By Arthur Veal of LeaseDefend.com
If you are new to real estate investing then I am about to save you years of heartache and pain. If you are a veteran then prepare to have your mind blown! Everything that you have been told is a lie (In my Matrix voice)! We have been going about things all wrong… Wait! Wait! Let me start from the beginning.
I am a 20-year veteran real estate investor. I primarily invest in buy and hold properties. As a landlord, my story was pretty typical. I was constantly dealing with late-paying, non-paying tenants. I had a high turnover rate in my properties and I struggled to keep a tenant in my property for longer than a year or two. That was 3 years ago. However, now all of that has changed. I have over 35 units and have not had a single eviction in 3 years. Previously I averaged about 2 a year. In fact, I have not had a slow-paying tenant in over 2 and a half years. Previously I averaged about 5 a month.
What changed my business and eased my stress you might ask? The biggest change was how I screened my applicants. Let me explain.
When you are screening a tenant, I assume you look at their credit profile, like I did years ago. The issue with credit is that it isn't showing you what you really need to see. You want a tenant that has the ability to pay your rent AND the intent to make the rent payments. If you're like me then you might deal in affordable housing and if thats the case then most of your applicants won’t have a stellar credit record. However, many of these applicant may be great tenants. The reason for this is because rent holds a higher priority than typical items on a credit report. Rent will carry a higher priority than a department store credit card. Also, credit typically does not report utility payments unless they are not paid or past due which can skew the results of a tenant that makes their basic bill (rent, utilities, basic needs) payments each month.
So What Do I Do?
When I began to look at this, I found that bank information is a much better indicator of how a tenant will pay basic bills. A tenants bank transactions will show things like rent payments, utility payments, total income, and the number of times their account was overdrawn in a month. All of these things are great indicators of their intentions to pay you AND their ability to pay rent. If a tenant applicant has 6 or 7 overdraft fees on their account and is at the lower end of my income threshold then right away I see that they might struggle with my payment. Meanwhile, a tenant with great utility and rent payments that has an income from their job plus a side gig and they put that money in the bank each week has a much better chance of meeting their obligations to me.
Now you may be concerned about information that sensitive lying around your home office. Or, you may feel uncomfortable asking tenant applicants for this type of information. If that is the case then use a screening service that screens by bank data such as LeaseDefend.com. These types of services keep you at arms length by summarizing up to 2 years of information into an easy to read report. They also can review pre-paid debt card accounts as well. Otherwise, ask your tenant applicants for their bank statements and look thru the information. It will give you an entirely new insight into who this applicant is and what are their intentions.
What's the Result
The result of all of this is that you will choose better tenants. Have you ever heard of the 80/20 Rule? 80% of your issues are caused by 20% of your tenants. Imagine if you were to reduce that number. The time you free up could be used to buy more property, improve the property that you have, or heaven forbid enjoy your free time! My results personally have been amazing and I suggest you definitely look into this form of screening. It could have a profound affect on your business as a whole.
About the Author: Art Veal is a 20-year real estate investor and has worked in residential and commercial real estate. He is also a web entrepreneur and founder of LeaseDefend.com a patent-pending bank based tenant screening service.
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