There exists perhaps one area for landlords that is the absolute most critical area for success, and yet seems like black magic to new landlords: screening prospective tenants. Typically we have a gut feeling for what we want, but struggle to articulate it. We sometimes also fear we’ll be forced to accept someone we don’t want because of landlord-tenant laws (which is itself black magic). It can definitely be intimidating.
The solution is to use what I call the S.O.L.I.D. Screening Method. There are 5 things you want to do to ensure you’re being fair and avoiding trouble. Here they are:
Systematic: Your screening process needs to be repeatable and treat everyone the same.
Objective: Your criteria need to be based on external measures that are relevant to your property.
Lawful: You absolutely must comply with all federal and local laws.
Interested: You must show an interest in who you’re interviewing and dig deeper when something doesn’t make sense.
Discerning: When validating information you must be able to tell the difference between what’s true and false.
In this post we will focus on the first part of the process: creating a Systematic, Objective, and Lawful set of criteria. In a later post we’ll dive deeper into the actual conversations you might have with prospective tenants and how to be Interested and Discerning with them.
Let’s get into the specifics of what your criteria should include and why they’re important.
Responsible Tenants Are Required For Gyroscopic Cash Flow
Gyroscopic Cash Flow is the concept that when you have a vacancy you’ll need to provide lots of focus and effort on finding a new tenant. Once you find someone, you’re able to focus on other activities because that new tenant will pay their rent and provide you cash flow from that initial work. You’ll need to check in regularly to make sure everything is OK, but the level of effort and focus is nowhere near what was initially required to get started.
There is a caveat though: You must find a responsible tenant. Otherwise you’ll lose your Gyroscopic Cash Flow because you’ll constantly have to monitor your tenants and/or loose money as a result of them not paying and/or causing damage.
What Makes a Responsible Tenant?
There are three characteristics you’re looking for:
- They pay their rent in full and on time,
- They take care of the property, and
- They respect and communicate with you and other residents.
It’s simple and achieves the goal of maximizing your long term cash flow while minimizing headaches. You’ll also notice this inherently avoids all discrimination issues because it’s based on specific behavior, and nothing else. Read more about what it means to be a responsible tenant.
So, how do you determine if someone is a responsible tenant?
To Find Responsible Tenants, Use The S.O.L.I.D. Screening Method
Screening simply means to create a set of criteria and compare applicants against that criteria. If they meet the criteria, you accept. If not, you deny. It’s relatively simple. The trick is coming up with criteria that will actually filter for responsible tenants. The S.O.L.I.D. Screening Method helps with this.
Instead of asking questions like, “Do I like this person? Do they seem ‘put together’?”, you need to be objective. A simple trick to becoming objective is to search for yes/no examples of your subjective questions. Let’s take the second question, “Do they seem ‘put together’?” You might instead ask, “Did they turn in all their paperwork complete? Did they show up on time to the appointment? Do they have all the money necessary to move in?” These are all yes/no answers where your opinion won’t get in the way.
It’s also critically important that you’re lawful when coming up with your criteria. Specially, there are certain protected classes you cannot discriminate/screen against. Unfortunately, some landlords took the lazy path when it came to screening and it lead to screening on criteria that has nothing to do with being a responsible tenant.
I’d like to tell a story to illustrate this point:
Let’s say a landlord noticed that certain types of people always paid their rent on time: Let’s say it was a husband, wife and a young child. Well… that’s not totally true, they defaulted just as much as everyone else, but the landlord had a young child too and had an unconscious soft place in his heart for them.
Since that landlord is really busy, he starts only screening for new families under the misguided belief that they make the best types of tenants. Not only is that landlord now missing out on potentially amazing tenants (who won’t default), but it gets worse…
A newbie landlord takes him out to coffee to pick his brain. The newbie asks about screening criteria and the answer is, “only rent to a married couple with a kid.” The newbie doesn’t know why, but follows the advice anyways. The newbie is now screening on something that really isn’t an indictor of whether or not they’ll be a responsible tenant. And that’s the problem that discrimination laws are trying to solve.
