Becoming a Landlord: Finding Tenants
A challenge that most landlords face is finding reliable tenants to fill their rental properties. An ideal tenant is willing and able to pay rent in full and on time each month, keep the property in good condition, and follow the policies in the lease or rental agreement. Particularly with a longer-term rental where you’ll have the same tenant for an extended period of time, it’s well worth the effort (and time) to find dependable tenants. In this section, we’ll take a look at some of the factors involved in finding tenants for your rental property. (For related reading, see Top 5 Ways to Protect Yourself Against Problem Renters.)
Fair Housing Laws
As you look for tenants, it’s important to understand the federal, state and sometimes local laws that prohibit landlords from discriminating against certain groups known as protected classes (discussed earlier in the "Local, State and Federal Compliance" section of this tutorial). In general, the Civil Rights Act prohibits discrimination based on race, and the Fair Housing Act prohibits discrimination based on race, color, gender, national origin, family status, disabilities or religion. The laws apply to advertisements and to interviewing and selecting potential tenants. Most violations are the result of ignorance of the law or a misunderstanding of the laws' applications. If you fail to comply with fair housing laws, you may be subject to penalties.
In order to find tenants, people have to know about your property. You can advertise your rental property by word of mouth (talking with friends, family and co-workers), flyers, putting easy-to-read signs at or near the property, placing advertisements in the classified sections of local newspapers (in print and/or online), and placing ads on websites related to rental properties.
Your advertisements should provide a factual and concise description of your property, highlighting any positive features (such as "large fenced-in yard" or "new stainless steel appliances"). Include details such as the number of bedrooms and baths, the monthly rent and the security deposit. You can include the physical address if you want people to be able to drive by and look at the property before contacting you. Conversely, you may want to leave out the address so you aren’t "advertising" a vacant home. Here is a sample advertisement that includes all the basics:
James Island Home for Rent
Because many renters today make their decisions online, it’s a good idea to build a website for your rental property (or properties). You should include photographs of the interior and exterior of the property, including the front and back of the house, the yard and each room in the property, as well as a description of the property. Every form of advertisement that you use to promote your rental property can reference this website, allowing potential tenants to view and learn more about your property.
Your potential tenants need to be able to reach you by phone to indicate an interest in the property or to ask questions. As such, it’s important to provide a phone number that you’ll be able to answer throughout the day and evening. Keep in mind that many people who are looking for a place to rent have a limited amount of time to do so. If you aren’t available to answer questions, the person will likely look into the next property on the list and forget about yours.
Another option is to hire a qualified real estate agent to find tenants for your property. While there’s no set commission for this, a typical fee might be half of one month’s rent, plus the cost of running a credit report on any potential tenants. If you don't have the interest, time or patience to find tenants, this can be an excellent option. Depending on your agreement with the real estate agent, they may:
- Advertise for tenants.
- Show the property.
- Screen the candidates.
- Complete the paperwork, including the lease.
Pricing Your Rental
The price you charge for rent is an important consideration and one that affects your bottom line. Charge too much and you might not find a tenant; charge too little and you might not make ends meet (i.e., you could lose money on your rental property). When figuring out how much the charge for rent, try to find a number that allows you to:
- Cover your operating expenses.
- Earn a reasonable return on your real estate investment.
- Be competitive within the local rental market.
Your operating expenses include costs for mortgage payments, property taxes, insurance, maintenance, repair reserves, utilities and administrative costs. You can research the going rate by reading ads online or in local newspapers, and by speaking with neighbors. Find out what similar properties in the area are renting for, and then price yours accordingly. If your property has an extra feature that makes it more desirable, you may be able to price it slightly higher. If, on the other hand, the other similar properties are somehow more desirable, you may need to price yours a little lower to be competitive. You can expect potential tenants to research several properties in the area. In general, they will not pay more money for fewer features.
Try to take into consideration the supply and demand for rentals in your area. If supply is high, you may have to decrease the rent to attract tenants; if demand is high (and it’s harder for people to find housing), you may be able to set a higher (yet still reasonable) rent. If your property is subject to rent controls, be sure you know the rules.
