Tuesday, 10 July 2012

Investing in Real Estate: How to chose the right tenants

This post is part of my Investing in Real Estate series which has so far covered all the steps of buying an investment property (from hunting, to negotiating, to financing and purchasing), then the things you need to put in place before you lease the property (i.e. your property manager or self managment processes, essential repairs that need to be done) and also how to set your rent.

This post will cover how to choose the right tenants.  I am assuming that to this point you have set your rent and your property is being advertised for rent.  Getting on the most popular websites for your area is essential so make sure your property is up there with the right details (even if you have a property manager doing this make sure that it is done!). 

If you have set your rent correctly you should get several applications before too long.  Each of them will be different and you get essentially a carte blanche to decide who to accept and who not to accept.  While it is true that sometimes the most unlikely tenants will be the best ones and the ones that look best on paper will be terrible I don't really want to be taking any chances with what is my biggest single investment.  I have therefore got some general tips on how to choose tenant:

  1. First and foremost: Be careful to respect the laws in your area. 
    • Most countries have non discrimination laws which prevent you from renting your property out to people because of their gender, age, marital status, whether they have children etc etc.
    • Practically this means that you cannot advertise for a certain type of tenant or give the real estate agent your list of requirements - you are setting yourself up for a lawsuit
    • Realistically though you can have an idea of the type of tenants you want and then you can access different applications on this basis

  2. Make sure you check rental references and rental history
    • First time renters always carry the most risk because of the unknown quantity.  I am always willing to let someone else take that risk
    • If you have a property manager make sure they check this and their references.  Other landlords / agencies are almost always honest about this. If they have had a bad experience they are going to tell you about it
    • Don't question the why's etc or accept excuses.  This will be one of your bigger investments - you want tenants who will pay the rent on time every time and take care of your property

  3. Choose tenants who your property is designed for - you will have less turnover that way
    • If your property is designed for families don't rent it to college students or if you are renting an apartment which is a 3rd floor walk up then even if older people apply you may want to consider not choosing them as they are more likely to move out quicker
    • It is all about choosing those people who are likely to like the property and stay for longer

  4. I prefer dual incomes (as long as they are a couple / married / related)
    • It all has to do with the likelihood that you get paid your rent on time.  A single person may never miss a days rent but if things start to go sour you can bet that rent will take a back seat to food and other essentials
    • Dual incomes offer some sort of protection against this.  However you will often groups who would not be able to afford rent on their own applying together (such as a low income couple and a single parent).  If things are going well this can work great for you but if one party suddenly moves out then once again you are left with the can. 
    • I know this seems rather harsh and in a perfect world I would love to trust everyone but the fact is that most people who take on loans for the property really need the rent to be coming in each fortnight / month to pay the mortgage so you want to maximise your chances of this

  5. The rent should not be too high a portion of their income
    • You do not want tenants to be paying too high a proportion of their income every month to you in rent because if things get tough for them you want them to still be able to afford to pay you
    • Property managers normally suggest less than 30% but I prefer to be more conservative with 25% of net income

  6. Children are not a problem
    • I know a lot of landlords get hung up on whether to rent to a family with children
    • I have not had a problem with them and I find that once a family is settled in a house they do not like moving as much as a single person or couple who has no family tied to the house. 
    • Against this there is more potential for damage (as kids will be kids) but I have not had any particularly bad experiences so am happy for families to move in

  7. Pets require a special bond
    • This was one which I was very unsure about at the start but have come to accept as long as the tenants sign a special pet bond which provides that they will steam clean carpets and repair all damages caused by the pet (i.e. it specifically excludes normal wear and tear provisions in bonds)
Normally if you have bought the type of property which appeals to your target tenant type and you have set the rent correctly you should not have any problem finding tenants who conform to all the above standards (or your own if you have things that you are worried about or less worried about).

If you have any other criteria which you use to assess tenants I would love to hear about them and perhaps others could use them so please comment below.


  1. Understanding the matters involved in property investment is not a bed of roses. I am impressed with resource you have provided here. Thanks!

    Custodian Wealth Builders

    1. Thanks Blake, I appreciate the positive feedback.