To rent or not to rent – that is a good question.
You won the mortgage game. You refinanced your loan when rates were in the 2% range, and your monthly payment is super low. As time passes, you find that your home is getting a little too cramped, or a little too big. You might find out that you need to move for work. You hate the idea of losing that low rate. What do you do?
If you can buy your new home without selling your existing property, one option is to rent your home. More and more single-family homes are being rented out as owners look to hold onto the value in cheap loans.
Still, renting is a scary thought - you’re bringing in a total stranger to live in your home. What if they won’t pay rent? What if they trash the house? These are important questions, so it’s important to take steps to ensure your prospective tenant will be a good fit. Among other things, you need a robust screening process, but you have to be careful what you ask.
Here are five things to ask about on your tenant application:
1) Financial capability
It goes without saying that you should verify a prospective tenant’s ability to pay the rent. Landlords can ask for a tenant’s employment status, income level and credit history. Their monthly income should ideally be at least three times the rent. A stable job and a good credit score can signal financial reliability. Late payments, high debt and or past bankruptcies are signs of potential trouble.
2) Tenant background
A background check can provide helpful insight into a potential tenant’s past. It includes checking criminal records and contacting previous landlords. It can show whether they have a history of paying rent on time, how they maintained previous properties and if they ever broke a lease. Clean records and positive feedback from past landlords are good signs that your prospect will be a responsible tenant that respects your property. On the other hand, past evictions are a red flag of a possible problem tenant.
Remember, there may be limitations on this. For example, New Jersey requires written consent from the prospective tenant for a background check. Be sure to comply with local laws.
3) Lifestyle and habits
While it may not directly relate to their ability to pay rent, a tenant’s lifestyle and habits can impact your property. For instance, tenants who smoke indoors or own pets could cause damage or additional wear and tear. On the opposite end of the spectrum, tenants who communicate promptly and politely, arrive on time for walkthrough appointments and provide complete documentation may be more careful with the property. Make sure their lifestyle aligns with your property rules and expectations.
4) Length of stay
Tenants who plan to stay for an extended period can provide steady income, reduce turnover costs and avoid lengthy periods of vacancy. During the interview process, ask about their long-term plans to gauge if they will be long-term renters. A good rental history can also clue you in on the likelihood that they’ll stay awhile.
5) Property rules
Ensure prospective tenants understand and agree to property rules, such as noise restrictions or maintenance responsibilities. Such rules should be prominent in your lease, and also included separately with your application. Setting expectations early can help prevent future disputes and ensure a peaceful living environment for all tenants, particularly in homes with space for more than one family.
Finding the right tenants for your investment property can require time and diligence, but it is an important step in successful property management. By carefully evaluating prospective tenants, you can maximize your ability to make a good return and ensure a positive rental experience for all parties involved.
Remember, federal, state and local government limit what you can ask, so be sure to consult with experienced counsel as you develop your application and lease documents to conform with all applicable laws.