Lesson Three: Screening Tenets
Blog Version
Hey, everybody. We’re back again. And this time we’re talking about tenant screening and selection processes. And I cannot overstate how important this is. Picking the right roommates and or the right tenants, in my opinion, it’s the oil of the house hacking engine. It’s a critical component and you have to do it well in order to ensure financial success, because this is where your money is coming from. So if you want the endeavor to succeed, picking the right roommates and the right tenant selection process is critical. So please hear me. There’s nothing more important than you can do than to put good people in your building, people that will pay on time and take care of the property. So you have been disclosed as to how high priority this is.
So listen closely today, because we’re going to share with you some things, criteria that we use personally for selections. I’m going to walk you through Our three qualifiers are big Disqualifier is really we’ve established this criteria through trial and error and personal experience, as well as engaging a lot of like super successful industry leaders in the real estate investing space and property management space. We’ve interacted with a ton of people that have been guests on bigger pockets. We’ve actually interacted with hosts of bigger pockets. So we spent some time figuring this out for you. So we’ll start with a little bit of a caveat. So this is for the people that are only bringing in roommates.
So it’s been in my experience, if you’re bringing all of your tenants under one roof, meaning you bought like a single family house and you have maybe two or three spare bedrooms and you’re bringing in roommates, Typically you can get those rented through your own personal network and don’t have to be quite as rigid in your screening process. So meaning like friends of yours, maybe family members, people that you see at the gym or other social circles, maybe you play volleyball at the YMCA or you’re whatever church, local networks or coworkers. Maybe you have some coworkers that you could bring in as roommates. Obviously, in those instances, it’s up to you to modify the selection criteria if you’d like, because you’re not going to like deny your best friend because their credit score doesn’t meet the standard.
Although maybe you should deny that dirtbag if they’re not paying their bills. But you get the point, right? So these rules can be modified a little bit if you’re talking about roommates and not tenants. But I would also say it’s a huge mistake. And this is one that Rachel and I made early on. It’s a huge mistake to think that just because someone is living in your backyard, let’s say you do have a house with an ADU, just because someone’s living in your backyard and you think that that means that they would take care of it or pay their rent on time is a big mistake. That’s not necessarily the case. And our very first tenant was like a total nightmare. We didn’t know how to screen them. We didn’t really screen them. We assumed that because he would see us every day, we would walk out of our back door and his apartment was right there and we’d see him almost every morning going to work.
We thought he’d be a reasonable tenant because he’s got to see us every day. And we were totally wrong. He was constantly late on his rent. The cops were there like multiple times. He was just a bit of a wasn’t even a bad guy. He just didn’t have his stuff together. But we ended up eventually having to evict him.
And then, of course, once we got inside the house, the ADU, the place had been trashed. So the lesson for us was don’t assume that just because your tenants know that you live next door or they’re a neighbor, that that means they’re going to take good care of their property. It oftentimes means virtually nothing. Okay, let’s get into the screening process. So from a macro perspective, we’re talking like big picture. There are essentially three major items that are like the most important things that we look at to decide if we’re going to go to the next steps with a tenant. The first one is their credit history and their credit score. So our personal criteria for our tenants is a minimum beacon score or middle score of 580.
We love to see a score of 600 because that really gives you the warm fuzzies to know that they’re stuff together because like at 600, 600 or 620, you could actually qualify to buy a home. But it’s not always feasible to expect a 600 credit score. Sometimes we’re purchasing in like blue collar neighborhoods or C class neighborhoods, and occasionally these folks just have a bill that they didn’t pay or some debts that they’re paying off, maybe a cell phone bill or a medical collection that’s gone. So those types of things we’ll consider on a case by case basis. If someone has a cell phone collection or a medical collection. The only exception that we’ll make on the 580 credit score is with someone who hasn’t established a lot of credit yet. So the credit bureaus essentially force you to start at a low credit score and then build from there.
They don’t start you off high and then knock you down if you don’t do a good job. So people who have an established credit yet may not have a 580 credit score. So in those instances, we’ll look at it on a case by case basis and then we’ll take a deeper dive into things like their references. If they can offer them, call people and get character references and also look into their rental history to make sure that if they have rented somewhere else, they paid on time and we’re in good standing. In those instances, we’ll consider them below 580, but that’s the only instance. Other than that, below 580 credit score is an automatic disqualifier for us. Number two, the next sort of automatic disqualifier for us is if they have an eviction at all on their record. And there are no exceptions to this one.
