Background Screening- Finding the Perfect Tenant

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Pete: Hi, my name is Pete Neubig. I am the Co-founder of Empire Industries Property Management, located here in Houston, Texas. I’ll be your host for this REI Classroom and today, we’re going to be talking about background screening, getting the perfect tenant, and minimizing your mistakes.

Mike: This show was sponsored by passiverental.com.

Pete: So it’s always important to get the right people in your house if you’re a buy and hold investor. The more due diligence you do on the front end, the better it is on the back end. So when performing your background screening, you want to get a good paying and hopefully a long-lasting tenant. You’ll never be 100% in your quest to find the perfect resident. But with some guidelines, you’ll get to 99% like we have here at Empire Industries Property Management.

So we manage about 500 properties and we have between a 1-1.2% eviction rate throughout the year. So hopefully, these tips I give you, you will get the same results with your properties. So tip number one, have a company policy on qualifications. So, for example, what’s your income policy? Is it going to be two and half times the rent or three times the rent? I don’t recommend anything less than two and half times, and obviously, anything more than three times is going to be very difficult to get a resident in there.

Debt policy, what is the debt to income ratio, and what is your policy on that? A lot of times, it’s maybe a three to one or a two and a half to one so you just want to look at it. And basically, what you’re looking at is, do they have so much debt, that they cannot afford your house? They might have the income, but what kind of debt do they have? Are there any evictions, broken leases, or bankruptcies? We go back, we don’t do any evictions. Broken leases, we go back about five years, so if there are no broken leases the last five years, and bankruptcies must be dismissed. And the reason why is if there is a bankruptcy, the bank can come in and they can actually not pay, and they can actually put that inside of their bankruptcy.

Felonies, misdemeanors, obviously, we don’t do felonies. And misdemeanors, it might be a case-by-case basis. The interesting thing is a lot of people go off on credit score and we use credit score as a part of our qualification process, but not the full qualification. And the main reason is there are a lot of little things that really ding a credit score on somebody, and it might be like a late pay on a utility bill or a late pay on a store credit card. So you really want to look at their credit score, as not the final end-all. But you want to look at it and higher rented properties we weight it a little bit higher, okay?

We also have a policy on the number of occupants, government subsidiaries and pets. So basically, you want to have a company policy on what your qualifications are and do not stray from that policy.

Number two is to have a company policy on what you are going to verify and how are you going to verify. So for example, at Empire, we have a 20-point verification system. It starts off with driver’s license, social security number and job verification, rent verification. So we have 20 points. If you go on our website, you can download that and we can review that. So it’s available on our website. We also get copies of pay stubs and tax returns if necessary. They’re not necessary if you have pay stubs, but tax returns if they are self-employed. We also do a pet selfie and a copy of the driver’s license. So again, just have your policy. You can use ours or take ours and create from there. But you want to have a policy.

And then, the last thing is to have a professional run the credit application. I have seen too many mom and pop investors that get something off the Internet and then they go run their own credit. And they’re not really exactly sure what they’re looking for. They don’t have a company policy on the qualifications on what they’re going to search. We use a third party called AccuTrack. I believe they’re nationwide. There are other companies out there and they do charge a fee. You should be charging a fee for your application from your applicants. That should cover your AccuTrack fee or your third party fee.

You do not need to be the expert in running applications. You need to be the expert in making the final decision on who you’re going to put in and on building the company policies and being the expert on finding great deals. So those are the tips on background screening. Hopefully, they were helpful. Thank you.

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