Creating a System For Screening Tenants

Sometimes it's hard to say no when you have someone who wants to rent your apartment. The bills still need to be paid but you have a vacancy. That means not only less money coming in, but sometimes increased expenses if your tenants normally pay the hydro or gas bills. Often landlords will jump at the first interested tenant who is ready to sign on the dotted line. I've done it, and I have also learned the hard way how much of a mistake this approach can be. That's why you need a simple and straightforward system to help you find your next tenant.

1) Pull a Credit Report.

I always require a completed application that gives me authorization to pull a credit report. I also get a small deposit to make sure that the applicant is serious. If I reject the applicant I return the deposit, but if they change their mind then it's non-refundable. Before I made this policy change I pulled a few credit bureaus only to be told afterwards that the applicant decided against the apartment. One woman even asked me for a copy of her bureau to show to another potential landlord (you are not allowed to provide a credit report to an applicant by the way)!

I always check references, and I consider a previous landlord's opinion more carefully than the current one if there is a difference of opinion. Keep in mind that a current landlord may see you as the solution to an existing tenant headache. Previous landlords on the other hand have nothing to lose by telling you the truth. I don't care if I have to call a landlord a thousand miles away. A few long distance phone calls are worth it compared to the financial and physical damage the wrong tenant can do to your rental property. Finally, in spite of how tempting it can be I always stick to the system. If an applicant doesn't meet my minimum credit requirements they don't get the apartment without a co-signer (or some other method to cut down on my risk). If I find out they lied about anything on the application they don't get the apartment - period.

Credit reports and tenant applications are beautiful things. There are a few companies where you can sign up and pull credit bureaus. If you check out www.tenchek.com you will find one of them. A lot of people don't realize just how much information is on their credit report. If someone thinks they can fill out an application and just leave out addresses with unpaid rents guess what? There's a good chance it's on their credit report. Even if the landlord didn't pursue the debt and there is no record of unpaid rent, if the applicant was there for any significant period of time chances are that the address is listed on their credit report as a previous address. If that address is not on the application I want to know why they didn't tell me about it.

It's not that hard anymore to check out a long distance address with free sites like www.canada411.ca. If a previous landlord is listed as a reference at a particular address, you can do a search to see if there is anything fishy about the reference. If I find an address on the credit report that is not listed on the application I might do a reverse lookup by address to get a name and phone number. If I want to see what the building looks like or want to know what type of building it is I can check out Google Maps. Once I found that the street address didn't even exist for the city listed on the application. Doing reference checks is extremely important, so you want to make sure you are not just talking to somebody posing as a past landlord.

That said, once you look over the credit report and do your reference checks keep in mind that people do make mistakes. Often it is a judgement call on how much risk you are willing to take. If you have a less than desirable apartment you might have to be a little less picky. For me, I would rather have a great place in a great neighborhood so that I can attract - you guessed it - great tenants. If you create a desirable unit and take great care of your tenants and the building you will find it much easier to avoid a potential vacancy. You can spend less time second guessing that questionable application and simply move on to the next applicant.

Am I little bit paranoid? Maybe. I have heard all the stories from people who are terrified of becoming landlords. If I am a bit paranoid, in my opinion people who are afraid to get into the game are right off the charts. Rental property is an investment, but it's not really a passive one. Like any job you need to know what you are doing. You won't have all the answers on your first day and likely you won't have them all on your last. I've learned a few hard lessons along the way and no doubt will learn a few more, but I do know that if you are willing to pick yourself up and press on the rewards are worth it.

Rental Property - Our Cash Machine for Retirement

About 4-5 years ago our family purchased our first rental property. You have likely heard the infomercials where you can pay “nothing down” and tenants take wheelbarrows full of money to your bank account every month. Isn’t being a landlord the easy path to a million dollars? In my experience, that would be a bit of a lie.

I could also tell you the down side and how this property drives us crazy with repairs and tenant issues. Landlords are commonly found with a toilet plunger in one hand or staking out their property as they wait for delinquent tenants to come home on payday. Again, this would be stretching the truth.

The reality is that being a landlord has its ups and downs. Not everyone is cut out to do it, and quite honestly I have days when I wonder why I got into property. You get an education on every reason why the rent is not available the first of the month. A few calls to the Landlord Tenant Board can also be a real eye opener. I have to admit that the first 2 years or so I routinely debated about putting a “for sale” sign on the front lawn.

So why do I still have the property? Thankfully, once you buy a rental property it is not something you can easily dump when you have a bad day. Selling your property can be a drawn out and expensive business. I say thankfully because if you buy right and you can “suck it up”, I know of no other investments where you can put so little money down and let someone else pay off your retirement plan. When I bought the property it was cash flow positive from day 1. This is the “golden rule” in my opinion. Although I didn’t make much more than my expenses initially, the property did not cost me anything out of my pocket after closing. Any pain I experienced as a landlord was more emotional than financial. Critics will say that in their areas you can’t find properties cheap enough to be cash flow positive right away. I once had that problem. We moved.

The other reason is that in spite of the challenges you might face as a landlord, and although it may not be an “easy” path to wealth, maybe it is easier than a lot of the alternatives. Preventative maintenance can cut down on your phone calls. You can also improve the property. Even if government bureaucracy limits your rent increases there is no law that says you can’t make improvements to better your cash flow. Our triplex had zero insulation when we bought it and the gas bill was murder. It was a cheap fix. Any reduction in expenses is an increase to your cash flow, and as a bonus the tenants looked a lot more comfortable too!

As net cash flow increases so does the value of your property. If you ever decided you wanted to cash out another investor would look at the condition of the property and the return on his/her investment. Every year that rents go up and every improvement you make that drives down expenses will add to the value of your property. Taxes on my net income so far have been zero thanks to depreciation. Definitely get yourself a good accountant who routinely deals with property investors. If and when we sell, we will pay capital gains tax, but this tax is a far better deal than income tax. I might change my mind, but right now I can’t imagine selling anytime soon.

Another real estate investor I know has told me that eventually you wake up and discover that the property you bought for X a number of years ago is worth way more today. The mortgages are paid off and you have a healthy stream of cash coming in each month. It’s a bit like buying an annuity, except you make only the down payment and your tenants make the rest of your contributions for you. You have gone beyond “paying yourself first”; your investment feeds itself each and every month.

So far I have limited myself to one property since I am also working very hard to eliminate personal debt (e.g. our personal mortgage). Our rental property has been a huge help on this quest as well. I also work full time and my family might get a bit annoyed if I spend all of my “off” hours handling my landlord responsibilities. These are my own personal excuses as to why I have not added any more properties to my portfolio so far.

One final point I thought I would mention. People joke about the toilet plunger when you become a landlord, but you won’t find me plunging any toilets outside of my own house. I have purchased and dropped off a plunger as a favor, but I have a clause in my rental agreement that specifies “toilet plunging” as a tenant responsibility!

Have you ever thought about taking the plunge as a landlord?