If your tenant has signed a lease, you can’t raise the rent until the lease expires unless there’s a provision (often called an escalator clause) in the lease that allows you to do so. Local and state laws may require that you provide a certain amount of notice to tenants before raising the rent. Even if the law doesn’t require any particular advance notice of a rent increase, it’s good practice to provide this notice as a courtesy to your tenants so they can plan accordingly. Advance notice could be the difference between your getting paid on time or having to deal with a past-due rent situation.
It’s helpful to establish criteria that you’ll use to select tenants. Not only does this process increase your chances of finding a reliable tenant, it helps ensure that you are in compliance with fair housing laws. In general, landlords hope to find tenants who are:
- willing and able to pay full rent on time
- willing and able to abide by the terms in the lease or rental agreement
- not expected to engage in any illegal activities on your property
You can have each potential tenant fill out a standard application form that includes the following information about the applicant:
- address and phone number
- Social Security number
- length of time at current address
- contact information for current and past landlords
- contact information for current employer
- current employment income and other sources of income
- personal and credit references
- statement authorizing you to contact references and confirm the information
Verifying Income Sources
To determine if a potential tenant can pay the rent on time each month, you’ll need to verify the applicant's income sources by checking with the employer listed on the application form. Many employers will not verify this information unless you have written authorization from the applicant. You may want to also consider the applicant's debt-to-income ratio. In general, rent should represent no more than 30% of the applicant's gross monthly income. For example, if an applicant has a total gross monthly income of $5,000 and you are charging $1,500 for rent, the rent would just fall in line with the 30% guideline (30% of $5,000 is $1,500).
Checking the Applicant's Credit
You can check an applicant's credit history to help determine the likelihood that they’ll pay rent on time. If you have the applicant's Social Security number, you can get a credit report from tenant-screening agencies or through credit bureaus including Equifax, Trans Union and Experian. Typically, landlords pay a yearly fee plus a nominal fee for each credit report. These costs may be tax deductible.
Because younger people are at an inherent disadvantage in terms of credit scores (all things the same, younger people will have lower credit scores because they have shorter credit histories), you may want to check with previous landlords and utility companies that the applicant has used. If a company won’t verify the payment history, you can ask the applicant to provide canceled checks or bank statements that show a history of on-time payments.
Contacting an applicant's previous landlords and references can give you important information about the potential tenant. In addition to questions about paying the rent on time, you can ask whether the applicant observed rental policies, was considerate of neighbors, kept the property in good condition and gave proper notice before moving.
If you don't use a standard application form, you’ll have to interview the applicant to find out relevant information, including employment and contacts for previous landlords. Even if you do use an application form, an interview can help you find the right tenant for your property. Keep in mind that you can’t ask any question that would violate fair housing laws, make inquiries regarding arrests (you can, however, ask if they have been convicted of a crime), or ask any question that is not part of your normal standards for qualifying applicants.
Turning Down an Applicant
You don’t have to accept an applicant who has an unsatisfactory credit history or who has not demonstrated that he or she will be able to make full and timely rent payments. When you notify the applicant of your decision, you may want to let them know the basis of your decision. Also, the applicant is entitled to know the name of the credit bureau, screening company or other organization that provided the report that you used in your decision process. Although you don’t have to put this information in writing, it’s a good idea to provide a rejected applicant with a written notice and maintain a copy for your records.
You can’t reject an applicant because of race, color, gender, national origin, family status, disability or religion. Base your decisions on sound business practices and not on anything that could be construed as discriminatory.
In some areas, you may be required to return any application fees or deposits to a rejected applicant (if you collected them), and you may have to do so within a specified amount of time. Check your local and state laws to be sure you are in compliance.
Accepting an Applicant
If you have decided to accept an applicant, it’s a good idea to notify them immediately before they sign a different lease and you have to begin the process again. Give the applicant the opportunity to ask any questions, review the lease and make sure they understand the terms of the agreement.
Becoming a Landlord: Landlord-Tenant Relationship