Two years ago, when I purchased my first three rental properties in a single day, I had almost no idea what I was doing or how things would pan out. It was my first foray into the world of rental properties. I figured that I would learn along the way and work it out step by step. Back then I was in no rush as I was still employed by MegaCorp, though I already had some thoughts about leaving the corporate life behind. Today, I am still learning every day about rental properties. As you might have realised by now, I am ultra risk-averse and much more conservative when it comes to investments and money matters than most people. This meant that I had to be very careful when selecting my tenants.
Unless you understand the legal basis for renting a property you probably shouldn’t
I used to think that once I selected a rental unit for purchase, fitted it out, and listed it on the market, the toughest job was done. It often took two or three months for a rental property to be renovated and fully fitted. The critical work however starts when you are selecting a tenant and making sure you get the paperwork done in such a way to protect your interests and your investment as much as possible. Overspending on the renovation – I have done that before – or being slow does impact your ROI slightly but picking the wrong tenant can cripple your ROI entirely; so take your time. Listening and reading about countless horror stories, I decided to be extra careful especially as I was emotionally invested in my apartments. No harm could be done to my babies!
Having lived in Australia, Singapore, Germany, and the US, I noticed the differences in the rental practices and landlord behaviours. Singaporeans, for example, will go through the effort to subtract anything of value from your security deposit if you return the rental property in any other conditions than when it was first rented out to you, including counting the light bulbs or slightly scratched tiles from normal wear. Australians were ready to evict you if you didn’t pass a bi-annual home inspection and replace you with another tenant right away as demand for rental properties is high – a rental property often attracts fifty or more applications in Australia’s major cities! In Germany and Poland, the tenant’s rights are simply ‘insane’, often protecting the tenant more than the owner, and almost impossible to evict any tenant even when they don’t pay their rents. For instance a pregnant woman or single mother in Poland who doesn’t pay the rent cannot be evicted. It would, in many instances, take years to evict a bad tenant on a standard rental contract potentially costing the investor 20-50% of a lifetime return with limited to no chance of recovering the losses. Thankfully though, if you read, understood, and leveraged the law appropriately, any landlord is able to protect their investment almost 100% against such pitfalls in most countries. That’s why I spent almost a week drafting my tenant agreement making it bulletproof, having it checked by notaries and lawyers rather than using the first template that came up online when googling ‘tenant agreements’.
So now the fun begins with the listing of your property for a specific asking price and then awaiting the market reaction. I always love this time. You get to meet the strangest of characters and some really good ones: but how do pick the best tenant? I am still refining this process but here is what I learnt so far.
In a nutshell, I prefer the likes of high-income professionals, business owners, lawyers, and doctors the most. I know I am discriminating and generalising here but placing your hard earned apartment into foreign hands, some few key criteria have to be met and as the owner you are responsible for picking the right tenant who suits you best.
Tenant Selection Criterion 1: Punctuality
I have experienced well over a hundred house inspection appointments by now, when searching for potential tenants for my five properties. While the potential tenant is looking at the apartment, I am using the time to evaluate the tenant for a possible fit, often quizzing him/ her for answers that could help me gauge a potential fit. You wouldn’t believe how many people rock up 15 to 30 minutes late for an appointment without an excuse. Chances are if they lack basic professionalism and courtesy, then they will most likely demonstrate the same character traits as your future tenants or even worse – do not count on the rental payment coming in on time and/ or in full. Being late without a valid excuse is an instant disqualifier in my book.
Tenant Selection Criterion 2: Personal hygiene and cleanliness of their car
I typically wait in front of the property to greet the potential tenant. This allows for a quick glimpse of their car (maybe even inside their car) which indicates if the person is clean and organised (or not). Obviously somebody not well groomed, wearing dirty clothes, or using their car as a wardrobe and/ or kitchen gives away a lot about the person.
Tenant Selection Criterion 3: Regular Income
Generally I don’t consider a potential tenant unless they are willing to volunteer proof of regular income. This can be a bank statement over the past 12 months or the most recent tax declaration. Typically, I do not consider tenants that earn less than 5x the rental price. I myself have always spent a maximum of 15% of my net income on rent and believe that anything above 20% is living beyond your means. Having said that I had people applying for my properties wanting to go as far as paying 70% of their take home pay to cover the rent – their math doesn’t add up.
Tenant Selection Criterion 4: Net Worth
I prefer the tenant to make so much money or have that many assets that he/she is able to purchase the apartment tomorrow if she/ he chose to. In many instances people choose to rent over buying even though they could afford it for various reasons – these are the tenants I personally prefer most. The fact they could buy the place gives me the greatest confidence that if they damage the apartment they can pay for the repairs. Yes, these tenants are rare to come by, but I am patient and so far have found them for all my rental properties. In Katowice it takes on average a couple days to rent out a place (if reasonably priced), however when I take my time in the selection process, and I always do, it often takes me three to four weeks to find the right tenant, and sometimes I even reduce my price just to get the right candidate. I know this will be positive in the longer term.
Tenant Selection Criterion 5: Security Deposit/ Bond
To gauge if somebody actually has enough safety buffer saved up, or rather lives pay check to pay check, I always double or triple the average security deposit asked for similar competitive units. If a potential tenant struggles to double the security deposit, I typically don’t consider any further engagement.
Tenant Selection Criterion 6: Rental History
If the person acts shady or evasive about answering ‘why they are looking for a new place to rent, where they rented before, how that fared, or if they could connect me with the previous landlord directly for a reference’, I would typically disqualify the person at this stage. I have a simple philosophy: you can ask me anything and I expect it to go the other way, too. If this basic expectation doesn’t match, a tenant-landlord relationship has no foundation to be built upon.
