Tenant selection is tricky. All landlords want to avoid bad tenants, but it can be hard to know when you should settle for the tenant applicant you have or if you should keep looking for a better tenant.
If you're wondering how to pick the right tenant for your rental property you'll need to realise an important truth: almost no tenant will be perfect or tick all the boxes.
The way good landlords choose between tenants is that they have a set of tenant selection criteria and they try to find a good tenant who fits this description as well as possible in a reasonable amount of time. So, the way to pick the right tenant is about balancing the time you've spent searching and the quality of the tenant.
Understanding how to pick a good tenant will help you avoid income gaps and ensure that your investment property will be taken care of, so the stakes are high.
In this blog post, we'll explain what makes a tenant good and help you set up your tenant selection plan with background checks and a tenant selection checklist. We've also outlined what property owners need to keep in mind during the tenant selection process, such as renting to tenants with bad credit and short-term tenants.
What is a good tenant?
Good tenants lower the financial risk to your property and save you unexpected costs down the line. Basically, they make managing your rental property a lot easier and bolster your financial situation.
This is because a good tenant:
- Is a long-term tenant
- Pays rent on time
- Treats your property with care and respect
- Will request reasonable maintenance when needed
- Communicates with you effectively
That being said, there isn’t a one size fits all tenant situation and good property managers know that. Many great applicants may come your way, but your property will be ideal for some tenants and not ideal for others.
Finding the right tenant is crucial. It means you reduce the risk of your investment property, secure a more stable income, and you have someone responsible taking care of your property.
When you think about the ideal tenant for your property, consider:
- How many tenants you want living on your property.
- Which tenants would fit in best in your property’s neighbourhood.
Unfortunately, most property managers and landlords have had an experience or two with problem tenants. These tenants tend to make a landlord's job a lot more stressful than it needs to be and can often affect your bottom line.
"It needs to be a balance of both a speedy process, but also making sure that the checks and balances are there."
The reason why you want to make an effort to avoid problem tenants is that they:
- Can end up in rent arrears
- Don't report damages or necessary maintenance for the property
- Decide to move out abruptly
So now you know what makes tenants good, and why it's worth putting a lot of thought and effort into tenant. Let's walk you through how you actually find good tenants.
How to pick a good tenant
Whilst it's almost impossible to select a perfect tenant every time, having a streamlined process for attracting tenants and selecting them will greatly increase your odds.
We'll call this your 'tenant selection plan'. Once you familiarise yourself with it, it'll be your best friend when you're on the hunt for someone responsible to live in your rental property.
Your tenant selection plan consists primarily of:
- Methods you want to use for screening applicants
- A tenant selection checklist to decide between tenants
That way you filter out the tenants who aren't right for your property and make it much easier for you to make a good decision faster. It also helps you remain more objective and apply the same decision criteria to all tenants, which is an important part of treating your property like a business.
1. Tenant background checks
Background checks are the step you can't skip when it comes to selecting a tenant. Your intuition is important in the tenant selection process but you can't rely on that alone. Only make a decision after screening all the applicants.
Here are some important items you should follow up on when you're considering an applicant:
- Verify the tenant's ID and make sure it matches up on different documents
- Get proof of income. Tenants can supply this themselves, or you could contact the HR department of the place they claim to work to confirm if the applicant works there. This can be uncomfortable for many though and we'd suggest more lenient measures.
- Check their credit score. If a tenant doesn't provide one, you can conduct a credit score check yourself. Keep in mind that the tenant should be notified of this.
- Scan their rental history. It's good practice to ask for at least one referee. Contact references to ask about the tenant's behaviour at previous rentals. You can also cross-check landlord references on the national tenancy database to confirm that they were actually a landlord for the tenant.
2. Tenant selection checklist
A tenant selection checklist is the best way to quickly scan and identify tenants who are a good fit, and it's how property managers find you good tenants. Once you've done your background checks you can compare your results with your checklist.
Your main criteria should be as follows:
- The tenant's weekly salary should be 30% greater than rent.
- If the tenant has a rental history, past landlords and references only have positive things to share.
- Everything looks in the green in the tenant's credit score.
- Your interactions with tenants at open homes and correspondence are nice and pleasant. It'll give you an indication as to how they'll communicate throughout the tenancy.
Not every applicant will have a great income or credit score, and often, there are legitimate reasons for that. However, if a tenant is not transparent about their finances or rental history, that should be a red flag.
If you have any concerns it's a good idea to simply ask the applicant about them. Let them present their side of the story and you'll find that most applicants are quite responsible.
Now, this checklist shouldn't be set in stone, but it should be used to help choose between different tenants. Ideally, you want someone to check as many boxes as possible. So while a tenant may tick 3 out of the 4 boxes, you would pick that tenant over someone who only ticks 1.
In the end, the tenant selection checklist is there to help make the selection process easier and more objective.
So, when should you stop looking for tenants and settle?
It can be tricky to know when you should settle for the tenant you have and when you should keep looking for a better one. After all, making the wrong choice could seriously hurt your bottom line, but you also don't want to sit on a vacant rental property for long.
A prolonged vacancy can cost you as much as $1,750 a month.
