How do you prevent putting in bad tenants?

Every landlords fear is that they fix a property up so well that it looks great and then they put bad tenants in who don't pay and destroy the unit on the way out. This is a real concern for real estate investors and there are no guarantees, but there are things to do to help shift away from bad tenants as much as possible.

Before I go any further, I need to add one condition. Different places have different anti discrimination laws. Find out what they are and base your tenant approval process around those laws. Please do not use anything that I write to justify breaking a local law or discriminating against good people for any reason. For the purpose of this article, I'll be focusing on residential tenants. I'll try to write something else for commercial tenants.

Once you understand the laws in your area, write a tenant approval policy. This should dictate the criteria where tenants will be approved or denied occupancy in your property. You should address credit history, previous rental history, income versus expenses & length of employment.

You may want to put something like:

1. Excellent overall credit
2. No rental lateness’s over 15 days in the past 2 years
3. Total monthly payments on debts are not greater than 36% of the potential tenant’s gross monthly income
4. Rental payment is not greater than 28% of the potential tenant’s gross monthly income
5. Minimum job history 2 years

You can adjust these categories according to your own discretion, but be careful not to make them too loose. You're better off making an exception to your policy to someone who doesn't qualify in a certain area then to reject someone for a reason other than that stated in your policy. That type of rejection is an invitation to a discrimination action.

You may be thinking... What do I do if I can't find someone who fits in every category??? Where do I make an exception? The first place I would make the exception is credit history... and the place I would never make the exception on is debit to income ratio. Someone might have been sick in the past or they might have taken out bills that they couldn’t afford in the first place. There are a lot of reasons that someone might have bad credit and they still can be good tenants. If someone doesn't make enough money to afford the rent, you're asking for problems. What if they have excellent credit and they say they can afford the rent even if it doesn’t look that way? Forget it. Do both of you a favor and recommend an apartment that they can afford.

As far as job history and income goes, use your judgment. If someone has always worked, even if at different jobs, and made similar amounts, chances are that will continue, even if they lose this job.

It's better to wait an extra month to find a good tenant, then to put someone bad in. What if it takes more then a month? Wait and don’t get discouraged. There are plenty of good, honest people out there.