When I bought my first rental properties I managed them myself, with some help from my wife. If you ask my wife, she would probably say she managed them with a little bit of help from me. Whichever is true, we did a decent job of managing the houses, but we could have done much better. We tried our best to screen tenants as thoroughly as possible, but we did not always do a great job. In the beginning, I thought I could judge people by talking to them and meeting with them, but I learned quickly to not judge a book by its cover. We did not do credit checks, did not do background checks, and did not charge an application fee. When I had 8 rental properties, we decided we needed to have someone else manage them. Justin, who is on my real estate agent team, managed my properties and quickly implemented credit checks, background checks, and started charging an application fee. The quality of tenants went up, the seriousness of potential tenants increased and we had fewer problems with tenants. Justin does not do the credit checks and background checks himself, he uses a company that makes it very easy for him: TransUnion SmartMove tenant screening. Please note I am an affiliate for SmartMove and make a small commission if you use them through a link on this article. However, I would highly suggest using background and credit checks even if it is not with SmartMove and another company.
Why do you need to run a credit or background check on tenants?
I decided I did not need to check credit when I first managed my rentals for a few reasons:
- I thought good people sometimes have bad credit. They could have gotten stuck in the housing crisis or had a medical problem that was not their fault.
- I assumed even if someone has bad credit, they would make rent payments because they need a place to live.
- I thought I was a good enough judge of character to decide if someone would be a good tenant or not.
- I was a little lazy and didn’t want to go through the hassle of getting a credit check.
When looking back at some of my problem tenants, most of them had credit problems. I began to realize that most people have bad credit because they don’t pay their bills. Yes, some people have extenuating circumstances that cause them to pay bills late or not at all, but most of the time they have a history of not paying their bills. When someone has a history of not paying bills, there is a much better chance they will continue to pay bills late or not at all.
One of the tenants who caused me the most problems proved to me that needing a place to live was not always the most important thing. He bought a brand new Toyota Sequoia, while he was behind on rent to me! He was constantly behind and catching up, but figured it was a good idea to add an $800 car payment to his budget.
A couple of times I used my personal judgment on a tenant, even though other indicators said I should not rent to them. One of the tenants was a lady who had lost her home to foreclosure. I was the REO listing agent for that house, paid her cash for keys to move out and she needed a place to live. She and her husband showed decent income, but because of the bad housing market, they lost their house. She did not end up being a good tenant and was constantly behind on rent the entire time she rented from me. It was not the bad housing market that had caused her foreclosure, but her inability to make housing payments. That should have been a good indicator to me that she would not be a good renter either.
I admit it, I do take shortcuts sometimes, and in the beginning, I thought it was too much of a hassle to run a credit check. I was also concerned about taking someone’s social security number, and the liability that came with that. I justified to myself that I did not need to run credit, but in the end, running a credit check would have saved me some money and hassles. One of the really cool features with SmartMove is you don’t have to order the credit check, the tenants do it all on their own.
How has running credit checks and background checks saved us money and headaches with tenants?
When someone else took over and started implementing better practices, we have had much better tenants. Yes, we still have an occasional problem with a tenant destroying carpet or paying rent late, but overall we have some great tenants. We also have some tenants who have rented from us for 8 years or more! When you have a lot of rentals, you are going to have some problems with tenants, no matter how good of a property manager you are. If you buy the right properties, the money you make will more than make up for those occasional issues. I looked at the stats a while back and about 8% of our tenants have issues paying on time or doing damage.
What does a credit check or background check tell you?
The really nice thing about SmartMove is it takes very little work from us. Here is how we use it.
- Set up a free account with SmartMove
- Enter properties that you will need screening for
- When you have a potential tenant, you enter them in the system with their email address
- You can pay the fee ($35) for the reports or have the tenant pay the fee. We pay the fee and deduct it from the application fee we charge.
- The tenant logs in to SmartMove to verify their identity, and their social security number, which we never see.
- When the tenant is done, we get access to their credit history, criminal background check, and eviction history.
The reports we receive are extremely detailed. If a tenant has bad credit, we can see exactly why it is bad, what they paid late, what their credit limits are, and much more information. If someone has bad credit and they have a story of why it is bad, you can confirm their story with SmartMove. You can see all of their criminal history in every state, including traffic tickets! If they have ever had any eviction action taken through the courts, you can see that as well. SmartMove saves all of this data for you, which makes it easy to go back and see if there were any red flags with problem tenants.
Some people may not know what bad or good credit is. Credit scores can range from 0 to 850. When buying a house you usually need a credit score of 650 or better but there are some loans like FHA that will allow lower credit scores to qualify. Any score below 600 usually means there are some serious issues with late payments or nonpayments. I can’t tell you what score you should use but the entire credit report and other screening techniques should give you an idea.
Application and application fees
You can find tenant applications online or have an attorney write one up for you. The one we use is not super complicated. We ask for their contact information, their work history, their rental history, their income, and references for the last place they lived at, work, and personal.
