In the last post we talked about how to arrive at a rent amount for your property. Before we talk about answering calls from prospective tenants, lets talk about what qualifications you are looking for in a your tenant. Once you know what you are looking for, then you can prepare the questions you need to ask your prospective tenant when they call about your property.
As soon as you place your ad for your rental property, you have entered the realm of a “business offered to the public”. You need to know what laws apply to your business. It is your responsibility to get educated on these laws. Get with your mentor and find out what books cover this topic well. I like “Every Landlord’s Legal Guide”, “Texas Real Estate Law” and when in doubt go to the source: Texas Property Code. Still in doubt? Consult your attorney. Ask your attorney if they have a handout for new landlords. Ask your agent who teaches their law classes. Agents and brokers have to take several classes each year and often these classes are taught by practicing lawyers and judges. They usually have handouts they can provide. You may even be able to email the teacher if they tell your agent they are willing to help their clients. Note that in addition to state laws, there are federal laws that impact housing. A good collection is on the HUD website: Fair Housing. In addition to real estate laws, as you are operating a business and dealing with the public, there are several business and trade laws both at the state and federal level that impact you. Who needs to know all this? You do. So, get with your attorney and your mentor and get educated.
Once you know what the laws are, you can create your process for qualifying tenants. This is a key part of your business plan, so take the time to arrive at this. Write it down and incorporate it as a part of your business. Use the process consistently. Your criteria can be very lenient or very strict. Just make sure your business model can deal with its results. Who you choose as tenants could be the single largest factor in determining your business’s success. Just one last thing before we get into the criteria: For the purposes of this practical blog we are going to assume people don’t change just because they have rented your house. Who they are, they will continue to be. So, find out beforehand.
With that preamble, let’s talk about some basic items that you may include in your criteria:
1. Income: In general the rent should be less than 1/3rd of the gross monthly income. This is called the front-ratio. Note that this is their pre-tax income.
2. Credit: There are broadly two things to look for in a credit report:
- Are they paying people they owe? If yes, most likely they are going to pay you. As a new investor you may choose to work only with tenants who have good credit. You are not necessarily looking for a minimum score. You are looking for patterns of non-payment or late payment and see if you have a business plan that will tolerate that or not.
- How much are they paying towards other debt every month? Can they comfortably pay the rent payment along with all of their other liabilities? This is called the back-ratio. It might include car payment, credit card debt, student loans etc. These are things they have to pay every month to other creditors. Add your rent to it and see if the ratio of total liabilities to gross income is less than 45%. The higher the ratio, the less conservative your plan. Note, this does not include their expenses like gas, groceries, utilities, taxes etc.
3. Background Check: Get with your mentor and decide what you will allow and what you won’t. As a new investor you may decide nothing other than minor traffic violations are allowed.
When we talk about the application process, we’ll get into how to collect and process the information above and also talk about some other items to verify. Ultimately it’s quite simple; are they getting paid and are they likely to pay you? That’s it.
It’s good to get your criteria reviewed by your attorney, so you know you are not discriminating in any manner not allowed by law.