Properly screening tenants for your rental properties can potentially save you thousands of dollars and countless hours of stress. In fact, proper screening increases your chances of getting renters who will pay on time and take good care of your property.
But proper screening is more complicated than most investors realize. And improper screening can lead to big problems, like discrimination complaints.
In this article, we will explain how to screen tenants for your rental properties - the right way.
The Importance of Screening Tenants
Despite the many benefits of investing in rental property, there is a risk of renting to the wrong tenants. You may have heard real estate horror stories of renters
Paying rent late.
Failing to pay rent.
Disturbing other residents with loud noise or troublesome behavior.
Bringing unauthorized people or pets to live in the unit.
Damaging the property.
Refusing to vacate the property.
Using the property for unauthorized purposes (like running a business or listing the property on Airbnb).
Engaging in illegal activities on the premises.
Screening tenants can prevent you from renting to the type of tenant who would engage in such behaviors. So it’s worth investing time upfront to find reliable tenants who are a pleasure to work with.
What Landlords Can Screen For (and What They Cannot)
Generally, landlords can screen for red flags that indicate a person is financially irresponsible, dangerous, or otherwise unqualified to rent the unit. These red flags could include the following:
Poor credit scores.
A prior eviction.
A history of late rent payments.
Insufficient income to cover the rent.
A violent criminal record.
However, landlords cannot screen for factors that are irrelevant to the tenant’s ability to pay the rent and take reasonable care of the unit.
To help clarify what you can and cannot screen for as a landlord, we need to consult fair housing laws…
Fair Housing 101
The Fair Housing Act helps protect vulnerable minorities from discrimination when finding a place to live. As a landlord, you cannot deny housing to someone (or deal differently with them in any way) because of their inclusion in one of the seven federally protected classes:
Race: the ethnicity of your applicant.
Color: their literal skin color.
National origin: which country they come from.
Religion: which religious affiliations they have.
Sex: both their gender identity and sexual orientation.
Familial status: whether they are married, pregnant, or have children.
Disability: any lack of “typical” physical or mental ability. Please note that Fair Housing Laws require landlords to make reasonable accommodations for renters with disabilities.
In addition to federally protected classes, there are also protected groups in certain states, counties, or local municipalities. These may include:
Ancestry: where the applicant’s ancestors came from.
Language: which languages they speak (or do not speak).
Age: how old they are. There is an exception for communities that specialize in housing residents aged 55 and older.
Veteran status: whether they served in the military.
Political ideology: whether they identify as republican, democrat, libertarian, etc.
Prior criminal record: history of criminal offenses. While many areas allow landlords to run criminal background checks and factor the results into their decision to approve or deny an applicant, other areas forbid landlords from considering criminal history in the decision. This is common in areas where protected minorities have historically been targeted by the local police and unfairly treated by the regional court systems. For example, New York City’s Fair Chance Act has been expanded from restricting criminal history questions on job applications to restricting criminal history searches on rental applications.
Section 8 or other housing subsidy program participation: whether they receive financial assistance from the government to help cover housing costs.
Before screening tenants for your rental properties, make sure you understand which criteria you can and cannot screen on in your area.
5 Steps for Screening Tenants for Rental Properties
Now that you understand the legal limitations of screening, let’s look at the five-step process for screening tenants for your rental properties.
Step 1. Establish Your Screening Criteria
To ensure that all applicants are screened in the same way, it makes sense to set and document your screening criteria before reviewing a single application.
Common screening criteria include the following:
Income. Do the tenants make enough money to comfortably cover the rent amount? For example, you might require that the gross monthly household income total at least 2.5 times the monthly rental rate.
Credit. Do the tenants have a history of repaying debts on time? You can set a minimum acceptable credit score. For context, many home mortgage lenders like to see scores of at least 620.
Rental History. Have previous landlords had any issues with the tenant? You can, for example, automatically disqualify any applicant who has had more than three late payments in a year or has been evicted.
Criminal Background. Does the tenant have a criminal conviction on their record? As mentioned above, some areas do not allow landlords to run criminal background checks or disqualify tenants based on this criterion. So pay close attention to your local laws.
If an applicant cannot meet your criteria, you might allow them to use a cosigner. A cosigner is held jointly responsible with the tenant. So if the tenant fails to pay rent, for example, you can seek payment from both the tenant and their cosigner.
The requirements for a cosigner should be more stringent than those for tenants. You might, for example, require a credit score of 700 and a monthly income equal to five times the monthly rental rate.
Your specific screening requirements will depend on your local market and personal risk tolerance.
Step 2. Use a Uniform Rental Application Process
All applicants must follow the same process and be treated the same way.
Rental Application Forms
The rental application form helps you determine if the prospective tenant meets your criteria.
This form should include fields to collect the following data:
Name and contact information.
Social Security number, date of birth, and driver’s license number. This is needed to confirm identity.
A list of recent home addresses, with dates of residency plus the name and contact information of the landlord at each location. This will help you establish their rental history.
A list of recent jobs and employers, with dates of employment and contact info for their direct supervisor or HR department. This will help you understand their employment history.
