This week we have an interview with Jennifer Beadles from REI Millionaire. Jennifer has a fascinating real estate story. She started investing in real estate at an early age and went all in. Jennifer and I met last year at FinCon and immediately clicked as we both share a passion for real estate investing.

Jennifer shares monthly income reports for her properties; this is very similar to my Landlord Report. She also enjoys helping people get started in real estate investing.

I’ll let her fill you in on the details and stop stealing her thunder. Take it away Jennifer…

Where are you from?

Snohomish, WA about 35 minutes North of Seattle

About you (brief or long bio)

I’m a pacific northwest native, a lover of travel & the outdoors, obsessed with life hacks, and I’m passionate about helping others achieve wealth through real estate.

In my teens, I worked as much as I possibly could to earn extra money. 

When I turned 16 I started my first job bussing tables at Alfy’s Pizza and fell in love with my newfound freedom to spend my own money on whatever I wanted to.

I often held two to three jobs at a time. My senior year in high school I worked at two different retail stores at the mall, and at a local fast food restaurant, in addition to taking a few running start college classes and finishing up my high school classes.

Unsure yet of what I wanted to do for a career, I continued community college for two years and eventually quit because the two jobs I was working left me with little time to complete my homework.  

Two years out of high school with no college degree and no plan on going back to college, I kept hearing about people having success and earning a lot of money in real estate. I set my focus on owning a home by the time I turned 21, and worked at an espresso stand from 5 am – 1 pm, and a restaurant from 3 pm – 11 pm saving everything I could to achieve this goal.

One month after my 21st birthday, I closed on a home built in 1901. The place was a fixer-upper, and I decided to go all in with real estate and started applying for real estate jobs. Pretty soon after, I got hired as an executive assistant to a builder/developer and real estate office owner.

I became a sponge and started learning about land development, estimating, hiring subcontractors, and designing homes. On the side, I did tenant placement for the owners and saved the extra income for my own investments.

In 2009 I got my real estate license so that I could use my commission towards a down payment on a house hacking duplex, and to get access to properties. In the 6 months that I had my license, I sold 6 homes to friends and family and fell in love with the process of finding & negotiating deals, and the commission checks that came with a job well done.

[Note from Drew: getting your license is a great strategy to save on your real estate investments. My mentor also served as my real estate agent. He has saved a fortune representing himself. I bet Jen has saved herself a small fortune as well. Being an agent also provides a great way to increase your income.]

December 31st, 2009, at 23 years old, I quit my 9-5 and became an investor and an investment focused real estate broker. I quickly became the number one agent at my real estate office while other agents were struggling in the recession due to my investment niche.

I helped investors build new construction homes for resale (since that was my background), flip houses, buy rental properties and acquire properties at the foreclosure auction.

[Note from Drew: Jennifer went all in and quit her job. She absolutely loves real estate and is passionate about the business. At the time, her soon to be husband and her rental portfolio had 2 duplexes and 2 single family homes. This was a risky move as they spent all of their savings on the new duplex and their wedding. She had the grit and determination to make this work. Taking risks, especially when you are young, can be very rewarding. Make sure you are taking calculated risks.]

In March 2010, I got married. My husband and I became laser-focused earning as much as we could and then using any extra money to buy rental properties. We were able to 

get creative by buying mostly fixer upper type properties, which we renovated ourselves in the evenings and on the weekends.

[Note from Drew: Notice how Jennifer and her husband focused on generating more INCOME and NOT cutting expenses. While keeping spending in check, frugality will only go so far. There is virtually no limit to how much you can make. I am personally a fan of offensively building wealth.]

In 2014 our rental cash flow had replaced my husband’s income, and he retired early at 29 years old. After 3 ½ years, he became bored with early retirement and went back to work for a friend with very flexible hours and unlimited vacation time. I then decided to retire from real estate sales in late 2017 to focus on doing more new construction projects, apartment acquisitions and helping connect other investors with my out of state investment teams through my new company, Agents Invest.

[Note from Drew:  Retiring Early (RE) is not for everyone but Financial Independence (FI) should be. Having options and flexibility is great. Jennifer’s husband may not have been able to land his sweet gig if they were not financially independent. FI gives you the ability to do things on your terms.]

When did you start investing in real estate?

2007 – I was 21 at the time and worked two jobs to be able to purchase my first house. After closing, I quit my jobs in order to go into the real estate industry and got hired as an administrative assistant for a small building & development company.

The next property was purchased in 2008, which was a one-year-old duplex that I acquired with a partnership with my parents.

From there my husband and I took turns buying owner-occupied houses, which we would live in for a year and then buy another. Once we exhausted those options, we moved on to the BRRR Strategy, then using HELOC’s on our highest equity rentals, and then to a more traditional method of putting 25% down on small multi-family properties.

[Note from Drew: Several great strategies here. Buying an owner-occupied home with a low or no down payment loan is a great way to get into real estate. Jennifer’s husband used a 0% down loan. Jennifer used an FHA home loan which requires a 3.5% down payment. I used FHA loans for my first and second property. HELOCs are another great way to take tap the equity in properties that have appreciated. I used a HELOC from rental property #2 to buy rental property #4.l]

We purchased 1-2 really great deals a year, and in 4 years were able to achieve financial independence, early retirement for my husband, and over a million in net worth from our real estate portfolio.

What market(s) do you invest in?

Seattle, Indianapolis, Oklahoma City

Are you working in real estate full-time? If not, what do you do?

