Renting investment properties to tenants is a good way to generate income, but if you’re not careful, you could end up with tenants who damage your property and/or don’t pay the rent. The challenge is choosing the right tenants from the start.
When you approve the right tenants, you shouldn’t have any major problems. However, that’s often easier said than done – unless you increase the strictness of your rental requirements.
How strict are your screening requirements? Will you let anyone rent from you if they have a verifiable source of income? Here are several signs that it’s time to create stricter requirements for your applicants.
1. Your tenants consistently pay rent late
A tenant who consistently pays rent late probably isn’t doing well financially. If they passed your initial screening, it’s possible that you didn’t set income requirements high enough. Most landlords require tenants to earn three times the monthly rent and this is pretty standard. Most tenants will have cell phone bills, car payments, and other financial obligations, and doubling the rent isn’t always enough.
If you don’t want to deal with tough conversations about late rent, pass it off to your property manager. Don’t have one yet? You’re missing out. Having a property management company is essential when you’re a landlord. For example, Green Residential makes life easy for San Antonio landlords by processing applications and screening tenants with background checks and verifying references.
When you hire a property manager, they’ll set high requirements to attract qualified, reliable tenants who meet your income requirements and have a track record of paying rent on time.
2. You have the same/similar problems with different tenants
Landlords with high qualification requirements tend to attract high-quality, reliable tenants. Sometimes people slip through the cracks and there are issues, but it’s not usually something that happens frequently. If you’re experiencing similar problems with multiple, separate tenants, it could be a symptom of accepting the wrong tenants. The only way to prevent this from reoccurring is to raise your standards.
3. Your tenants can’t afford a late fee
If your tenants can’t afford to pay the late fee for being late with rent, you probably don’t have a high enough income requirement. While it’s always possible that tenants have extensive financial obligations, and some live paycheck-to-paycheck, it shouldn’t be too difficult to pay a $20 to $100 late fee, even if they have to do it in chunks.
First, check to make sure your late fees are reasonable. Even if your state doesn’t put a cap on late fees, they should be reasonable. Generally, keep it at or under $20 per day, and the fees should cap off at five days max.
If your late fees are reasonable, and your tenant can’t come up with the cash even in payments based on their paychecks, increase your income requirements for your next tenant and/or your other units. Even well-meaning people are late with the rent sometimes, but you want people who can afford to pay a late fee. When someone can’t pay a $100 late fee, that means if anything happens to their income, like getting sick and missing work, they won’t be able to pay the rent.
4. Your properties are being damaged from smoke
Smoking is one of the more controversial aspects you’ll have to deal with as a landlord. You will get tenants who are smokers and will be perfectly aware they’re signing a lease for a unit that doesn’t allow smoking. Some of them will smoke outside and you’ll never have a problem. Others will smoke inside and it will damage the walls and carpet.
If you notice your tenants are causing smoke damage, it’s a sign you need to create stricter standards. Even if you already have a no-smoking policy that applies to your entire property, including outside, many lower quality tenants will ignore this policy. Higher quality tenants are more likely to honor a no-smoking policy and will walk across the street or somewhere off the property.
What tenant standards should you set?
Each landlord will have their own set of standards for acquiring tenants, but generally speaking, here are the most common standards:
- A credit score of at least 650
- Verifiable income for W2 employees; 2 years of tax returns for self-employed individuals
- Income should be three times the rent at a minimum
- No evictions or felony convictions
- Solid references from personal friends and past landlords
These are just a handful of requirements that should be stricter than others in your tenant screening process. Having high standards is a requirement to protect your property and avoid issues most commonly seen with low-quality tenants.