This is where you decide how you’re going to choose your tenants. Being intentional and specific about what characteristics you require will help ensure that you end up with reliable long-term residents. Creating tenant selection criteria also makes it easy to decide quickly whether to accept or deny an applicant. It also ensures fairness when selecting tenants. Below is a brief rundown. See the complete episode for more information.
Here are the factors landlords often use to select their tenants:
- Employment Status: Decide whether you require regular W2 income, and what documentation you require if applicants are self employed, contractors, or have other forms of income. We look for tenants who have at least 3 years of employment history.
- Income: Many landlords choose a 3:1 ratio of gross income to rent. We like to use a debt-to-income ratio. This could be a debt-to-income ratio not exceeding 20% of the applicant’s income
- Income Documentation: W2’s, paystubs, job offer letters, bank statements, etc.
- Credit History: We generally require a minimum credit score of 650, no current delinquencies, and no more than 3 late payments in the last 3 years.
- Criminal Background: Not allowable in certain places, like Seattle, though sex offender status is.
- Eviction History: It’s a good idea not to accept someone with an eviction history unless it was long ago.
- Bankruptcies: We also don’t accept applicants unless it’s been over 7 years.
Keep It Legal
First and foremost, make sure you are not choosing, or denying, applicants in violation of HUD’s Fair Housing Act, which protects people from discrimination based on:
- Race
- Color
- National Origin
- Religion
- Sex (including gender identity and sexual orientation)
- Familial Status
- Disability
Also make sure you know your local laws. Some cities now make it illegal to consider criminal background when evaluating applicants, for example.
Also Read: How Can Landlords Avoid Discrimination in Tenant Screening?
Verified Identity
You’re going to want to make sure that any applicant is able to verify their identity. The nice thing about many property management software products is that they request an image of a government-issued photo ID by default. Make sure that the applicant matches with the photo that is submitted.
Verified Rental History and References
You should also be able to verify past rental history. We generally ask for 3 years of rental history. We’ll also check references and ensure that I’m able to get ahold of at least 1.
Also Read: Choosing the Best Questions to Ask Rental References
Smoking
Next, you should decide what your rules are around smoking. For example, Chris specifies that no one who lives on the property can smoke or vape any substance in any form inside. If it’s outside, he’ll specify that they must be a certain distance away from the property. Eli chooses to not allow smoking at all. So during the prescreening process, he’ll ask if anyone smokes.
Co-signers and Guarantors
In the event that an applicant does not meet your set criteria, consider whether you will accept a co-signer or guarantor. For example, students and college graduates may not have the income or history necessary.
Decide how you will treat guarantors. We have them fill out an application and submit screening reports just as if they will be a tenant, and they must meet our selection criteria. Make sure to use an appropriate form to make their commitment legally binding.
Takeaway
The trick to setting rental criteria is deciding what factors actually help you choose applicants who will actually turn out to be good tenants, while at the same time not making your standards so strict that no one can actually qualify.
When it comes down to it, setting rental criteria ahead of time helps you be clear about what you feel is important in selecting a tenant. With that road map in hand, you then have the option to follow it to the letter, or consciously decide whether a particular tenant or situation warrants making exceptions. One caveat though — in a “first-in-time” location such as Seattle, we are required to include rental criteria in advertising, and to accept the first person who meets those criteria. In this situation, it is possible that making exceptions in some cases could lead to trouble if you deny someone and they later show that you have been inconsistent in applying your criteria. (Talk to a lawyer!)
Landlording A-Z Series:
Our Landlording A-Z series will walk you through each of the stages, tasks, and issues involved in rental real estate investing. In our next installment, we will discuss setting terms for your rental property.
