How to Find Good Tenants for Your Rental
Written by Jamie Palmer, President and Broker of Power Properties
I am going to pull back the curtain, expose OZ, publish the 11 herbs and spices, reveal our secret sauce, I am going to tell you how we screen our tenants. Why should you care? Because we have been doing property management for over 42 years and have already made and learned from our mistakes. Avoid making your own tenant screening mistakes and see how we keep our tenant failure rate at only 1%.
It all starts with a phone call…
Ugh, who even talks on the phone anymore? We do, regardless of how tenants contact our office, phone, email, text, chat, we call them. Why, because you get the unpolished, raw answers that you want from the prospective tenant. Not the grammar checked, proofread, social media filtered picture-perfect responses of text and email.
Rule one, be vague and open-ended in your questions, “tell me about yourself and the people that will be living with you”. This question alone can give you excellent insight as to what and who you are dealing with.
Next question, if they didn’t already answer it, “how many people smoke outside”. This implies that smoking outside is permitted so people tend to answer it honestly. If they say any answer other than zero, you can reply with “I’m sorry it’s a non-smoking property, so this won’t be a good fit”. You just saved yourself at least an hour showing the property to someone that won’t qualify.
Along the same lines, the next question is “what kind of pets do you have”, again this implies that some types of pets could be okay, so people tend to answer “mostly honestly”, but will often stretch the truth with “it’s a small Great Dane” or “it’s only 18 pounds” (18 pounds now because it’s only a 4-month-old rottweiler). Again you have the information you need to move forward or not depending on your preference regarding pets.
We actually recommend our clients accept pets as we have found the damage from a well-behaved or elderly dog is usually less significant than that of an ill-behaved two-year-old child who has never heard the word “no”. In addition, the largest adult demographic in North America is Millennials, of which 70% have pets or as they call them “fur babies”, so by allowing pets you dramatically increase your potential pool of tenants.
The final question for the phone call is “as a guideline, we like to see our tenants earn three times the monthly rent as a minimum monthly income before taxes, do you meet this guideline?” Three times the rent gives people financial breathing room in case of unexpected expenses. Canada Mortgage and Housing Corporation (CMHC) recommends people spend no more than 35% of their household income on housing for this very reason. We do make exceptions for basement suites, or bachelor apartments as the target tenant for these properties tend to be a different socioeconomic class.
Two additional considerations when screening people on the phone include the following:
Do they fit the property? Is it a family of five trying to rent a two-bedroom apartment, there are going to be noise issues, and excessive wear and tear. Is it a single 21-year-old looking to rent a 3000-sq-ft executive home; guess whose house just turned in to party central!
Have they lived together before? Most romantic relationships fail, not all best friends make great roommates, and you don’t want to be the place where they experiment unless you like drama… lots and lots of drama!
The Showing: Operation Sherlock
Okay, they talk a good talk, they meet the preliminary guidelines, the next phase is an in-person showing, what we call Operation Sherlock. Arrive early, and if possible leave a parking spot right in front of the property for them. Yes, it’s courteous, but it also gives you a chance to wait for them by the parking spot so you can see the inside of their car. Is it full to the windows of fast-food wrappers, and other garbage? If that’s how they treat their car, how do you think they will treat your property?
When you greet them and shake hands, try to lean in a little, do they smell like smoke or just plain old smell? Take a glance at their coattails and pant cuffs, if there is fur there this is usually a give away that they have a pet.
Tour the property with them and try to make small talk, ask why they are moving and what they are looking for in a home. If they complain endlessly about their current landlord and what poor condition their current home is in, make a mental note. After the showing, send them your application.
The Application
Requirement #1: Application Deposit
We require all of our tenants to provide an application deposit equal to one month’s rent with their application. We will not look at the application without the deposit. This is another way to financially qualify the prospective tenant. If they can’t provide one month’s rent right away, then you know they have less than that in their bank account as savings, and any major financial hick-up is going to impact their ability to pay the rent. We don’t cash or deposit this application deposit until they are approved and have confirmed that they still want the property, at which point it becomes their first month’s rent.
Requirement #2: Credit Score
Once we have the application, we pull their credit report. This gives us three pieces of information. Their credit score, their credit accounts, and their previous addresses.
Their credit score is useful as it shows their overall creditworthiness but Alberta is a boom and bust province so bankruptcies and foreclosures are not uncommon, so we don’t put too much weight on the credit score alone.
The list of credit accounts shows us every credit account they have, every car lease, credit card, and cell phone account is on there with the balance outstanding and the minimum monthly payment. So we can quickly tally their expenses, and while they may earn $10,000/month if they are spending $9000/month on consumer debt it’s going to be a problem.
The list of previous addresses is useful because if someone is in the process of being evicted or has just been evicted they probably won’t use their current/past landlord as a reference. Instead, they will use their previous landlord and the addresses on their application and the credit report won’t line-up.
If their credit is terrible, you can stop right there. No further work is required other than to say, “Unfortunately, you were not approved for the property, best of luck in your home search.”
Requirement #3: Reference Checks
Part A: Employer
The next step is to contact the tenant’s employer and verify their income. When talking to the employer, again, ask lots of open-ended questions and avoid yes/no questions. Ask the following questions:
What kind of person are they?
Is this a stable position?
Can you confirm their income?
Are you related to them?
And finally, “would you rent your home to them”. Now, most employers will say “yes” to that last questions as no one wants to be a jerk to their employee, but listen for how they answer. Did they say “ABSOLUTELY! Oh my gosh, they are just the best, I would completely rent my house to them”? Or was it more along the lines of “Uuuuummmm, well, I guess… if I had to, maybe not my house but I would rent them a house” Listen for their tone and how they respond.
Part B: Landlord
With a successful employment reference, the next step is a landlord reference. If you are calling a private landlord (homeowner), make sure to pull title on the property so you can verify that the person you are calling is in fact the homeowner and landlord and not the tenant’s best friend, cousin, or some guy from work. Once you have confirmed they are the property owner and landlord, ask away.
Would you rent to them again?
Do you expect to refund their entire security deposit?
Did they take care of the yard?
How many of them smoke?
What kind of pets did they have?
Did they pay the rent on time?
Are you related to them?
Do you know why they are moving?
Once all of the above information is compiled the package is given to one of our licensed Property Managers for final approval. They are the ones to approve the tenant because they are the ones that will build an ongoing relationship with them, so they only want to select quality tenants. It forces them to rely on the data provided, they can’t “go with a gut feeling”. They have to use objective criteria to select the best tenant possible.
Summary
Using the above method should all but guarantee that you end up with a good tenant. What about that 1% failure rate I mentioned? Life happens, and it happens to tenants too. Tenants get divorced, they get laid off (sometimes both happen in the same week, ouch!), they get cancer, they get in car accidents, and they die. None of those events can be screened for and are just part of the risks of owning a rental property. Proper tenant screening is about managing risk not eliminating it.
Written by Jamie Palmer, President/Broker of Power Properties Ltd.
Jamie Palmer is the President and Broker of Power Properties. He holds a Certified Property Manager (CPM®) designation, the highest designation in Property Management in North America. He earned an Honors degree from the University of Toronto, and he has over two decades of experience in property management.
Power Properties was established in 1980, and is a member of the Canadian Real Estate Association, the Real Estate Institute of Canada, and the Calgary Residential Rental Association. They currently manage over a quarter billion dollars in residential real estate and collect over one million dollars in rent each month.
