There are two important traits a seasoned landlord looks for in a prospective tenant.  The ability to pay rent on time and the ability to care for the property.  Absent either of these traits and a tenant can cost a landlord thousands of dollars in damage and lost rent.  Follow these steps for the best chances of inheriting a tenant which complies with both of these important traits.

CREDIT: Credit reports are available to both professional property managers as well as private landlords and costs roughly $10 with the score included.  The credit report gives insight into how well the tenant pays their obligations.

• Credit Scores.  Different credit reporting agencies report scores differently, so basing a decision on a score is not always going to provide the same results across all major credit agencies.  When a FICO score is returned, scores can range from 300 – 850 with 850 being impeccable credit.   If the tenant recently lost their home to short sale or foreclosure, their score might be even lower almost entirely based upon the loss of their home and should be factored in accordingly.
• When a score is included and is near or above 650, generally  you can count on the tenant as a good payer.  It’s still a good idea to review the content of the report to make sure there are no current obligations past due.  The most important gauge as to if a tenant will pay their rent is if they are paying their current obligations such as credit cards.  If current obligations are past due, this is a great indication that the tenant is financially strapped and may not be able to afford rent either.
• Late mortgage payments.  Most property managers provide a special exception when a prospective tenant’s credit history shows late mortgage payments, or a mortgage default.  With the current economic climate and housing market there are a lot of previous homeowners either voluntarily or involuntarily losing their homes back to the bank.  Because these previous homeowners tend to be very positive and responsible renters, and provided other obligations are current, most landlords I have interviewed do not reject prospective tenants based on poor credit from the loss of a home.
• Medical bills.  Another component of a poor credit score can be related to medical bills.  An uninsured person with even a short hospital stay can attain tens to hundreds of thousands of dollars in medical bills in short order.  It’s fairly impractical for most people to pay these bills at the time of visit and as such they can often be turned into collection.   In interviewing numerous landlords, medical bills are often disregarded or lesser regarded when considering a prospective tenant’s credit worthiness.  It is however important to take into consideration the tenant will have a portion of their income going to these bills, likely from garnishment.  This reduces their income to afford rent and could impact your income to rent formula.

CRIMINAL: There are a number of criminal reports available to landlords and property managers.  One of the most popular and easy to obtain is a nationwide criminal history which cost about $9.  This report aggregates criminal data from states nationwide to provide a concise view of the criminal behavior of an applicant nationwide.  Unlike credit data, criminal data is not indexed by social security number.  Instead, criminal data is typically indexed by name and date of birth.  Even still, some jurisdictions have only logged criminal data by name only which makes determining criminal behavior a little more tricky than with credit.  Here are some tips to get the most from your criminal background reports.

• Be certain the name and date of birth (DOB) are correct when ordering your criminal report.  An applicant could accidentally or purposefully mistype their DOB on your application form which could cause a criminal report to appear clean, when it may not be.  The best way to guarantee this information is obtained correctly is to request a copy of a photo id with the application that includes dob.
• Verify address history.  Each criminal record returned will typically list the county or city of the offense.  Many screening vendors will cross-match these entries with an address history report for the applicant, to narrow the results to a manageable list; however, if your vendor provides you a complete list, it can be quite long.  To verify if a criminal record matches your applicant you can order an address history or SSN verification report that includes address history.  If a past address matches a city where the criminal offense took place, it’s a good bet the offense matches the applicant.
• When in doubt, order a more detailed report.  If the national or state-wide report you’ve run is inconclusive, you can order a county report on the applicant which in most cases will be more up to date than a broad report and may include more details to help identify the issue in better detail.

EVICTION: Perhaps the single most important factor when renting to a new tenant is if they have previously been forcefully evicted.  Eviction reports cost a landlord about $10.  There are three primary ways a tenant moves out of their rental.  1) They paid their rent on time and choose to move out voluntarily.  These tenants should not have any eviction history on record.  2) They were required to move out by their landlord (often referred to as “eviction”) for non-payment or other reasons, and did so as requested of the landlord.  This type of “eviction” will not show up on an eviction report because it is a voluntary eviction.  3) They were asked to move out by their landlord, and refused to do so leading the landlord to file for a court ordered eviction and forced removal of the tenant from the property.  This class of tenant will show eviction history on an eviction report.