Criteria You CANNOT Screen On
The Fair Housing Act and other civil liberty acts state that you cannot screen against any person because of race, color, ethnic background, religion, sex, age, martial or familial status, physical disability or sexual orientation. This makes sense because they have nothing to do with the characteristics of a responsible tenant. Stick with the criteria below and you’ll be fine. Check yourself regularly too and make sure you’re not accidentally passing on people for any of these reasons.
Criteria You CAN Screen On
What does have an impact on your property? There are 8 objective items you can measure and evaluate:
- Income: How much money does someone need to make in order to reliably pay the rent? How stable should that income be? If they don’t earn enough, are you willing to let a 3rd party cover them? We personally expect their income to be 3 times the rent with at least one year of continuous employment.
- Credit History: A high income is great, but you want to know if they’ll pay you on time and in full. Do they pay their other bills? How much debt do they have? You can set a specific credit score, base it off of the number of delinquent payments, the debt payment vs income ratio, or another measure from the credit report.
- Rental History: How they treated a previous rental is a fantastic indicator of how they’ll treat your rental. How many times they paid late, the number of notices, and if the deposit was held back are all information you can get.
- Criminal History: Do they respect others? Will you accept any felons at all? How bad of an offense will you allow? How long ago should it have happened?
- Pets: Will you accept pets? What types will you accept if you do? We like pets but require them to pass a “pet interview” first because we don’t want any aggressive or violet dogs. We’ll also specifically ask their previous landlord about any pets.
- Smoking: Will you allow smoking inside? Outside only? Not at all? We promote smoke-free environments and therefore do not rent to smokers. We tried the “smoke outside only” rule and found that “outside” gets relative when the weather turns bad.
- Occupancy: What’s the legal limit on how many people can live in your rental? In our area that’s defined at 2 people per bedroom plus one. So a 3 bedroom unit is 7 people! Look it up and follow it.
- False or Incomplete Information: Finally, do they respect you enough to tell you the truth? If they lie, or try to hide something at any time during the screening process, it’s not a good sign for how they’ll act if they break something or can’t pay the rent one month.
Write Down Your Screening Criteria and Systematically Follow Them Each Time
Take the time to create a written document to follow every time you screen an applicant. This has a few advantages. First, it’ll make your job easier when talking to someone because you’ll already know what you’re looking for. If they’re not a match, you can simply tell them. If someone asks what your criteria are, you can tell them. Treating everyone the same way also helps you avoid discrimination charges; it’s hard to claim you’re unfair if you put everyone through the same screening; especially screening that only deals with objective behavior and not any protected classes.
There’s also another nice benefit: It stops you from falling for a “story” in the moment. Someone will start pulling at your heart strings and talk about their kid needing a roof over their head and about how hard it is to find a job and that they only need someone to give them a chance (pro tip, when someone says, “We just need someone to give us a chance.” That’s typically not a good sign.). When they head down this path, their whole goal is to emotionally connect with you and by-pass the screening process. I don’t blame them! I try this all the time to get what I want (just ask my wife). However, because you have the screening criteria and systematically follow them, you can listen and agree that it must be tough. Then you can let them know you have a standard process and set of criteria. If they pass, you’ll be happy to let them rent from you. If not, you can wish them luck going forward.
S.O.L.I.D. Screening Criteria Download
You now know the objective criteria you should (and shouldn’t) use. You also know that it should be written down and followed systematically. You can spend a lot time creating your own from scratch, and there is definitely merit to that. However, you don’t have to re-invent the wheel. In this video I walk you through the exact criteria we use and then you can download it below for free and modify it to meet your needs.
The next part of The S.O.L.I.D. Screening Method are the pre-screening questions based on these screening criteria (which are Objective, Lawful, and written down to Systematically follow, right?). There we’ll be talking about the questions you should ask and how to be Interested in and Discerning about what you learn.