The number of people who will reside in the apartment, and the names of those who are over 18 (all adults residing in the apartment should be listed on the lease). Be careful not to ask questions that could violate fair housing laws (i.e. Are you married?, Are you pregnant?, or How many children do you have?). The applicant may volunteer this information during the showing or on the application form, but it cannot be asked and cannot be used as qualifying criteria.
A signature authorizing a credit and background check as allowable by local law.
In many areas, landlords can get a standard rental application form from the local housing authority or landlord association. Otherwise, you can purchase forms online. Just confirm that the forms were drafted by attorneys with knowledge of local housing laws and are enforceable in your state.
Application Fees
In many markets, charging an application fee is common practice to limit your applicants to those who are serious. However, some states limit or prohibit application fees. In Massachusetts, for example, landlords cannot charge application fees. In Wisconsin, application fees cannot exceed $20.
Generally, application fees are non-refundable. However, if you receive multiple applications and must deny someone simply because another applicant qualified before them, their application fee should be refunded.
Step 3. Run a Credit Report and Background Check
The easiest way to run credit and background checks is to go through a specialized online platform.
Some platforms allow landlords to pay a flat fee for each application, while others offer monthly subscriptions. Here are a few of the most popular credit and background check services for your consideration:
Step 4. Verify Income, Employment, and Rental History
It’s always wise to validate the information provided on the rental application.
You can request pay stubs, W2s, or bank statements to confirm income amounts. For hourly employees, take care to confirm that the hours reflected in the pay stubs provided are fairly consistent with the rest of the year. For self-employed applicants, you can request copies of their two most recent tax returns.
Be careful to calculate monthly income correctly when using pay stubs for hourly employees. If you have an applicant with consistent work hours who is paid twice per month, for example, you can simply add two pay stubs to get the monthly income. But if the applicant is paid every two weeks, you would need to multiply the amount on one pay stub by 26 to get the annual income, then divide that amount by 12 to get an accurate monthly income.
You can, and should, contact the employer to confirm that the applicant is still employed there and that the dates of employment on the application are correct. While the applicant should provide contact information on the application, you might look up the company online and use their general phone number to confirm that you are speaking with a true representative of the company.
You should also contact prior landlords to confirm that the residential history on the application is correct. And to ask if there were any issues with the tenant.
Step 5. Accept or Deny Each Application
It is good practice to process applications as quickly as possible. Your applicants are eagerly awaiting your decision, after all.
It is also good practice to process applications in the order they were received and to make a decision on each application independently before reviewing the next. For example, if you received three applications, and the first applicant is qualified, there is no reason to process the other two; you can simply inform them that the first application was qualified and return the application fees for those other two. If, on the other hand, your first applicant does not meet your screening criteria, you can deny their application and process the application for the second applicant.
This means presenting an adverse action letter to the applicant via email and/or post, which outlines the reason(s) for the denial. Valid legal reasons for denying an applicant include the following:
Unverifiable income or income that is too low for the rent amount,
A credit score that is too low,
A criminal history that indicates a possible risk to other tenants of the property,
Unverifiable employment, too little work history, or workplace trouble as indicated by the employer,
Evictions, judgments for property damage, unpaid rent, too many late payments, or problems with neighbors or law enforcement.
Maintain records with supporting documentation for your reason for denial.
How to Approve a Rental Applicant
A straightforward approval can be conveyed to the tenant less formally, with a phone call, text, or email. Then you can arrange a time for the lease signing and start preparing the unit for move-in.
In some cases, an applicant’s approval will be conditional. For example, let’s say an applicant’s rental verification turns up information about a property being damaged during their tenancy. You might choose to approve the application, but only with a higher deposit. In this case, an adverse action letter would be needed to explain why this applicant would need to pay a higher deposit than another applicant.
The applicant can either accept your terms or decline. If they decline, you can move on to the next applicant.
Rental Investments Without the Hassle of Tenant Screening and Management
Screening tenants for your rental properties is a complex, time-consuming process. And it’s just one of many complex, time-consuming processes required from rental property owners.
Imagine, instead, if you could receive all the benefits of rental property investment (like the recurring passive income, tax benefits, and appreciation) without any of the stressors of traditional property management, like:
Scouting, evaluating, and acquiring properties,
Making units ready for occupancy,
Marketing vacant units for rent,
Showing units to prospective tenants,
Handling move-ins and move-outs,
Maintaining the property,
Resolving repair requests,
Addressing tenant issues,
Negotiating lease renewals,
Etc., etc., etc. …
With real estate syndication, you can invest in rental properties without dealing with any of these ownership and management hassles.
Syndication allows investors to buy shares in professionally managed real estate projects, including long-term rentals. Even better, with Gatsby Investment, you can buy into a build-to-rent project, which provides the additional benefit of gains from the forced appreciation of the ground-up development.
Syndication allows you to own an equity stake in a rental, with low minimum investment amounts, and no time or energy required on your end. Professional management of the project allows investors with no prior experience to leverage the specialized industry knowledge of the experts!
Learn more about investing with Gatsby and find out how our unique investments have produced average annualized returns of 23% for our investors from 2017 through 2023.
Explore Gatsby’s open real estate investment opportunities today and start benefiting from real estate investments without investing your time and energy in the minutiae of managing applicants and tenants.
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