Some landlords charge application fees and some do not. The application fee can help pay for credit checks, background checks, and screening tenants. Some states have rules for how much you can charge for application fees and some do not. But cities in each state may have even stricter laws on what can and cannot be charged. Make sure you check with your local municipalities to see what the local laws are.
I did not charge application fees when I first started mostly because I didn’t want to ask people for money. However, most people who are applying for a lease will expect an application fee. It is also very important to check credit and that costs money. If you really do not want to charge an application fee you can have potential tenants fill out and pay for a credit and background check directly on SmartMove. I love this because I do not have to handle their social security number or any private information.
Should you allow pets?
Another part of screening tenants is deciding if you will allow pets or not. You will have many more applications if you allow pets that can bring more risk as well. Many pets are great and the pet owners are great as well, but not all. Some pets can do major damage. We try to find tenants without pets but do allow dogs on some occasions. I do not allow cats as they can destroy a house if they pee in it. I do not allow fish as tanks can pose serious water and fire risk. I used to have a saltwater tank and it almost caught on fire a few times! I have an article that goes into more detail about pets here.
We do call and check out references that are left on the application. You might think well of course any reference they leave will say good things about them but you would be surprised! You can learn a lot from talking to a previous landlord or the boss. Even a personal reference can tell you a lot in certain cases. We ask how steady their work is, if there is any plan to cut hours, how long they have been working there. We also ask the last landlord if they paid on time, if they did any damage, had any pets that were not allowed or allowed, etc.
A lot of landlords skip this step because it is a pain to get ahold of people at times but this is one of the most important parts of screening tenants.
Another tricky part to accepting or denying a tenant is deciding if they can afford the rent. The rule of thumb that many landlords use is the tenant’s income should be at least three times the rent amount. There are many factors that go into affording a place to live. It is not just about how much money the tenant makes but how they manage their finances as well. If a tenant lives in NYC and has no car and few expenses they may be able to afford more rent than a tenant who has three car payments. How much you think is enough can change based on the tenant and the area you are in.
Another huge part of picking a tenant is how well they communicate with you. One reason to use applications is to see how well it is filled out and how quickly. If the tenant isn’t willing to fully fill out the application do they really want the rental? If they do not fill out references is it because they are worried about what they will say or they were just lazy? If you talk to them a few times and you ask them the same questions do you get the same answers? I would ask about pets, about job history, why they are moving etc. If the story keeps changing that is a bad sign.
If the tenant has bad credit or not enough income but you think they still may be a good tenant you can see if they have someone who will cosign on the loan with them. This happens a lot with younger adults or college students who may have never rented before or have much of a job history. Their parents can cosign the lease and now the parents are just as responsible for rent payments as the people who are living in the rental. In fact, anyone who is on the lease is responsible for paying rent. Just because someone moves out or isn’t paying their fair share, doesn’t mean the other people on the lease aren’t responsible for the full rent.
Stories and more stories
I have leased properties to people based on what they told me without confirming what they said. Some people are really good at telling stories and telling lies. No matter how good they sound or how awesome their story is check it out! Sometimes the better they are at talking and the more likable they are, the worse tenant they will be. They have practiced and learned how to get by with their words and not their actions.
You will also find this happens a lot when they get behind on rent or something else happens after you pick them as the tenant. They have a sick mother, or their car broke down, or their dog was sick, or the bank sent the check to the wrong address. I have even heard their bank account was hacked. Stories mean nothing, actions are what you need to pay attention to. If you don’t receive rent, the stories mean nothing and you must act accordingly.
Fair housing and section 8
Section 8 is a government assistance program for rent. The tenant pays some rent and the government pays the rest of the rent for that tenant. Section 8 works great for some landlords and others have nightmare stories about section 8. We have had section 8 tenants in houses we bought and inherited a tenant from. We had some issues with section 8 tenants and others were great just like regular tenants. I have never rented to a section 8 tenant myself but not because I don’t rent to section 8, we have not had many applicants and if we did there were other applicants who were better suited for that property. There is no national law that says you have to rent to section 8 but some local areas do have laws that say you cannot deny a tenant because they are section 8. I would be very careful denying based on section 8 as a landlord.
There are also many fair housing laws landlords must abide by. You cannot deny an applicant based on:
- National Origin
- Familial Status
There are some limitations to who must abide by these laws but it is advisable for everyone to follow them. This is from the HUD website linked above: “In very limited circumstances, the Act exempts owner-occupied buildings with no more than four units, single-family houses sold or rented by the owner without the use of an agent, and housing operated by religious organizations and private clubs that limit occupancy to members.”
Screening tenants is extremely important. Most horror stories come from landlords not properly screening tenants or not checking on their properties for years. Most of the issues I had with tenants came from me not properly screening tenants. If I would have used SmartMove when I was managing my properties, I would have avoided a few problem tenants and saved some money. I can’t use the excuse of not wanting someone’s social security number anymore. I would not rely on just a credit check, background check, and eviction history, but it sure helps. I would still check references, verify employment and make sure the tenant can afford the rent.
It is also very important to know local laws and it doesn’t hurt to review what you are doing with a local attorney to make sure you are doing it all correctly.