Establishing tenant selection criteria can be one of the most confusing areas of operating rental property for many people. On one hand, you want to make sure you choose the most responsible tenant possible; a tenant who will pay his or her rent on time and one who can be relied upon not to destroy your property. Yet, at the same time, you must make sure that you abide by fair housing laws.
Before you actually begin renting out your property it is a good idea to sit down and determine the criteria you will use to choose the best tenant. Without guidelines, you will have no choice but to rely on your instinct to choose the best tenant and this could result in trouble if you are only relying on your feelings to make a tenant selection. One of the worst risks you can take is to let your own personal opinions and biases guide you in your decision because this could open the door for a discrimination lawsuit.
First, you should always make sure that you notify prospective tenants that you utilize a fair system to make your decision. Ideally, it is best to include this type of statement in all rental applications. For example, you might state “Our policy is to rent our units in compliance with federal, state, and local fair housing laws.”
If you are fairly new to operating investment rental property, you may not be cognizant of fair housing laws. Be sure to consult your state’s fair housing office to determine the guidelines which you must follow.
Beyond fair housing laws, it is important to make sure you establish criteria that are concrete by which to judge all potential applicants.
For example, it is common to require that the applicant provide identification that is verifiable. You may require the applicant to present a photo ID with their application so that you can make a copy of it. This type of requirement is valid because you may need it in the future in the event you need to describe adult occupants of the unit. If someone co-signs the application, it is also a good idea to obtain identification for them as well.
It is also quite valid to require information that would help you to determine that the applicant has a sufficient income to rent ratio. If the applicant were applying for a loan to purchase a home, the lender would require similar information. The general rule of thumb is to identify applicants that have a gross monthly income that is three times the amount of the rent. One way to document this information is by requesting copies of the applicant’s pay stubs along with their application. If the applicant is self-employed, you might ask them to provide their last tax return in addition to three months of bank statements. If you cannot verify the applicant’s income, this would be a perfectly legitimate reason to deny their application as you have no assurance that they would be able to pay their rent.
Many property managers and landlords also check credit ratings and scores on applicants as well. The purpose of this is to verify the financial responsibility of the applicant. The general guideline is to obtain a credit report on all applicants as well as any co-signers who are over the age of 18. Keep in mind that you will need to receive permission to run a credit report; however, you can request this information on the rental application. Applicants with low credit scores could be legitimately denied on the basis of being unable to prove financial responsibility.
In addition, you should check references. Typically, you should ask all applicants to provide the names and telephone numbers of individuals who can verify the applicant’s income sources as well as character references.
Finally, make sure you follow up to check that the applicant has been able to successfully rent a dwelling in the past and paid their rent on time. In the event, an applicant is unable to meet this requirement but does meet all other requirements you may consider requiring the applicant to have a co-signer.