper, BEFORE you advertise for a renter.  You need to be able to reject, or accept them, before you ever meet them.  I do it all the time, and am very successful.

Not everyone will subscribe to my philosophy.  I want only the cream of the crop tenants; I mostly only take tenants in the upper fifty percentile of the entire tenant population. I want a low maintenance, high profit tenant.  I am not concerned about the highest rent; I am not concerned about their dire financial or housing condition, I am only concerned about the highest profitability for me.

Section 8 Tenants

I cut my teeth on Section 8 tenants; I have rented to the lowest of the low in terms of tenants.  I have rented to tenants that were murderers, stranglers, people that bit off other peoples fingers in my apartment, tenants in a duplex that filed restraining order s against each other, drug dealers, prostitutes and the like.

I have fought bedbugs, roaches, extra pets and extra felon tenants.  I have seen my fair share broken windows, holes in walls, doors punched, and dirty beyond recognition appliances.  I have had tenant turnovers that wipe out several years of rental profits.  I know what I am talking about in terms of low quality renters, I do not want them.

The interesting thing about Section 8 tenants, is that only experienced landlords should be allowed to take them. Yet experienced landlords typically do not want Section 8 tenants.

It is usually first time landlords that take them, or a housing project that specializes in that type of tenant.  In MN, only about one in three landlords accept Section 8.

With today’s great rental market, more and more landlords are giving up on Section 8.  Renting to Section 8 tenants, or any low-income, low credit score tenant, is a high risk proposition.  Perhaps those types of renters with great credit scores would be OK, but that is hard to find.

My Current Tenant Base

I now rent exclusively to a class B or better tenants; in the same neighborhood that I previously rented to the Section 8 and low income tenants.  You can re-position your property to a better grade, if you want to.

You can have 100% of your rents collected by the second of the month, every month.  You can have apartment turns that are easy, and have a minimal turnover cost.

Most of my tenants are actually class’ A’ tenants; they are professional white collar, college educated, high household income (80K – 160K+), high credit score (700+) tenants.

These types of people pay rent, on time, all the time.  When they leave the apartment, the apartment is nearly ready for the next tenant, without any additional work.  I have recently re-taken my RE license test, so I will be selling homes to them when they leave.  Try that with a low-income, low credit score, tenant.

If you have multifamily buildings, like I do, you need to be doubly concerned about a tenant’s personal behaviors.  When you own a multifamily building, a single bad tenant can poison your entire building.  You have to be on top of your game.

In a single family home, even if all of the neighbors move out of the neighborhood, as long as you get your rent you are fine.  In a multifamily you have increased turnover, and higher expenses, with a poisonous tenant.

Most Landlords Do Not Have a Clue

Many landlords will say “I have had great tenants with low credit scores”.  Sure, and every time I go to Las Vegas I win.  And I never wear a seat belt because if I go over a bridge in my car and land in a deep river, I want to be able to get out of my car quickly.  Go with the odds, wear a seat belt.

The truth is, most landlords generally have no clue to what an ‘average’ tenant looks like on paper.  They see one or two tenants every year, at best, and they get lucky.

They have no idea what the median credit score of the area is.  They don’t know what the median income of the area is.

They have no idea how many criminal events the average person has.  If you do not know what an average person’s background is, how can you identify an above average, or even below average, tenant?

Landlording is a game of probabilities, taking in a low credit score tenant is a large gamble.  You have a higher risk of non-payment, a higher risk of an insurance claims, a higher risk of damage, a higher risk that they do not have their own insurance, and a higher risk of police incidents.

If you take in a lower grade of tenant, either you have a Class C- property or below, and that’s all you can get in, or you are a lazy property manager.

Credit score is a much better tenant predictor of tenant success than criminal record. A credit score requires a positive behavior by the tenant, a clean criminal record only requires not getting caught. 

And most landlords do not even know how to run a proper criminal check.  They are still focused on a ‘National’ criminal check.  Use Google and save your money.

If you still insist on taking the risk, make sure you are not only aware of the increased risk, but are compensated for it.

Evaluate all of Your Past Tenants

If you are already a landlord, look back at the good and bad tenants.  Grade them by credit score.  You will probably find your lower score tenants had late payments, non-payments, adverse behaviors and other detractors that you would rather not have.

They probably called you more, had more pest issues, and more police incidents in one year than you have had in your entire life.  They put more holes in doors and walls, and broke more items than you or your parents have ever broke – together.  Odds are, the problems could have been prevented with a better upfront method of selecting tenants.

So, be prepared to challenge me on my philosophy, and I will say you are wrong, and deposit my rent money in the bank while you are still chasing your rent or in the middle of an eviction.

I will outline, in specific detail in upcoming posts, what you can use as a criterion to screen tenants.  Follow me Grasshopper, and you will learn to make money in landlording without having to lose money first.

It’s May 2, 2014 as I write this.  I have 25 of 25 rents in the bank.  The same as I did last month, and the month before that, and so on….  If you have a challenge, be prepared to discuss your rent collections too.

Remember, a tenant’s income will tell you their ability to pay rent, the credit score will tell you’re their desire to pay rent.  You need both to have the highest profitability.

This post is also shown at my page at http://www.biggerpockets.com/renewsblog/2014/05/05/effective-tenant-screening-higher-profitability/

 

 

 

6 Replies to “How Effective Tenant Screening Can Lead to Higher Profitability”

  1. HI Eric.
    I am glad to found your posts here. It is all good stuffs.
    I live in MN too.
    Thanks for sharing.

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