Finding and Selecting a Tenant

by Mr. Cheap

I’ve had a draft of this post sitting in the Four Pillars draft queue for over a month, and after a recent question by JN it seemed time to finish it and post it.  While I hope it gives a decent overview of finding, selecting and finalizing a tenancy for a rental property, please keep in mind that I’ve only actually gone through this process once.  The tenants have stayed for 3 years (but I can’t stand on my results), and I put quite a bit of effort into figuring out each stage in the process (reading, talking to other landlords, going through the proper procedures, etc).  A previous post on this topic was part of my “Getting Started With Investment Real Estate” series.

Philosophy on Renting

Before you even start trying to rent out your property you must know yourself and what you’re looking for.  Do you need to get a tenant (any tenant) in the property as soon as possible?  Do you want to focus on finding the best tenant possible, even if it takes longer to fill the unit or leads to a lower rent?  Do you want to maximize the income from the unit?  Do you want to minimize the bother your tenant causes?  Your answers to these questions will affect how you go about the process of finding a tenant.

For the record, my belief (which underlies my suggestions in this post) is that no tenant is better than a bad tenant (and I’d rather minimize bother than maximize income).

Advertising

The first step in getting tenants into an empty unit is to let people know that it’s available.  If you have the time and inclination, I would first try to advertise through every available free channel (e.g. Craigslist, Kijiji, posters in the neighbourhood).  If you aren’t getting a large number of responses (at least 10+) you need to crank up your advertising immediately and maybe consider paying to post in the local newspapers or paid internet postings (such as ViewIt in Toronto).

I provide as much information as possible in the advertisement to help people make their decisions.  I put together a website for the unit (which I referenced in each ad), which had pictures, maps of the area, and lists of local amenities.

Rent

Determining what is market rate for a unit is tough.  If more than half of the people showing up to view the apartment choose not to fill out your application then your rent is too high.  Lower it.  Keep lowering it until you get half the people to fill out your application.  If someone takes an application to fill out at home or says they’ll contact you later, they’re just being polite, they aren’t interested. If everyone is filling out an application than your rent is too low.  I’m not 100% sure the best course of action in that situation (I’d probably pick the best person, and be upfront with them that I know they’re getting a good deal and warn them that the rent will be increased at the end of the lease).

Showings

A large number of people won’t show up for appointments.  If they find another place or something comes up, for whatever reason they don’t bother to let a potential landlord know.  I suspect tenants view it as one situation they’re in control and can safely stick it to a landlord.  When I was renting my unit I’d rush over to show it whenever was convenient for the people who called.  Next time I’m doing it I’m going to plan all the showings at one time (maybe on a Saturday afternoon) and make them 20 minutes apart.  I’ll take the name of anyone who can’t make the showing and offer to contact them if it doesn’t rent.

I walk around and point out the nice features of the apartment and answer questions.  If there’s something that’s a negative about the unit I don’t point it out, but I certainly acknowledge it if the tenant inquires (such as no security guard, no air conditioner, or no dishwasher).

Application

If you do a Google search for rental application or ask any friends who invest in real estate for a copy of their rental application you should be fine.  First and foremost you don’t want any illegal questions on your form.  The purpose of the form isn’t really to get the answers (although they might rule out some applicants).

If someone has a convoluted explanation for why they can’t tell you their current landlord or why they don’t have a current employer I’d probably drop them as an applicant.  There may be good reasons why they are in the situation they’re in, but don’t spend your time trying to assess their unique challenges.

Check out anything they’ve listed and see if you can verify it (I was able to tie a woman’s “current landlord’s” phone number to her father’s consulting firm with Google).  If they’ve lied on the application, reject them.

Contact current and previous landlords.  If they’ve ever had problems collecting rent reject that applicant.

Keep the form.  Sometimes if you run into problems later their “personal references” will be a way to track down a tenant or may help you with other problems.

Credit Check

In Ontario you can do this with Rent Check Credit Bureau.  They’re expensive for only one unit though ($20 per check and a $100 annual membership fee or something like that). You can avoid the membership fee if you join the landlord self-help center for $25.

You want to look for delinquent payments (if they aren’t paying other people on time, why will they pay you in a timely manner?).

If there’s problems with the credit check, reject them and move on to the next applicant.  If you run out of applicants, advertise again and show it to some more people (perhaps lowering the rent if you’re having trouble getting enough applicants to find a good one).

Lease & Keys

At this point you have a tenant, fill out a lease (you can sometimes buy one at a bookstore, get one from a landlord’s association, or ask for one from a friend who rents properties), get first and last months rent (and damage deposit if local laws allow).

Let the other applicants know that you’ve rented to someone else.

I don’t claim this is gospel, and if anyone with more experience disagrees with anything I’ve written, please comment below.  Also comment on any alternative approaches you’ve had success or failure with.

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{ 20 comments… read them below or add one }

1 Mike

Great summary.

I wouldn’t mention to the tenant that they got a deal and the rent will be raised later on. There just isn’t any reason to do that.

2 Mr. Cheap

Mike: The only reason I’d do that is so they aren’t surprised by the increase. A lot of times people get upset by something unexpected, but if they’re told about it well in advance they’re ok with it. That was my only thinking with that, but you could be right.

3 Alexandra

I always put in my ads “non-smoking”, I verbally tell the potential tenant the same thing when showing the place, and I put it right in their lease agreement.

I rent my basement unit in our house, as well as another home with 3 units. One common ventilation system in the house ensures that if one person smokes, everyone in the house smells it.

