How to Screen Tenants Properly

Verification Income

You’ll want a tenant to fill out a standard rental application form and you’ll want to take the time to verify their income. This step is crucial. This can’t be understated.

Most tenants are honest people. Unfortunately, there are a few bad apples out there trying to ruin it for everyone. A prospective tenant may say that they make $100k a year, but unless you take the time to verify if this is true, you won’t know for sure. You’d hate to accept a tenant saying that they make $100k a year, only to find out that they’re actually unemployment.

How do you verify a tenant’s income? It’s similar to verifying someone’s income who is applying for a mortgage. You’ll want to ask for the following for a tenant who is an employee:

• Letter of employment
• Most recent pay slips
• T4 slips for the last 2 years

If the tenant is self-employed (this includes freelance or gig workers), you’ll want to ask for a slightly different list of documents to verify their income:

• Complete Personal Tax Returns for the last 2 years
• Notices of assessment for the last 2 years
• Invoices and contracts and bank statements for the last 6-12 months
• Articles of incorporation (if applicable)
• Financial statements for the last 2 years (if applicable)
• Business license (if applicable)

If a prospective tenant is self-employed, it makes little sense to call up their employer, as they work for themselves. That’s why you’ll want to request a lot more documentation from them to verify their income. You could add up their bank statements for the current year to see how stable their income is and to make sure they are on pace to earn as much as last year. You could also phone up some of their existing clients.

If a tenant works for a company, you’ll want to take the time to contact their employer and confirm that they indeed work there and verify all the details from their letter of employment, including their salary.

Unfortunately, some people fabricate income documents. As such, it’s a good idea to Google the company to make sure they really exist. I also like to email rather than phone the undersigned on the letter of employment. That way you can get a reply back and confirm that they indeed work there. That way you know you’re not just phoning one of the tenant’s family members or friends.

If you are phoning, I would call from the company’s main line to dial by extension. If you’re calling someone’s cell or a direct number, I would be very careful, unless you can find it on the company’s website

Stability Income

Similar to mortgage lenders, you also want to consider the stability of the income. Is the prospective tenant an employee or are they self-employed? Someone who is an employee is typically less risky than someone who is self-employed. The reason for this is simple.

When you’re an employee, you’re guaranteed a paycheque from the company that you work for. As long as you show up to work and do your job in a satisfactory way, you can expect to be paid. This differs from someone who is self-employed. When you’re self-employed, unless you bring new or repeat clients in the door, you don’t get paid. It’s as simple as that.

If you’re considering a tenant who is self-employed, you’ll want someone with a long successful track record. If someone has been self-employed for 5-10  years with increasing revenue, the chances of them paying the rent is likely a lot higher than someone who just started their first business 3 months ago.

Here are some other things to consider:

• Seasonality of the business: You’ll want to be extra cautious renting to someone whose business is seasonal. For example, if someone’s main source of revenue is fishing or  snow shoveling, unless they have another income source to fall back on in the months they can’t work, it may be tough for them to pay the rent, even if they want to.
• How long they have been in the industry: Whether an applicant is an employee or self-employed, you want to know how long they have been working in the industry. You’d much prefer a tenant who has been working in the same industry for many years, over someone who is new in an industry.
• If someone is on probation, earns most of their income from commission, is an hourly employee with non-guaranteed hours or is on contract, you’ll also want to be extra cautious. If someone is on contract, ideally you’ll want to see proof that their contract is going to be renewed, or understand their plan in case it isn’t.
• You’ll want to be careful renting to anyone with non-guaranteed income sources, such as child support, severance, employment insurance or disability payments. If it makes up more than 25% of their income and they’re going to be relying on it to pay the rent, that’s when you want to be extra cautious. They may be good people and have every intention of paying the rent, but may be unable to if their disability or child support stops.
• For employees, you want to look at the stability of the company that they’re working for. A tenant working for a well-known large employer can usually expect their income to be a lot more stable than someone working for a startup.

Credit

Not to be overlooked is a tenant’s credit. Now it’s easy to overlook a tenant’s credit, and credit scores and credit reports are far from perfect (rent paid to landlords isn’t typically included on your credit report). Nevertheless, it’s an important thing to do. The past is a good predictor of the future, as they say. If a tenant is always late on their bill, what do you think is the likelihood that they’ll magically start paying their rent on time? Probably not likely at all.

If you’re like most landlords, you depend on the tenant’s rent to pay the mortgage and expenses of the rental property. A prospective tenant’s credit is a good way to assess their risk of not paying their mortgage on time.

Now you don’t need to check the credit of every single prospective tenant that wants to rent your place. That’s not necessarily. However, what you want to do is narrow down the list of prospective tenants to 2 or 3 that you’re seriously considering renting to and perform a credit check on them.

Before you do a credit check, it’s important to know that you can’t just do a credit check on anyone. You need written permission from them. On your tenant application form, there should be wording giving you, the landlord, permission to pull their credit for the purposes of renting the place to them. Otherwise, you could get in trouble for pulling their credit without their permission, as it could impact their credit score.

A tenant’s credit is made up two parts: their credit score and credit report.

Their credit score is a 3-digit numerical value assigned to them. It falls anywhere between 300 and 900. The higher the credit score, the better. Generally, you’re looking for a credit score of at least 700. Anything above 800 is considered excellent. A higher credit score indicates that the tenant has done a good job of making all their payments on time and in full and isn’t carrying large balances on their revolving credit accounts (credit cards, lines of credit, etc.).