Tenant Selection Criterion 7: Apartment Occupancy
Occupancy rate, length of lease, and number of occupants have a huge impact on the wear and tear of a rental property. The more days and time are spent in the apartment and the more people live in it, the higher the wear. I usually prefer single, pet-less, children-less career driven folks who want to stay at least for one year, ideally longer. They tend to spend the least time in the apartment and have little time to socialise at home; when they do have time to socialise, they prefer to do that outside of their four walls. My rental agreement requires tenants to designate who will live in the apartment by name and identity card. Any changes are to be approved in writing by me. Should a tenant want to bring in their partner or kid to live with him/ her, this is usually no problem as I will simply ask for an appropriate raise in rental fees due to higher wear. Animals and young children are generally not preferred in my rental properties due to the unpredictable maintenance load and cost involved. I simply want to avoid any hustles associated with renting my properties out. One of my favourite anecdotes is about a man who wanted to rent my 48sqm one-bedroom apartment. The apartment was brand new and renovations just finished. He wanted to rent for three months only, meanwhile put in a dividing wall in the living room to make space for his Mother and have his two kids and dogs live on the large terrace in a tent. Seriously? I wasn’t sure if I should call the child protection agency right away or if this guy was for real. Turned out he was serious – ouch!
Tenant Selection Criterion 8: Patience
Often I receive a call from a potential tenant wanting to move in on the same day. Of course the person doesn’t realise they have just been disqualified, when I ask them why there is such a rush. It’s amazing to hear people being utterly disorganised, often starting to look for a rental a week or less before they have to move out (for whatever reason). For the organised people that get a viewing invitation from me, I often end the appointment with ‘Let’s both sleep over it and connect tomorrow morning about our decision’. This gives me time to evaluate the tenant, connect with my family to discuss the tenant, but also tests the patience of the tenant who often would be ready to sign on the spot.
Tenant Selection Criterion 9: Social Media Presence
Last but not least, and often the first thing I check, is the applicant’s social media presence. It gives me some level of confidence that the prospective tenant has a well maintained LinkedIn or Facebook profile. Reading about common friends, a past education history and verifying the workplace during a meeting is building confidence. Of course this is to be taken with a pinch of salt, as we all know that whatever you publish can be exaggerated or even be a lie.
Tenant Selection Criterion 10: Reputation
In addition to the above I maintain a social network with agents. Whilst I don’t directly employ real estate agents I share apartment availability with a few select good agents I have met throughout my landlord ‘career’. I connect regularly over coffee or lunch with them, and very often they are a great source to validate experience with a tenant. They also do share bad tenants and scammers with each other using WhatsApp groups or similar. Tapping into this knowledge base is invaluable. A short meet-up or a message exchange about a potential tenant can reveal things you might have overlooked and it can save you from falling for a professional scammer. The biggest scammers are usually published online in specialised knowledge bases, so simply googling the name of the tenant can expose the repeat scammer right away.
Based on the ten decision criteria above, I have put together a list of my most used interview questions to screen potential tenants. Just asking these or similarly worded questions and gauging the reaction of the person gives you tremendous insight into a potential tenant. Just a word of caution: certain countries don’t allow certain types of questions. Before using the list, please make sure you use these within the legal framework you are operating in.
Cheat-List: 15 Questions To Ask Potential Tenants:
- How long have you rented where you stay at present?
- What is the reason for you wanting to move?
- When do you prefer to move in?
- What do you do for a living?
- Would you be able to provide written evidence of your income and/ or assets?
- Who exactly would be living with you, if anybody?
- Do you smoke, if so, do you ever smoke indoors?
- Do you have any pets?
- Can you connect me with your current landlord for a positive reference?
- Were you ever evicted or sentenced to jail?
- Are there any issues I should know about before I run a background screening for all the adults in the household?
- Have you ever filed for bankruptcy or do you have any outstanding debts?
- Would you be able to pay the discussed security deposit at the lease signing?
- Are you willing to sign a minimum 1-year lease agreement?
- Do you have any questions for me about the process?
Following the above criteria and questions to select the right tenants, I have enjoyed a full occupancy of all my rental properties since I started over two years ago. All minor damages have been repaired and paid directly by my tenants. To date no tenant has missed a single rental or utilities payment so far. Fingers crossed it will continue to go as smoothly hereon.
Now some questions for you:
- What do you think of the criteria and questions?
- Do you use any other questions or criteria to screen potential tenants?
- What has been your experience renting out to your tenants?
- If you do not own a rental property yet, could you imagine investing in one?
For Freedom and to Live Your Dreams,
Your Financial Gladiator
About: This Financial Gladiator retired early at age 34 by investing most of his savings in a small real estate portfolio in Eastern Europe. Today he saves approximately 75% of his income while roaming the world and occasionally teaching as a Scuba Instructor on tropical islands. It helps him to keep fit while doing what he loves – teaching, traveling, and scuba diving. He called quits following a successful 13 year career in Information Technology throughout which he saved between 30-40% of his net income annually. Before he quit he positioned himself in a role he suspected was going to be made redundant eventually. The day arrived quickly and he ensured not to leave without a retrenchment package reducing the need to work and save 3 more years. His real estate portfolio draws a return high enough to pay him twice his annual expenses, allowing him to continue to build up his retirement portfolio while enjoying 100% freedom today.
Disclaimer: All information provided on this site is for informational purposes only and does not constitute professional financial advice.