This is a great subject, and I’m glad you’re asking this question, because it’s incredibly important to the overall success of your rental property.
Obviously your tenant is the source of a lot of things, some good, and some potentially bad. The first and most obvious item is the rent revenue, which is probably the reason you’re renting the home in the first place. If it’s not this may not be the best business for you! Aside from the rent there are several other things that tenants may be the source of, and some of those are absolutely not good. I’m going to work down the list in reverse order starting with the absolute worst one.
Stress
Why is stress the worst? Rental properties are supposed to generate passive income when you’re doing it right. Adding stress to your life in exchange for a small monthly income is anything but passive. This is the primary reason many people divest from their rentals, whether or not they even know it. Bad/low quality tenants WILL be a source of stress for you without question. Proper screening will help to minimize this as much as possible for the particular property type/class you’re working with.
Unexpected Losses
When you receive a 30 day notice what do you do? If you’re running your property correctly you inform the tenant of the move out process, what you expect of them, and what they should expect of you. You follow up with them on the move out day and make sure they’re aware of how to turn in their keys and that the home should be clean, right? That gives you the time to make arrangements for make ready repairs, changing locks, etc. You may even list it for rent and start a list of prospective tenants so you can minimize your vacancy period, and conversely your lost rent. Low quality tenants rarely give a notice of their intent to move out, they typically move out without regard to the lease status or requirements, and may never actually turn in their key.
A very common situation with a bad tenant is to contact them in an attempt to collect past due rent only to have them respond to you saying they moved out ten days ago and left the key on the kitchen counter and left the front door unlocked for you. I’m sure this makes sense to them, but it’s never made any sense to me.
Many low quality tenants never intend on paying their last month’s rent. When they decide to move out they quit communicating with you all together, quit paying rent and attempt to maximize the free time in the home. If you’re an amateur/rookie landlord it may take you months before you finally get around to dealing with the problem and figuring out what to do or how to get them out of your house. When they get a notice of eviction from the court system that’s when they finally start looking for a new home. They usually know the system much better than you do (unless you’re a professional), and they will work it as much in their favor as they can. If they’re smart they’ll be moved out before the court date gets there, unless they’re confident that you’ve compromised your right to the possession of the house, in which case the eviction process starts all over again! If eviction court is a regular part of your process you should consider a change to your system or process, that is not normal no matter what anyone tells you.
Property Damage/ Direct Expense
Whether it’s punching holes in the walls or unsupervised children flushing inappropriate things down the toilet, bad tenants always cause damage to a property. In some cases you may not even find the damage until the next tenant moves in and the sewer is overflowing because it’s been back up for weeks. Bad tenants are also less likely to report problems, which makes the effects of those problems amplified and more expensive when they’re finally fixed.
Indirect Damage and Expense
The effects of bad tenants are sometimes less obvious than most people would think. When a person is irresponsible in their personal life (finances, etc) they are often irresponsible or ignorant of proper behavior and maintenance that they are responsible for. A big one here is flushing feminine hygiene products or not replacing the air filter in a central air unit. Both of those may seem like common sense to you, but you aren’t your tenant, especially if you aren’t screening appropriately. Low quality tenants are harder on a homes systems overall, which means more repair and maintenance costs.
This isn’t a totally inclusive list, there are a LOT of indirect costs associated with low quality tenants, many of which you won’t even realize until it’s too late. Now that we’ve addressed the importance of avoiding bad tenants how in the heck do we actually avoid them!?!
What makes a bad tenant?
Despite what your most empathetic friends may tell you, bad tenants are not a victim of their circumstances, and you shouldn’t ‘give them a second chance’ without reducing your risk in some manner. Your socioeconomic status doesn’t inherently make you a good or bad tenant. There are a lot of wealthy people with high incomes that will prove that to you if you rent to them, and there are a lot of poor people that are very responsible and considerate of other people’s belongings that would make a great tenant for you.
Bad tenants all share several psychological traits which include being incredibly self centered, having very little foresight, and an absolute need for immediate gratification, usually with no regard to the consequences. If you keep these indicators in mind during your interactions with prospective tenants you’ll usually see the evidence of a bad tenant very clearly. They want the nicest house even though it’s well out of the range of what they can afford, they have cash today and ready to move if you just skip the application, they demand to be shown a property on their schedule rather than accepting your own availability, their credit and tenancy history is terrible, and usually they’re just difficult people to deal with.
