Investment property owners must evaluate prospective tenants’ creditworthiness as an essential part of creating a solid return on their investment while mitigating any future potential issues.
It is essential to be thorough in evaluating and qualifying a prospective tenant for single-family rental homes. Many issues can develop from a tenant who may lack integrity in paying rent on time or even worse damage the property.
In commercial real estate investments, the value of the real estate is directly tied to the income derived, and therefore the tenant’s creditworthiness is essential. However, as in residential real estate much can go awry with the tenant’s use of the property.
Evaluating residential tenants
Qualifying a tenant for a rental house is a straight-forward process. The one caveat to remember with evaluating a tenant for a house is to apply the same legal standards for every applicant to not be accused of discrimination. For example, a credit report cannot be requested from an applicant who is college-aged while not also for an older professional couple.
One good standard to consider is for a minimum income threshold. For example, the minimum gross income required could be three times the monthly rent to qualify.
Get a rental application
The first step in evaluating a prospective tenant is to secure a rental application. The application should include the legal verbiage allowing the landlord to obtain a credit report on the applicant as well as explain the applicant’s rights if they are denied.
The laws about how a landlord can charge for and use a credit report differ by state. In California, a landlord can charge a nominal fee of $30 to $50 dollars per person for the actual report as well as a small processing fee.
In addition to the credit report, many credit reporting services also provide an eviction and conviction history report. A past recent eviction could be the sign of a future potential problem with timely rent payments.
Be sure also to receive a copy of some form of identification to ensure you are renting to the correct person as stated in the application.
Verification of income and employment
The landlord should verify income and employment, which could be in the form of current pay stubs, but it is also prudent for the landlord to call the applicant’s employer to verify their employment is in good standing.
The landlord could ask for copies of bank statements as well for further verification of income and expenses that may have been overlooked in the application.
Acceptance or rejection
As part of the approval, a lease or rental agreement is executed and a security deposit and first month’s rent is received to ratify the contract.
If a rejection is warranted, a landlord may reject an applicant based on credit history (or lack thereof), income, payment history, prior bankruptcies, references, some types of criminal convictions and pets.
The landlord must give a reason for rejection if it is based on the credit report as well as provide the applicant information as to how to obtain a free copy of their report through a credit reporting agency.
A landlord should hold on to rejected credit reports and supporting documentation for at least two years until the statute of limitations expires for an anti-discrimination lawsuit.
A landlord may not refuse to rent to an applicant based on race or color, national origin, religion, disability or handicap, sex, and familial status.
Look for part two as we discuss the aspects of a commercial tenant applicant.
Burt M. Polson, CCIM, is an active commercial real estate broker. Reach him at 707-254-8000, or [email protected] Sign up for his email newsletter at BurtPolson.com.