Your tenant selection decision should be based on your financial goals, planning, and capital.
Here's what you should keep in mind if you're looking to select a tenant as soon as possible:
- If the shortlisted candidate is only looking for a short-term rental, you'll find yourself on the lookout for new tenants soon enough. Avoid short-term rentals as much as possible.
- Whilst you can't always expect a tenant to be a 100% fit, if you rent out your property to someone who only meets the bare minimum you expose yourself to problems down the line, like a sudden breach of the rental agreement or chasing down rent arrears.
- You can make the most out of vacancies by upgrading your rental property and conducting pre-emptive maintenance. Good property investors see it as an opportunity to increase the value of their investment property, so give those walls a fresh coat of paint if time allows it.
If you're feeling stressed out and the vacancy is pushing way past the average time a house is on the market, then it might be time to just settle for the best option you've got in order to secure an income.
By renting to a tenant who only meets the bare minimum you could expose yourself to risk down the line. If you decide to do this, make sure you're covered with landlord insurance and a strong rental agreement.
Here's the absolute bare minimum a tenant should live up to if you're considering selecting them:
- The tenant can pay the rent consistently, and on time.
- The tenant gives you a good feeling through your conversation with them, and come across as responsible and reasonable.
- The tenant has passed the background checks or has clarified reasons for falling short on some of your tenant selection criteria (like a poor credit score).
If your applicants don’t quite meet the tenant selection criteria, it will probably be better to keep looking. If they do, you can sign off on a tenancy with that applicant, but it does come with a risk. If you do, make sure you're covered with landlord insurance and do your due diligence with our new tenant checklist.
It's also worth noting that a lack of quality applicants might mean you've priced your rental property incorrectly. We'd recommend going through our guide on when to reduce the rent on your rental property advertisement, to see if reducing the rent could solve your low-quality applicant problem.
Renting to tenants with a bad credit score
If you find yourself backed into a corner you might be wondering if renting to a tenant with a bad credit score is worth it. While it might seem like something you should never do, banks actually do provide loans to those with bad credit, and you can employ some of the same safety measures to make your decision less risky.
While tenants with bad credit aren't ideal, if a candidate has an immaculate record overall but a poor credit score, it doesn't necessarily mean that they can't pay rent on time.
Good people can make financial mistakes or be subject to extenuating circumstances that can result in bad credit.
Regardless, what should you do when a tenant has a great application except for a bad credit score?
1. Talk to the applicant
Have an earnest conversation with your tenant about their bad credit score. Very often, good people end up in unfortunate situations due to things that are out of their control. For example, you might discover that they had to pay urgent medical expenses, or were laid off due to the pandemic.
If their explanation adds up, the credit score is likely an outlier in their overall good application, and this should help you feel more comfortable renting to them.
2. Follow up with their references
When it comes to tenants with bad credit we highly suggest you ask for at least 1 reference.
Contact their references and ask them about the applicant's past behaviour and if they were ever late on rent payments.
If all they do is praise the tenant and recommend signing them up, then you should still consider renting to them.
3. Add a cosigner to the rental agreement
One way you can get assurance when considering renting to tenants with bad credit is to have them cosign the lease with someone else.
The cosigner, or guarantor, can be a tenant's relative or friend. Cosigning a lease means that the cosigner will cover rent obligations when your tenant cannot.
If your tenant is willing to cosign the rent agreement, run the same kind of extensive background checks on the guarantor so that you can be sure that they are reliable and can actually cover the rent if needed.
4. Sign the tenant with bad credit for a shorter period of time
If your best applicant has poor credit and you are wary of the risk involved, consider renting to them on an initial short-term agreement.
While this is not ideal, it may end up being better than having to keep your property empty to look for more tenants, especially if continual income is a priority for you.
Say that you sign them on for a 3-month lease with the agreement that you can extend it if all goes well. Then, your hands aren't tied if they're inconsistent with paying their rent on time, and you also get the chance to keep them if they turn out great.
Renting to tenants with bad credit isn't as scary as it might seem. You shouldn't assume that a tenant with past blunders is irresponsible or ill-behaved, and there's plenty of measures you can take to make it a less risky decision.
Finding good tenants and knowing when to stop looking is one of the harder aspects of property management. A great way to make the tenant selection process easier is to hire a property manager.
While the final decision remains yours, a good property manager will streamline the property leasing process easy for you by running all of the necessary background checks and getting to know the applicants. Plus, they have access to the strongest pools of applicants on Domain.com.au and realestate.com.au.
Read through our article on how good property managers help you find good tenants if you want to know more about what it's like to lease with a property manager.
Disclaimer: The information provided on this blog is for general informational purposes only. All information is provided in good faith; however, we do not account for specific situations, facts or circumstances. As such, we make no representation or warranty of any kind whatsoever, express or implied, regarding the accuracy, adequacy, validity, reliability, availability or completeness of any information presented.
This blog may also contain links to other sites or content belonging to or originating from third parties. We do not investigate or monitor such external links for accuracy, adequacy, validity, reliability, availability or completeness, and therefore, we shall not be liable and/or held responsible for any information contained therein.