Everyone has heard at least one horror story from a friend or acquaintance about someone who had a tenant from hell. Dealing with tenants is actually one of the biggest fears that potential investors have, let alone dealing with problematic tenants. In many cases, the thought of having to deal with them is enough to keep prospective investors from investing ... which is a shame because that threat can easily be mitigated.
Owning an investment property is tantamount to owning a small business. To succeed in business, you have to ensure that you have a good client base that respects your business and pays its bills on time. The same holds true for succeeding in real estate investing, you have to ensure that you have a tenant profile that respects the property and pays its rent on time.
For most novice investors, the tenant profile is likely something that hasn't even crossed your mind, but it is actually one of the most important factors to determining your success. Some of it is tangible and some of it is intangible. As you become more experienced, you'll get a better feel of what makes a good tenant profile.
There are 2 occasions when you have to pay particular attention to the tenant profile. The first is when you are purchasing a new investment property. Assessing the tenant profile has to be a consideration because a bad tenant profile can cost the novice investor time, stress and money. On a side note, for the more experienced investor a bad tenant profile isn't necessarily a bad thing as; (1) the experienced investor knows what they are getting into; (2) the property is usually priced accordingly, and (3) turning around the tenant profile can be a lucrative proposition.
Assuming Tenants - Talk to Every Tenant
When purchasing an investment property, the buyer has to assume the existing tenancies so you need to ensure that you are comfortable with what you are getting as you have no control over who is currently living in the property. The best way to learn about your prospective new tenants is to talk to them. Be present at every inspection and to try to schedule inspections for the weekend or evenings as most tenants tend to be around at that time. Depending on the reports required (eg. appraisal, building condition assessment, phase 1 environmental), you will likely have at least 2 occasions to meet and talk to them.
Always take personal notes so you can review and assess in its entirety afterwards. Engage the tenant in small talk. This will not only reveal potential issues with the building, it will give you a good idea of the tenant's personality. Things to looks for:
- Cleanliness of unit
- Items that shouldn't be in unit (eg. washer/dryer, moped - I found one in my latest building inspection)
- Pets (loud, neglected)
- Does the tenant seem personable and cooperative?
- Does the tenant like to complain alot?
- Does the tenant work, do they have anyone that stays over, do they like living there, do they get along with their neighbours?
After a quick inspection and short conversation you can usually tell what type of tenant this is going to be. Once you have inspected all the units and hopefully met all the tenants and have taken good notes, you can review and decide on whether this is the type of tenant profile that you would be comfortable assuming.
Renting to New Tenants - How an $11.30 investment can save you thousands!
Here you have alot more control of your tenant profile as you decide who gets to live in the property. This is where you need to be diligent and selective about who you let in as it will make all the difference between owning a profitable and headache free investment or owning a money-losing and headache filled investment.
All too often landlords are more concerned about filling vacancies than the quality of their tenant profile. In the short term they may fill a vacancy, but in the long term, it always, always costs them more ... I know from experience.
The ability to come up with first and last month's deposit should only be one of the criteria, and certainly not the only one. You need to learn as much about your prospective tenant as possible. My checklist includes the following:
- Letter of employment or pay stub
- Call employer to verify employment and get reference
- Call previous landlord for reference
- Tenant traits - Appearance, punctuality, demeanor
- Do an online search (eg. work, hobbies, activities, asssociates, etc...)
- Credit Check (Price: $10.00 + HST) - The single most important and effective way to forecast if you will get your rent on time every month. People earn good credit scores by being responsible and diligent with their financial obligations. I typically look for a score of 680 or higher.
While it may be tempting to fill a vacancy with a suspect tenant, you are ALWAYS better off to absorb the cost of the 1 month vacancy and hold out for a good tenant to occupy the unit.
What's the Big Deal About the Tenant Profile Anyway?
As mentioned earlier, having one bad tenant can significantly affect your investment and your stress levels. When I first started off, I was a lot more lax about who I let into my properties. The application, first and last, and a call to the previous landlord was about the extent of my due diligence. This lack of scrutiny ended up costing me tens of thousands of dollars and lots of stress.
Below is a sample calculation of how much one bad tenant can cost you:
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Lost Rent (assume $800/month): $2,400+
Tribunal Filing Fee: $170
Tribunal Representation (if you don't go yourself): $200+
Sheriff: $330
Repairs and Renovations (almost every tenant I have evicted has left the unit in need of repair): $3,000
Intangible Costs: Stress, Your time, Tenant Profile
Total: $6,100 + Intangible Costs
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I own and manage close to 100 doors right now and I find it easier to manage now, ever since I became more prudent with my due diligence and started checking credit scores, than I did when I owned substantially less doors but did not run credit checks.
With a good tenant profile tenancies tend to last longer and when tenants give notice to vacate, transitions are almost seamless. A good tenant tenant will give proper notice which then gives the landlord enough time to advertise and rent the unit (which is usually left in good condition) out to a new tenant without incurring any vacancy. This not only maximizes your revenues, but also minimizes your stress and headaches as a landlord.
In closing, pay close attention to your tenant profile as it is one of the most important elements to running a successful and profitable investment property.
Author: Paul Kondakos, BA, LL.B, MBA - Professional Real Estate Investor