The second part is their credit report. Their credit report is like a report card on their credit. Credit grantors (financial institutions, credit cards, cell phone provider, etc.) report to the credit bureaus your credit accounts and payment history to make it easier for other credit grantors to assess your credit risk and worthiness before approving you for another credit account.

The following important information can be found on the credit report:

1. Personal Information – such as tenant’s name, address, date of birth and employment information. Make sure that this information matches the info on rental application.
2. Payment Behavior – how often the applicant is late on their debt payments. Poor payment behaviour will be reflected in the credit score. 
3. Credit Accounts Information –  the types of accounts, when they were created, the limits and amounts for these accounts as well as payment history.
4. Debt Type and Amount – The debt amount is not the only important factor, mortgage debt is much safer than credit card debt and as the interest rate will be much lower.
5. Type of Inquiry –  hard credit bureau inquiries can negatively impact the tenant’s credit score if done too often, soft inquiries do not. A tenant credit check is a soft inquiry.
6. Public Records and Collections – from public court records such as bankruptcies, collections files, convictions and sometimes past eviction judgements.

It’s a good idea to check both Equifax and TransUnion credit report for tenants, as something negative could be found on one, but not the other.

You’ll want to take the time to add up any prospective tenants’ monthly debt obligations and make sure they still have enough money to pay their rent on time. Although the monthly debt obligations don’t include everything, if they are up to their eyeballs in debt, it’s a good sign that they may have difficulty paying the rent on time.

You never want to accept a credit report directly from a tenant. It may seem like the tenant is doing you a favour. While they might be, there’s too much of a chance of fraud. The tenant could redact unfavourable information from their credit report. They could also alter it altogether or give you someone else’s credit report. It’s far too risky.

That’s why you should always spend the money and purchase credit reports to make sure that you’re getting the real thing. Not buying one yourself is a case of being penny wise, pound foolish. You don’t want to cheap out on something as important as this.

Best sure to get the credit report from a reputable source such as SingleKey.

References

Along with a tenant’s credit, you want to check their references. We already talked about the importance of calling their previous employer. In this section we’re going to focus on calling previous landlords.

Calling a previous landlord isn’t a step to overlook. Chances are that previous landlords will be happy to tell you the good, the bad and the ugly about a tenant interested in living in your place.

When speaking with previous landlords, it’s important to come prepared. Here are some good potential questions to ask:

• Has the tenant paid you all the rent?
• Does the tenant pay on time?
• Has the tenant caused damage to your property?
• Were they respectful towards the neighbors?
• Would you rent out your property to this tenant again?
• How long did the tenant live at your place? 

Of course, you can make up your own questions, but these are still a good start. By asking these questions, you can not only know more about the prospective tenant’s financial history, but you can also know more about their personality as well.

You can also confirm other details like the current rent that they are paying. If the monthly rent amount is similar to yours, it can be a good indication that they can handle the payments on their own.

If you’re speaking with the current landlord, take what they say with a pinch of salt. The current landlord could be painting you a rosy picture to get the tenant out of their place because they are really a bad tenant. That’s why I always like to call the previous 2 or 3 landlords. That way you get a good feel whether their current landlord is fibbing or not.

Interview And Gut Feel

While you shouldn’t rely on your gut feel alone, it’s not something to be ignored. This is going to be someone who is going to be living in your property. Even if you’re using the services of a property manager to find a tenant, you want to take the time to interview the tenant because at the end of the day they are going to be your responsibility.

Realtors and property managers can be great for finding tenants, but just remember that they get paid the sooner they find you a tenant. As such, the tenant may not be the best of quality. That’s why you need to look out for yourself at the end of the day.

Interviewing a tenant is a lot like a job interview and you should treat it as such. However, instead of being on the receiving end, you’re the one asking questions. You’re trying to narrow down the list to the final tenant and weed out the ones who you don’t want living in your home.

The tenant interview is to confirm if they are good on paper, they are good in person. The tenant interview doesn’t have to be super formal. You could grab a cup of coffee if you want to and have a friendly chat.

You want to use the tenant interview to answer any lingering questions. You can ask them questions about their previous landlord experiences to see if it lines up with what the tenant says. You also want to make sure it lines up with what’s on their rental application.

If the tenant handles it in a professional manner, it’s a good sign. However, if the tenant has a ton of excuses or tries to tell you a sob story about why they were late on their rent, remember that you could be the one on the receiving end of the sob story if you accept them as a tenant.

You have to remember that being a landlord is a business. You aren’t in the business of being a charity. You could think that you’re doing a tenant a favour by giving them a break, but it could come back to haunt you later on.

You could use this time to ask the tenant about their previous relationships with landlords and how they handled any difficult situations. Imagine finding out that a tenant you’re considering renting to is in court fighting with their landlord. You probably wouldn’t want to rent to someone like this, but you might now know this unless you asked.

Also be sure to check out social media. Social media can be a great judge of character. Do they look responsible on social media or are there lots of posts about them throwing wild parties?

Most people have their guard let down on social media, so it’s not something to overlook. Someone could seem great on paper, but when you see them on social media, they seem like someone you wouldn’t want to rent to.

Going back to employment verification. For employment verification, be sure to stop in at their LinkedIn page to make sure it matches what’s on their paystub. You’ll also want to double check that with their credit report.