How can you rent out your investment property and avoid the problematic, bad tenants?
That is exactly what we are going to discuss right here, right now.
The Top 5 Ways To Avoid a Problematic, Bad Tenant.
I have been managing investment properties and tenants since 2015, and in that time I have developed the necessary systems to avoid those problematic, bad tenants, or at least to minimize the risk of renting to a problematic tenant. You can never fully guarantee success, but this methodology would see a high probability of success in renting out investment properties.
What is a bad/ problem tenant?
In my opinion, a bad tenant is someone who first and foremost, does not pay their monthly rent. Among other things, this one being the biggest aspect.
Owning and operating an investment property is a business after all, unlike any other business, rental properties require income to operate successfully. If your clients (tenants) do not pay their rent, that is problem number one.
Some other reasons why a tenant might be considered problematic:
- they cause damage to the rental unit
- cause issues with other residents in a multiple unit setting
This brings us to the Top Five Ways To Avoid Bad Problematic Tenants:
- Credit Check
- Income Verification
- Rental History
- Building Demographics
How can we ensure the tenants are going to pay?
I address this right from the very start with our rental application. We require all prospective tenants to complete our online based rental applications. We have made it easy for prospective tenants to apply for any of our rental properties.
There are two options for applying:
- Tenant applies using our in-house application, which is free and found here. (https://fusepm.ca/application/)
- Submit an application using one of our partners, Naborly, which is a fee based application.
Naborly is an intelligent tenant screening service that compiles the tenant’s information and produces a fantastic report that includes Identity Verification, Employment Verification, Income Verification, Credit Check and an Eviction Search. To find out more about Naborly you can head on over to, https://naborly.com.
Tenants will choose to apply on Naborly and pay for their report because it saves them having to produce their own credit check. Our in-house application is just as easy, but it requires the applicant to provide a full credit check that has been issued recently (within the past 30 days).
Our in-house application asks all the same questions that we are permitted to ask in Ontario, Canada, to which it gives us a good understanding of who is applying for our rental properties.
Which brings us to the first way that we can try to avoid problematic tenants.
Credit checks should be on every landlord’s radar when renting out a rental unit, especially in Ontario with the way our province governs tenancies.
We of course look at the credit score itself, looking to see if there is any outstanding debts listed that would make it difficult to pay for rent as well as looking to see if there are any past judgments that have been made. All of these items would have a significant impact on their credit score itself which makes the credit score relevant when doing tenant screening.
One thing to take note of, while we do put considerable stock in the credit report, it is not always the be all and end all. If a prospective tenant has some prior issues that is affecting their credit score, we will have a look to see if there is signs of positive change and steps that have been taken to correct those past issues, we are open to giving those prospective tenants a second chance, pending our client’s final approval of course.
The decision to place a tenant is always made by the owner of the property, which is our client.
We provide the necessary information that we have compiled during the application process and seek approval before placing any tenants.
Once the prospective tenants complete the application, they send us their proof of income (paystubs, bank statements, whatever proves the income that they have stated on the application).
Not only do we want to verify their income that was stated on their application, but we also want to figure out the rent to income ratio. This ratio can vary based on the property and whether they are paying for utilities or if the unit is being rented all-inclusive. Our rule of thumb is anything less than a 50% rent to income ratio is preferred and preferably closer to the 30% to 40% range. Ultimately, we want to ensure the tenant can afford to pay their rent plus pay for all the other things that they need to pay for on a regular basis.
We also want to see income stability, as in how long the tenant prospect has been with their current employer or how long have they been receiving a form of income, have they bounced around from job to job? If the income is sporadic and inconsistent that could lead to potential issues down the road.
Rental history becomes important when looking at how much movement tenants have had, as in, have they bounced around from address to address or do they show consistency living in one address for a long period of time. We like to learn the reason why they are leaving their current residence. In asking for the rental history, we also ask for a landlord reference. We do confirm landlord ownership and references.
The other aspect that becomes important when looking at rental history is whether or not it’s a good fit for the unit they are applying for, as in are they moving to a larger unit because they need more size and space or are they moving to a smaller unit because they want to downsize or what is the reason behind the move.
Building demographics has more of an impact in a multiple unit dwelling situation where tenants are going to be living amongst each other and you really want to try and ensure residents will get along. You need to know the demographics of your rental building to make decisions on applicants that is in the best interest of the building and the building’s current residents.
One thing that we think is important to point out with this point, is that the tenant is not necessarily a bad/ problematic tenant just because they might not fit the demographic of the building. However, if the wrong decision is made here, that could lead to issues with that tenant which in turn would make them a problem tenant.
In terms of consistency, we are basically looking for the consistency of the answers that were provided across our application process. Our application process starts right from the beginning when they book a showing to see any of our properties. We ask prospective tenants to complete a pre-screening application to which we are then able to track the answers provided on the pre-screening to ensure they match with the application answers. If we are finding discrepancies in answers, for us that is an instant red flag. We also want to see if the information provided checks out, such as their stated income, previous landlord names and past addresses. Any inconsistency with any of these submissions, provided it was not an honest mistake, would see that we would not suggest approving the tenant application.
So, there you have it, those are the top five ways that I take to avoid the bad problematic tenants.