adminLast week we briefly looked at the tenant screening process as part of protecting the property investor or landlord. In addition, a property investor needs to watch out for clear warning signs of trouble ahead.
When you are interviewing prospective tenants, there are certain behaviours or statements that should raise red flags.
These items are not necessarily deal breakers, but they are items that should concern you and warrant further investigation.
Here are some red flags to watch out for. If a landlord ignores some of these signs their investment can turn into a nightmare and financial ruin if the tenant fails to honour their financial obligations.
Does the tenant have poor credit or have they ever faced bankruptcy?
Just because a prospective tenant consents to a credit check and verification process does not mean you are going to like what you find.
If a tenant has had trouble paying their bills in the past, their credit history will reflect. A tenant who has had trouble fulfilling their previous financial obligations will likely have similar difficulties fulfilling their monthly rental payment in the future.
A tenant who was not able to rectify their financial challenges may have gone as far as declaring bankruptcy. If the bankruptcy filing was recent, the tenant’s finances are likely to be in disarray.
You may be more lenient if the filing was done 10 years ago, because the tenant has had ample time to get back on their feet, although it still shows that they have the potential to make poor financial choices.
Do they have a history of evictions?
If you have discovered that a prospective tenant has a history of evictions, either by running a credit check or by speaking with a former landlord, you should run the other way. Evictions can be filed for a variety of reasons, but the most common reason is for non-payment of rent.
You want to avoid engaging tenants with previous evictions because these tenants were knowingly violating the terms of their lease agreement, but refused to leave until they were forced out.
Did they lie on their application?
This is where the importance of a thorough tenant screening process comes in. If you simply take a tenant’s word and don’t double check their application because everything looks good on paper, you could be setting yourself up for disaster.
You will never know if the tenant is being truthful if you do not follow through. You should verify everything on their application.
Check with previous work references and landlords. Verify previous addresses. An applicant could say they make US$2 000 a month when they do not have any income.
People do make mistakes, so if they write down the wrong street number, but the correct street name and town may be excused as an error, but a blatant misrepresentation on an application, such as lying about their place of employment, should be a red flag that it is time to move on to the next applicant.
Do they have the full security deposit?
If a prospective tenant does not have the entire security deposit that you are asking for before they move in then drop them.
A tenant who attempts to negotiate the security deposit payment or tries to get you to agree to let them pay you in instalments is a bad idea because you will most likely never get the money.
Security deposits are vital for the protection of landlords, which if not paid can result in the later being exposed in the vent that a tenant violates their lease prematurely or cause damage to the property.
Do they move or change jobs often?
Prospective tenants who constantly change jobs will likely continue that pattern. Your goal as a property investor is to have few vacancies as possible and by renting to someone who will be gone in a year or even worse, in three months, you are limiting your chances for success.
This may not be such an issue for landlords who have hundreds of units, but for those who only have a handful of tenants, even a one month vacancy can take a large chunk out of any potential earnings or even cause a net loss for the month.
Similarly, if a tenant changes jobs often, there is a chance they will be unable to meet their monthly mortgage payment if they are between jobs. Tenants who change jobs often may also have to relocate to different areas, which might force them to terminate a lease prematurely and leave you without a tenant earlier than expected. For a property investor with less than 20 units, it is very important to look for tenants who have a consistent lifestyle to help reduce the risk of vacancies and non-payment.
Do they stick to their story?
If a prospective tenant told you one thing when you pre-screened them over the phone and another when you interview them in person then you should proceed with caution.
For example, if the prospective tenant told you over the phone that five people would be living in the apartment, but when you meet with them in person, they tell you only three people will be living there, you should heavily pursue the issue.
There is a chance they may try to sneak the other two into the apartment even though they have not been included on the lease, which could pose liability issues for you and cause overcrowding in your property.
Another example would be a tenant who at first claims they are relocating to the area because of a job transfer, but later they tell you they are moving from down the street because they need more room.
A tenant that feels they need to lie in response to seemingly harmless questions is obviously trying to hide something. You want to look for a tenant with a consistent story.
Are they rude or do they complain a lot?
If a tenant is rude or complains often before moving onto the property, chances are it will only get worse.
Prospective tenants are usually at their best behaviour so if a person exhibits poor manners from the onset, you will have a very long road ahead of you if you decide to rent to engage them. This particular tenant will likely treat everyone with the same disregard, making your life and the lives of everyone around them miserable. You risk losing other tenants because of them or receiving complaints from neighbours or getting 3am calls just to tell you they blew a light out in their toilet.
Are you renting to roommates?
While this is not necessarily a deal-breaker, it is a situation that often goes awry. You are basically renting one apartment to two separate households. You are relying on two separate incomes and personality types to make one monthly rent payment.
As is often the case, the roommates normally get into an argument and one will move out, leaving the other to pay the entire rent.
Being unable to afford the monthly rental payment on their own, the other tenant will often have to terminate their lease prematurely and move out as well, leaving you with a vacancy – a landlord’s worst enemy.
Renting to roommates may not be such an issue if your rental property is located near a university, polytech or teacher’s college where it is much easier to find a quick replacement.
So before renting out your investment make sure you have done your homework and watched out for obvious red flags.
Disclaimer: GMRI Real Estate is a property holding division of GMRI Capital which owns, manages, develops and leases out its own property. We do not act as agents for the public or third parties. This article is provided as is for informational purposes only as a public service, not intended for trading purposes or advice. Prior to execution of any property/real estate trade, you are advised to consult your authorised financial advisor/real estate agent to verify the accuracy of all information. Neither GMRI Real Estate nor any independent provider is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.
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