Screening For the Right Tenants
Screening For the Right Tenants that Pay Your Mortgage to Real Wealth
I grew up with tenants. I was raised in a triplex from the age of 7, we were actually the tenants. My dad has big dreams to own rental real estate and be a real estate investor, so a few years later my mom and he bought the triplex we were in and we moved upstairs from the basement apartment to the top floor. From then on I was part of the family business of painting apartments, cleaning up for general contractors for work they were performing in the three apartments and meeting with tenants to show them around.
From a young age, I knew the type of tenants I wanted in my building, but I had no say. I guess that is when I started becoming a judge of tenant character and it was a subconscious competence I developed through the years as I visited more tenants and rental properties and saw what different tenants did and how the good ones were and what the bad ones could do. When I saw my dad come home one day with a black eye after fighting with a tenant for his weekly rent, I swore that I would never rent to low income tenants in short-term situations. I was going to be smarter and make my living being an executive in a fancy suit!
If only I could talk to my younger self today and tell him that it is those suits that will be working for a successful real estate investor! That would have gotten me into real estate earlier on in my career.
Tenants are not your friend, they are your clients, and as such, you owe them respect and set the tone of communication and accountability. The accountability is a two way street. When a landlord promises to do things and follows up, it shows a commitment to the relationship. Treat tenants like an important part of your investment team, because they are the ones that are helping the landlord create his wealth. Call foul early on problems and have a clear line of communication to prevent repeats. Be flexible with tenants that show care and a desire to work with you.
This is the first line of defence to a bad tenant, which is a nightmare to an unsuspecting landlord. A bad tenant can cost you thousands in lost rent, but even more in property damage. This is why I demand high quality property that commands the desire of only the best tenants and give me the power to turn away undesirable ones. Good tenants appreciate a quality place to raise a family or lay their head to sleep at night and they will not hesitate to pay a fair price.
Always check credit- Credit is the leading indicator of financial responsibility, discipline to pay what is owed and pay it on time. It shows that a tenant understand the financial game that we all play in a financial system where mortgage payments are due at a specific date, utility bills are due by a specific date and that there are contracts that must be honoured. A credit report is more than just a credit score. It can detail a whole financial history dating back decades. A good interpreter of a credit report is worth his weight in gold and the best in the business are mortgage brokers. Tenants won’t always be upfront with you and a credit bureau will allow you to pierce the veil of deception.
Always get a tenant application- This forms as one of the legal documents of the rental agreement as it will detail many items that are usually not in a rental agreement, like pets, smoking, number of occupants, number of vehicles, etc. An application give you a chance to get in writing, what your tenant profile is before you meet to have the “due diligence debriefing”.
When a tenant is applying to rent from you here should be your initial line of questioning:
- When are you looking to move- immediacy can mean danger, so watch out for those; also undeterminable dates in the future mean complete time wasters.
- How many adults, kids and pets? This give you an idea of the family income if more than 3 adults and more than 4 kids, which is done when there are low income applicants. This is directly correlated to wear and tear on the home. Pets are the last resort, but I have had landlords tell me they understand the plight of pet owners and are willing to look past it if the other variables are strong. This is an important distinction; there are numerous variables to weigh in for the overall determination.
- When would you like to view the property? Arrange a few showings in a row so you can deal with cancelations and no-shows. 30 minutes each. Any appointments past a few days are a waste of time, because tenants move quickly.
Prepare for the meeting:
- Bring the application
- Bring the credit check documents
- Ask the tenant to call you an hour before, if you don’t hear from them, call them.
- Ask them if all the occupants will be coming to view the property, if not, request that at least all decision makers can attend.
- Be dressed professionally and make sure the property shows well with snow shovelled, grass cut, light bulbs working, home heated or cooled near room temperature. If currently tenanted, ask the occupying tenants step out while showing.
The initial meeting:
- Were they on time or communicate they were going to be late. This is where you set the tone of communication and how you operate.
- Were they dressed decently, what type of car did they drive?
- Shake hands, look them in the eye and listen carefully to them during the meeting.
- Give them an option to complete the application on the spot or take it home.
- Give them a business card and ask them to call you if they have any questions. Also give them the fax or email for them to send you the application.
You will usually get a good or bad feeling based on that first meeting. That feeling will come from this fundamental question: “Do I trust them with a $350,000 asset?” If you’ve rented a car you have been through the extensive application process to rent a $30,000 car, now how about a property? You get the idea, are these type of people that you see having a function working relationship over the next year or two or three when they have Cashflow problems over the holidays or there is a leak in an upstairs bathroom that needs immediate attention.