Set Reasonable Requirements
If you’re applying for a loan the bank has a set of requirements that you must meet in order to qualify, and while renting a home to someone may not exactly be loaning them money, it is extending credit to them. You need to be reasonably sure that they can make those monthly payments.
Depending on your exact market and quality of your property the requirements often include income (Documented 3-4x the monthly rent is very common), some landlords focus on gross income while others focus on net income. The number of occupants is something that many don’t even think to consider, but I would argue it’s one of the MOST important considerations. 10 people moving into a 3 bedroom home should be a HUGE red flag, on top of it likely being against fire marshal regulations.
Eviction history is another important factor along with criminal activity and collection activity on your background and/or credit checks. Other items worth considering are length of time at their current employer, length of time at their current and/or former residences and the reasons why they moved out. If you really want to get down in the weeds you can consider things like their transportation and other factors that would prevent them from being able to reach their job, especially if your rental property is in a rural setting.
Obviously the more rigorous your requirements are the longer your vacancy periods will be. Smart tenants will ask about your requirements before submitting an application, and if they feel like there’s some chance they won’t meet them they likely won’t apply. Same goes if they don’t feel the requirements are reasonable, as that can be an indication of an overly involved landlord, which is generally a big turn off for most tenants.
Check check check
Credit check….check. Background check….check. Eviction check…..check. Screening is INCREDIBLY important. Your gut feeling may be spot on, but if you don’t have any OBJECTIVE means of qualifying your tenants you’re opening yourself up to a discrimination lawsuit that you’re most likely going to lose, especially if the prospective tenant is included in a protected class. Generally speaking a credit check and background check will tell you everything you need to know about an applicant, and in most cases will help confirm that gut feeling you had about them. Don’t be tempted to make exceptions to your requirements unless they are bringing in a a well qualified co-signer or through some other means of reducing your exposure to their bad habits. Multiple poorly qualified signers doesn’t equal a good signer, but one good cosigner can easily eliminate the problems of multiple bad ones.
Typical red flags on a credit report include collections from previous landlords, collections from utility companies, and evictions. All of those indicate the applicant is someone who doesn’t tend to the most important expenses in their lives, as they’ve had ample opportunity to prevent those charges getting all the way to their credit report. By having that disregard for the most obvious requirements to a stable household they are actively putting their entire household at risk on a near constant basis.
Excessive collection activity on their credit report is an obvious indicator that they are only concerned with the present and aren’t likely to be considering the consequences of their actions. Either that or they are hoping that if they ignore their problem it will go away. Most children learn the facts of life early enough to reassure themselves this is almost never the case, but some people make it well into adulthood never having fully understood that lesson.
Other items won’t show up on a credit report but are just as important to consider, like whether they showed up to their showing appointment on time, are they communicating effectively, do they take pride in their appearance and the appearance of their belongings (think about the condition of their car). Are they looking at subsidized housing but are wearing designer clothes and the latest technology. Are they conducting themselves in a socially acceptable manner, or are they being rude by being on the phone constantly, using inappropriate language, disregarding you when you speak to them, texting constantly while they’re speaking to you, etc.
Landlord References
While “old school” landlords may tell you this is the most important source of information to rely on, I’m here to tell you it’s become one of the least informative or reliable sources of information. Bad tenants are not likely to give you contact information for their current landlord, and due to our overly litigious society if their landlord were to give you and opinion without objective information to back it up they could be liable to defamation litigation, and you could be open to discrimination.
Many professional landlords have limited their tenant references to yes/no questions answered verbally that are purely based in fact. If you think about it, asking another landlord in your market about their tenant is kind of a conflict of interest, because if you approve them to move in, that landlord loses their tenant. If they’re a bad tenant they may tell you good news to get rid of them, and if they’re a good tenant they may tell you bad news in an effort to keep them!
In summary, use common sense, put yourself in their shoes, and don’t let yourself get so worn down by showing your property that you’ll approve the first person with the first month’s rent. Set standards, stick to them, and make sure your decisions are based on objective facts!
Happy hunting!