It is hard to always tell who will be a great tenant and who will not. We have had one crazy tenant who drove us nuts, but we would never have guessed it when we first met her. Other tenants leave after only a few months – again, that kind of thing is hard to guess. But at the same time we have a few great tenants who are there long-term and we never hear a peep from, and one outstanding one who even helps out around the place, does small maintenance jobs, and keeps up the garden.

I think it’s a matter of luck of the draw.

4 Mike

Good point. But don’t tenants expect annual increases unless the vacancy rates are high? I always did.

5 Mr. Cheap

Alexandra: I agree there’s an ELEMENT of luck whether a tenant works out or not, but I also think there are ways that you can increase the chance of a good tenant…

6 Jess

Wow, I’m not alone! This post is good.

I post some Real Estate investment too at my blog at http://www.TheAutoMatedMoneyMachine.com

7 nobleea

When I was renting out my condo, I had a lot of applicants, from all walks. It came down to a choice of a very young ‘trades’ couple who were just starting out and were from out of town, or an early 30’s crown prosecutor and his wife who had just moved in from out of province.

I picked the young trades couple instead. They were so grateful for being considered (vacancy rates were quite low at the time) and were willing to sign any term of lease (I got them for 14 months). The lawyer only wanted 6 months, and was upfront that they’d be looking for a place to buy then and his wife didn’t like the hill the condo was on. While they’d be very responsible and money wouldn’t be a problem, it just seemed like there could be a lot of hassles, unfortunately with someone who knows the laws (or could figure them out).

8 Mr. Cheap

nobleea: I’ve read some people who refuse to rent to lawyers (which isn’t illegal, its ok to discriminate based on profession).

I don’t think this is totally insane (with respect to Thicken My Wallet and Money Hungry Lawyer, I think there are some people who are drawn to the law because they’re bullies who like to get in fights).

9 Juan

Yes,this is correct.
You can also advertise on many holiday rentals websites. Ex: http://www.holidaysbyowner.com ,here you can also advertise for free for a limited period only.
Hope I was helpful!

10 Joyce

Can I ask the question on an application for our rental if the people smoke or not? Is that legal or not?

11 Mr. Cheap

Joyce: It probably depends on where you live. My understanding in the US and Canada is that smokers are *NOT* protected by any anti-discrimination laws, and landlords can ask on their application, ask the person directly, and choose not to rent to them if they’re a smoker.

12 Stephanie

@ Mr.Cheap in regards to mikes comments, do you think that by telling the tennant about the rent increase that the tennant might plan to leave before the rent increases, or even decides not to rent the place at all? If you tell everyone this could it be harder to rent it out?

13 Mr. Cheap

Stephanie: Well, Mike certainly makes a good point (Mike’s the boss, so I think *ALL* his points are good), but I guess it’s just two different approaches. Mike doesn’t think there’s any benefit from telling them (and as you list, there are a number of potential drawbacks). My feeling is if you told them this on day 1, probably they aren’t going to care much (a year looks like a long time away), they’re probably aware the apartment is renting cheap, and it avoids any problems when you raise their rent the next year (you gave them a years notice).

I don’t think one approach is absolutely better than the other, whichever people are more comfortable with.

14 Four Pillars

FYI – This post was mentioned by WiseBread in their “Top 5 articles of the week”. Congrats.

http://www.wisebread.com/best-of-personal-finance-whats-more-dangerous

15 Mr. Cheap

Woot! (as the kids say)

16 embxewtiywopeht

I think landlords need to approach credit reports in this economy carefully. I have NEVER been late on my rent and NEVER not paid my rent in many many years. I’ve also never broken a lease. My credit report is a truly ugly thing at the moment, however. I pay my rent FIRST. Always. It has nothing to do with anything else as far as I am concerned. So don’t make the blanket assumption that if folks are delinquent on this thing they’ll be delinquent on the other thing (ie rent).

17 Mr. Cheap

embxewtiywopeht: I can understand that you wouldn’t like to not be able to rent a place based on your credit history. Surely you understand that if a landlord had to choose between two otherwise identical applicants, one with a spotless credit report and one with a “truly ugly” credit report, it makes sense that they’d rent to the tenant with the spotless credit.

It’s wonderful that you’ve made paying the rent a high priority in your life. As a landlord you’re taking a big risk whenever you hand the keys over to a tenant. They might trash the place, pay late, or not pay at all (while the landlord has to keep paying all the ongoing expenses and repair bills). Doing everything you can to avoid potential problems is important (sadly, even if it means making blanket assumptions).

18 ASDF

I’ve been a landlord for 5 years now, and here’s my strategy: my rents are usually higher than comparables around the neighbourhood. I do have to do more viewings, but I book them 10 minutes apart and keep people moving during 2 timeslots a week. Usually takes 3 weeks to get a few applications and then I decide to take the best one (its never first come, first served). Usually my tenants are from out of town.

Compared to my neighbour, I get tenants who are young professionals, pay more in rent, but do leave after a year or two. For my neighbour, renting the units quickly is more important so his rents are lower but his tenants usually stay for 2-3 years.

I’ve basically decided there is no “right” way of renting out a place ;-)
Each landlord will have their preference or strategy that fits their personality. Now there are wrong ways to be a landlord… but those ppl aren’t landlords for very long.

19 Mr. Cheap

ASDF: I agree there isn’t a “right” way to rent out. Good for you for coming up with a way to get top dollar (and it sounds like you don’t have to accept sub-par tenants to get it either).

I 100% agree with NOT making it “first come, first served” (that’s a ridiculous strategy for finding a good tenant).

20 rose gonzales

appreciate your info.

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