If you answer no, then you can politely let them down if they follow through with an application. I have rarely been surprised by an application once I met them. It is important to note that under fair housing rules in most jurisdictions a landlord cannot be discriminatory in tenant selection. This is carefully handled by a landlord by not giving a reason just that the application has not been accepted. That you didn’t think the tenant was the right fit. I found asking to meet at their current residence to have a follow up meeting, or asking for further documentation of proof of income to be enough of a hurdle for the tenant to start looking elsewhere to rent.
If you answered yes, then follow up for the application documentation with credit bureau. You can also ask for proof of income. This is a tricky subject, because most tenants will not have been scrutinized to this level before, but the good tenants follow through. I ask for a recent pay stub, and a job letter or previous year’s T4. A self-employed applicant I ask for a CRA issued Notice of Assessment and some proof of recent sales. For example, I had an EBAY reseller issue me a copy of his Paypal account showing the sales over the last 30 days. This again lends to a strong mortgage broker being able to assess the income quality and sufficiency of a tenant.
My own due diligence includes:
- Googling the applicants names
- Previewing social media trails like LinkedIn, Facebook and Twitter
- Calling employment and personal references when the application is received.
- Checking the status of current or past residence by MLS or Land Registry if their reason for moving is that the owner is selling. This is a warning- most tenants in conflict with their current landlord over non-payment give this reason for an immediate move. I stay far away from these types of tenants.
- Drive by their previous residence or current place of employment including popping in to retail or offices and asking for the applicant. I usually say it is because I forgot them to sign or initial on a document or that I was following up on their application.
These may seem extreme due diligence actions, but I can tell you that this due diligence will save you from a problem tenant. The best tenant is a slam dunk perfect one. Another good note is urgency. I understand that mortgages need to get paid and that it is always easier to have a tenant right away, but I caution you to NEVER SELECT A TENANT OUT OF DESPARATION. This is where a good advisor comes in. A smart landlord always has two most of vacancy allowance prepared and realizes it is an investment in their property, not a burn of cash. Property marketing time is very market-driven, but I have found 60 days a minimum vacancy period between tenants with anything shorter happening due to luck or smart marketing or early enough actions.
The Due Diligence Debriefing is a meeting if you are interested to work with the tenant but you need clarification on items found in your due diligence. I usually also let the tenants know that I would like to use this time to go over the lease with them. This meeting allows you to reconcile credit problems, income problems or other things that need clarification. I usually ask to do this in your current place of residence and I always do this for a tenant I have seen no online presence on social media and the same can be said of their employer.
By now, you have shown this tenant that you are the most thorough landlord they have ever met, if they have rented before, and that you are great with follow up and really care about getting the right tenant. This is what tenants want in their landlord because there are horror stories of missing landlords and lack of attentiveness to problems. This upfront investment of time pays big dividends.
The lease- The intricacies of your local jurisdiction for Tenant Protection and obligations of the landlord will be weaved into a well-constructed lease. Here are a few items to include:
- Incentives for the tenant to pay on time and have the convenience of post-dated cheques
- Provisions for maintenance clearly stated including dollar amounts
- Enforceable restrictions on number of occupants
- Clear delineation of utility bill payments
- Requiring tenant insurance
- Fire code requirements in your local jurisdiction
Please keep in mind that all leases or overridden by the Tenant Protection Act of your region and its interpretation by its Boards or the presiding judges in their courts.
About the Author
Randy Ramadhin is a professional real estate investor, a graduate of the Rotman School of Business and possesses both the real estate brokers’ and mortgage brokers’ licenses in Ontario. He is a co-author of the book “Investing in Condominiums: Strategies, Tips and Expert Advice for the Canadian Real Estate Investor” which is available at local bookstores now or on online by visiting www.condoinvest.ca.
Randy is the former Chair of the Condominium Committee at the Building Industry and Land Development Association, currently serves as President of one condominium board and is on the board of a 500 unit tower in downtown Toronto. Randy has taken a number of courses by the Condominium Institute and has advised a number of clients on pre-construction and resale condominium purchases for over 10 years. Randy has expanded his knowledge base by becoming an appraisal candidate with Appraisal Institute of Canada.
As a professional real estate investor, consultant and instructor, Randy strives to learn as much as possible to advise his clients on their real estate portfolio.
CENTURY 21 People's Choice Realty Inc., Brokerage*