Buying a property to rent out is a great idea. The theory is that you find a tenant to rent it out to and let them pay down the mortgage while you sit back and build equity. Or maybe you are renting the basement to offset some of the monthly expenses. Whatever the reason may be, finding the right tenant is critical to your success as a landlord. A bad tenant can make your life miserable by not paying rent, damaging the property, etc.
Thankfully, I've had mostly great experiences in the properties that I have owned. The problems usually occur with the tenants that are living in the home when I take ownership. What can you do to make sure your experience of being a landlord is a positive one? While there is no guarantee that any tenant will be perfect, following the steps below may help you separate the great ones from the rest.
Rental Application
Have potential tenants fill out an application to give you an overall picture. Each person that will be living in the property should fill one out. The main information that you want is their current address and why they are leaving, their place of employment with a phone number (to verify salary), contact information from previous landlords (for reference checks), what financial obligations they have (car loan, etc.), and a paragraph at the bottom stating that by signing the application, they give you permission to run a credit check.
Credit Check
In Canada, Equifax and Transunion track consumer's debt history. They record the length of time they have had access to debt, what percentage they have used, how long they take to pay, type of debt and more. A number between 300 and 900 is generated based off an applicant's financial health at that given time. The higher the number the more likely that person will pay back the loan. Never accept a tenant without verifying his credit. Even if he brings you a copy he printed himself, run the check and make sure to do your proper due diligence.
Tip -- I charge applicants a small fee to run the credit check (approximately $20). This helps save time and money by eliminating some of the people that aren't serious. I credit the person this fee when they are selected and supply the first and last month's rent cheques.
Utilities
My leases are arranged so that the tenants are responsible for utilities. How many lights a tenant leaves on, how long they let the water run, the temperature the home is kept at, etc. is all out of your control once a tenant moves in. The last thing you want is to end up with is a massive utility bill that erodes your cash flow every month. The tenant should call the utility companies and have the account put in their names before they move in. You will want to see proof of this via a document provided by the utility company.
Tip -- If you are purchasing a home with existing tenants, make sure the utilities are still in the tenant's name once you close on the property. If they transfer over to your name and the tenant decides not to pay the bill, you'll be on the hook for the balance owing.
Insurance
Whether it's a condo, a unit in a rental high rise, or a house, all tenants should have insurance. While not required by law, no landlord should rent a property to a tenant without first seeing proof of a policy. You, as the landlord, must carry home insurance which covers the property itself, but tenant insurance covers the tenant's contents. Some policies have liability built in as well which will provide coverage if someone is hurt at the home or the tenant does something to damage another person's property. Basic tenant insurance is generally very affordable and can save a lot of money and headaches should something go wrong.
Hands-On Relationship
You may be managing the property yourself or have hired a company to take care of the details. Either way, you want to develop a positive relationship with the tenants that will be living there. Small things like a card on Christmas with a gift certificate or a bottle wine once in a while will put you into the tenant's good books. In turn, they will treat the property with more respect and be more willing to cooperate should something come up that needs attention Who knows, they may even help locate new potential tenants when they decide to move out.
Being a landlord can be a challenging experience to say the least. Speak to any real estate investor and they will have a "tales from the real estate trenches" story for you. Calls in the middle of the night, tenants not paying the rent; the list goes on and on. If you take the necessary steps to find the best potential tenant, you won't eliminate all the risk, but you have a much greater chance of success as a landlord. If something does goes wrong, make sure you fix it as fast as possible and figure out why it happened. With a little time and experience, you'll be able to handle any problem thrown your way!