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6 Steps To Reduce The Risk Of Having Undesirable Tenants
The biggest risk in becoming a real estate investor other than overpaying is something that don’t get discussed often enough.
It’s as if a given that if you manage to snag a house at a good price, you are going to be banking in the cash every month.
Acquiring real estate at a bargain price is just the first step in becoming a profitable landlord.
The next biggest risk concerns the customers that provide you with the recurring rental income your have been dreaming about.
Tenants pose a significant risk to real estate investors. Particularly bad tenants.
There are various ways why a landlord might label a tenant as an undesirable one. Personal values might also swing a landlord’s view of a tenant.
No matter how you determine a tenant is the type that you’d want to avoid, here are some steps that will greatly limit the risk of renting to one who would do nothing but cause you problems on a regular basis.
Your decision making process might be different if the housing market is starved of tenants.
But if rental demand is high, you would probably have many applicants to select from.
When you are enjoying this luxury of too many potential tenants, make it a point to get everyone to fill up application forms to obtain basic personal information.
This is not to say that when you are experiencing a low tenant market that you don’t need to enforce application forms.
They should be filled up for documentation anyway.
Basic information that should be collected include:
- Full legal name
- Employment verification
- Bank references
- Landlord reference
Information provided here would enable a landlord to conduct a basic review.
Take note of applicants who do not fill up all the required information.
2) Reference checks
If you are requesting for references, then make it a point to make good of these information.
A lot of landlords collect references as a formality without actually making reference checks.
Do be mindful that undesirable tenants can cause you issues that will take up your time, effort, and money too. So making reference checks even if it’s just for peace of mind will be well worth it.
If you are really too busy or too shy to make calls to strangers, at least verify with the bank whether the account exists! Then make a courtesy call to the current landlord.
A call to the employer would be good too to see if the employment details declared are true.
Surely you want to avoid renting to someone who has no income to pay rent?
3) Credit history
While credit checks are usually associated with lenders and borrowers, it doesn’t hurt to take a look at the credit record of an applicant.
To conduct this check, ensure that you obtain permission from the applicant.
The credit report generated should be able to give you a general idea of an applicant’s habits towards finances and repayments.
4) Rolling rental
There is no written rule that tenancies have to be on a yearly basis.
If you feel uncomfortable with renting to a tenant, consider a rolling tenancy whereby the tenant is signed onto a monthly lease arrangement.
You can then offer to extend it onto an annual lease once you are comfortable enough with the tenant.
This practice gives a landlord considerable protection against renting to undesirable tenants.
If you don’t know, evicting a tenant can be a long tedious process. And we haven’t even talked about the potential real and opportunity costs involved.
Such an arrangement would give you elbow room to take decisive action should a tenant turn out to be a monster.
5) Legal history
In most states, an individual’s legal history is public record. And access to this information is usually free.
In view of this, a meticulous landlord should definitely make a legal history check when it is accessible.
Legal record would show previous evictions… which would be of particular interest. And also previous convictions of crimes.
6) Hire help
If managing people, let alone tenants, is just not your thing, then hiring a management company to take on operational tasks must be something to seriously consider.
If screening tenants, chasing for rental payments, attending to day-to-day property problems, is not your cup of tea, then hiring a property manager will help alleviate all these headaches.
Property management companies charge a percentage of rental, so you do need to work out your numbers to determine whether it makes financial sense to hire them.
Overall, a real estate investor shouldn’t spend too much time worrying about potential bad tenants.
He should focus on increasing revenue and profits.
But since just one bad tenant can cause huge problems both on and off the balance sheet, it should not be something that can be ignored too.