The reason this eviction report is so vital when screening your next prospective tenant is because if a tenant has a tendency to be required to move out by their landlord and fails to do so without the court and sheriff forcefully removing them from the property, you as a landlord could stand to lose a lot of income catering to this type of tenant.  A court ordered eviction can take at best many weeks, and at worst many months.  All this time you cannot move in a new tenant, and are not collecting rent on the previous tenant amounting to a huge loss.

PERSONAL: The final critical step in screening a tenant is to verify the information they have submitted and interview the prospective tenant.  Much of the information provided on your application can be corroborated via the reports above and the remainder by calling the employers, past landlords, and other references.  If the information on the application does not add up or there is any evidence that the tenant provided invalid information on your application, that is an instant sign of trouble and an instant reason to decline the application.

Meeting and performing background screening on all adults that will reside in the household is an important step often forgotten.  It is normal and allowed in most states to charge a reasonable application fee which will cover your costs to run the combination of all reports above.  One final item which more landlords have said provided them an indication of how well a tenant will care for a property than anything else; look inside their car.  The interior of their vehicle is an excellent indication as to the inside of their house.

SUMMING IT UP: The reports listed above tend to be the most popular and in use by most landlords; however, there are many more reports available to landlords also.  Regardless the reports ordered, be sure to comply with all federal and state laws as well as FCRA (Fair Credit Reporting Act) guidelines.  If in doubt, most areas have local associations of landlords which are happy to help instruct in the legal aspect of screening prospective tenants.  The information above is opinions from many landlords nationwide; however, may not be effective in your particular market.  Define your own criteria and seek local legal assistance if necessary.

Learn more about Rentec Direct’s tenant screening products here.

What does it take to get those properties though.  That’s where so many investors are running into trouble.  Conventional lending is shot.  Let’s face it, although every man and woman in the US just donated roughly $7.000 to finance the “mortgage bailout”, all the banks have done is buy up other banks with that money and it has not loosened up lending restrictions.  Quite the contrary really.  Lending restrictions are tighter now than I’ve ever seen.  A+ credit is no longer 720+.  You need 760+, and in some cases 780+ to get a lenders best rate.  While the richest people get a little richer, the average investor’s life becomes a little harder.

Aside from the tips everyone knows about (don’t pay late, etc); here’s some tips to improve your credit, and maintain it.

• Make sure your credit cards are increased to their maximum level.  Your credit line with the major banks should equal 25% – 35% of your annual gross income.  If your limit is not there, call them and ask for a credit increase.  The most compelling line I give is:  “I’d like to see my credit line increased.  Frankly, some other banks have given me larger lines and so I carry their cards in my wallet so I’m prepared for a large purchase.  Your card only offers me $x and therefore it’s not as valuable to me”.  I’ve yet to be turned down for a credit line increase with that reasoning.  If you don’t have a credit card with a higher balance than the one your asking for an increase on, come up with another reason, don’t fib.
• Use your high limit cards, even if it’s for smaller purchases.  Cycle the card in your wallet every month or find another way to cycle them.  The reason for this is banks, even the larger ones, are reducing credit lines automatically.  Amex has recently sent out thousands of letters to consumers stating their credit line is being reduced because they believe the consumer does not need that high of a line.  If this happens to you, your credit score will take an immediate dive because your ratios of used credit to available credit will go down.
• Pay down your revolving lines.  If you have any home equity or 2nds that are considered a revolving line, I suggest paying them down as quickly as you can.  Get them below the 50% level so they are not negatively impacting your score.  Your conventional loans don’t matter.  A 30yr conventional loan, regardless the balance, will typically improve your score.

Aside from these items, keep your expenses low and income consistent.  A good way to reduce your expenses immediately is to begin managing properties yourself.  Also use a free property management software to manage those properties with minimal effort and time.  A lot of people predict tough times ahead and it is best to prepare now.  For those prepared, there will be abundant opportunities for property owners and the like to do very well.