And I would suggest you adopt the same approach. We are not going to rent to someone who has been evicted for any reason, even if they have this amazing story that it was their mother’s best friend’s cat that caused the problem because it pissed on the electrical box and there was a fire and then they had to figure out how to pay for it and the landlord screwed them. You’ll hear stories like that. I don’t care if there’s an eviction on their credit, do not let them in your property. And look, I hope it doesn’t sound heartless. We know that hard times can happen to anyone. But I also know that someone’s rent is like second only to food and maybe transportation in the list of priorities on your bills.
It’s like food, water, shelter, right in the order of priority to survive. So if someone has a history of either not being able to or not being willing to pay for their shelter, then I don’t want you and I certainly won’t put myself in the position of having to evict them if they go down that path again. So we simply don’t consider people that have a prior eviction. The third primary selection criteria is income. So this is pretty simple. We want to see that the rent is no more than 33% of their income, or said differently, their income needs to be 3x whatever the rent is that you’re charging. So let’s say you’re renting a unit for 900 bucks a month and that person’s income should be $2,700 a month or more in order to meet the income qualifier.
Occasionally, this could be difficult to hit. I know there’s been instances where we’ve let somebody in when they were like squeaky clean. The income wasn’t there, but they just seem like they had their stuff together. But I’d say by and large, 90 plus percent of our tenants hit the 3x income qualifier. And it’s a good way to know if someone can sincerely afford a unit that you’re going to rent. So those are sort of the big macro perspective criteria. Let me give you some like tricks of the trade or I guess additional data points that might help you screen further. The first one may kind of seem obvious, but what we’re going to do is we’re going to get a copy of their driver’s license. There’s a variety of reasons for this, but not the least of which is to make sure that it matches the current address on their credit report.
You just want to make sure that they actually live where they say they live. That’s it. Number two, we’re going to see if we can collect bank statements. It’s a great way to confirm that they are who they say they are because you get to get something from the bank that gives their info. And it’s also a way to make sure that the address on their license and application matches their bank statement. This is just sort of like fraud protection, making sure there’s no, we haven’t run into it, but we’ve heard people that have run into like stolen identity scenarios. So this is just sort of a CYA for you to make sure you’re not letting somebody in that might not be who they say they are. You can also look to see that they’re current and their rent and that their rent is coming out each month.
If you get these bank statements and they’re paying it for the amount that they say they are supposed to be paying their landlord. So it’s also a good way to make sure that they’re paying their rent on time. So third, you’re going to get pay stubs and you’re going to call their work to confirm that they actually work there. If you want to go like next level, like Sherlock Holmes investigation, this is something that we don’t do. But if you want to be like crazy with it, you can do it. Don’t ask for the supervisor that they listed on the application you’re going to call their were going to ask to speak to someone in HR So that you know that the person the tenant referred you to may or may not be like some best friend or some, like inside confidant.
If they’re really trying to play the system. Again this is like next level probably won’t come into play. But if you really want to do it, verify employment call the place, ask for the HR person and make sure that John Doe that’s applying for your unit actually works there. Number four, this is my personal favorite just because it’s like sneaky, funny and but probably 90 times out of 100 is very accurate. At some point when you meet this person, see if you can check out the condition of the interior of their vehicle. And trust me when I say that the condition of the interior of their vehicle is probably about on par with how they’re going to treat your property. Now, it’s okay to be a little messy. That stuff’s cleanable and there’s probably some folks who are like, Oh, crap, if you judge me by the interior of my vehicle, I’d be screwed.
But it’s not a disqualifier. But it is another data point. If their car is totally trash on the inside, it’s disgusting. That’s probably what your unit’s going to look like. So just something to think about. And last but not least, if they have a utility bill, you’re going to ask for a utility bill and you’re going to make sure that that utility bill is in the name of the applicant and the address matches where they’re currently living. So there you have it. Basic tenant screening with some extra selection tips and data points on top. So we’re looking for good credit, good credit score, 580 or above, absolutely no evictions, and we’re looking for 3x income to rent ratio. If you do these things and you exercise the tips that I gave you, I have a great feeling that you to weed out probably the worst tenants and really get some folks in there that will consistently pay their bills on time, which is how you make money in the house hack game. Until next time, I’m Jonathan Beasley. Hope you enjoy this, out!