No, I “retired” from a very lucrative real estate career as a real estate broker in late 2017. Now, I run my company Agents Invest, which is maybe 10-15 hours a week, and the rest of my time is spent on evaluating new investment opportunities, blogging and spreading the word about investing in real estate.

What does your real estate portfolio look like

Currently, we own 15 rental units in Washington state which are mostly duplexes and a triplex, and we own a duplex in Greenwood, IN. We also have a primary residence and a new construction duplex we’re building in Washington.

What type of real estate do you invest in?

We primarily invest in value-add small multi-family (2-4 unit) properties which offer high cash flow and a strong equity position after we get the property into performance.

[Note from Drew: this is one of my favorite ways to invest in real estate. 2-4 unit buildings usually provide great cash flow. The financing options for small multi-unit buildings is great since you can still qualify for residential loans (bigger apartment buildings require commercial loans).]

What is your investment strategy?

Acquiring fixer-upper properties (or building new) that have 2-4 units. Our goal is to leave as little of our own capital as possible into the deal after we’ve fixed the property up. We maximize the cash flow by making smart renovations that are inexpensive but will last for a long time. We also use HELOC’s as an opportunity to tap into the stagnant equity trapped in a property. This allows us to get a return on the equity without having to sell the property and lose an income stream.

Another strategy we utilize is the supported living program, which exists in all 50 states but few know about it. We rent out half of our units through this program.

[Note from Drew: this was not a strategy I was familiar with. Supportive living programs remove some of the risks associated with being a landlord and owning rental property. Just goes to show – you should never stop learning.]

How much time do you spend running your real estate business?

Running the business: 4 hours on average a month which includes some bookkeeping, sending notices to tenants, handling repairs.

Growing the business: 5-10 hours a week evaluating new projects

How has real estate changed your life?

My life would be drastically different had I not started investing in real estate in my early 20’s. I’d probably be working a 9-5 job somewhere and would be limited due to the lack of a college degree.

Now I have the freedom to work on whatever I want, knowing that no matter what I do all of our bills will be paid by our rental income with extra going to savings each month.

Real estate gave me the ability to have a lucrative career in sales, allowing me to earn more in one year that I could working several years in a traditional career. That career paved the way for investing, which eventually replaced the need to work.

What is your goal? What are you trying to achieve with your real estate investments?

My goals have changed over the years, and the current goal I am working towards is generating $250,000 a year in (semi) passive income from our investments, this is outside of any business income. We are 19 units away from that goal if we continue with the same criteria.

We may focus on larger apartment complexes to achieve this goal sooner, and we love the challenge of learning about a new strategy.

Please share one of your investment with our readers. Please include general location, property type, some of the basic numbers (cost, returns, etc.)

I share a lot about my investments on my blog, but below is one that is pretty ordinary and certainly not our best deal, but a great one because it was our first out of state investment.

This is the duplex I purchased in December of 2016 in Greenwood, Indiana.

It was built in 1974, each unit is 1240 sf with 3 beds and 2 baths and two car tandem garages This is my favorite building style due to the only common walls being garages, and the size of the units are not too large (too large of units means a more expensive turn over) or too small (harder to keep renters long term as they grow out of them), and it’s single story. All of our units are single story properties, which we’ve found to be easier to rent (works well for families with small kids or aging tenants who don’t want stairs). Plus, we don’t have to worry about decks.

Purchase Price: $155,000

Renovation: $19,200

New Rents: $2,235

Utilities: Paid for by the tenants (including water/sewer/garbage)

Our initial investment was $60,662 and this property cash flows after all expenses $9,120 per year, which means we’ve achieved a 15% cash on cash return before taking into account appreciation, tax advantages or principal pay down on the mortgage.

[Note from Drew: These are good numbers. Jennifer will recoup all of her investment in about 6.5 years.]

How did the deal go? What would you do differently?

For our first out of state investment in a city we’d never been to, and where we didn’t have anyone we knew personally, it went really well.

The only issues we had was that I had switched over the utilities, but had not communicated with the gas company to make sure they lite the furnace, so over the winter the pipes froze and we had to replace some plumbing.

I also made the mistake of hiring the wrong property manager at first, and got stuck with some outrageous AC unit repair bills and a unit that sat vacant for longer than it should have. The new PM (property manager)solved all of that, and it’s been a great investment ever since.

[Note from Drew:  There will usually be growing pains as a landlord or real estate investor. It’s important to learn from your mistakes. Jennifer shares a great post on some of the deals she passed on; very insightful post.]

Do you self-manage your property(s)? If not, how did you select a property manager?

We self-manage all of our Washington State properties, our Indiana property is managed by a property manager.

What advice would you give to someone who wants to start investing in real estate?

Start as soon as you possibly can, even if you feel like you’re not quite ready or don’t yet know enough. Experience is the best teacher, and if you make smart decisions and stick to your investment criteria it’s hard to lose money.

House hacking is by far the best way to start, we house hacked a duplex early on and that duplex paid us back our initial investment years ago, and continues to pay us $10,000+ a year just because we were willing to live in one side for a year.

[Note from Drew: House hacking is a wonderful tool. I would not be where I am today without house hacking. It’s something worth considering.]

What is your favorite real estate book that you have read? Additional book recommendation?

The Four Hour Workweek by Tim Ferriss. It’s cliche but for me that book wasn’t about achieving a four hour work week (I’m pretty sure Tim says this is not the point of the book anyway) but rather a way of looking at your life for maximum optimization and leveraging work you don’t want to do to overall be a more productive and happy person.

Additional amazing reads are: So Good They Can’t Ignore You & The Millionaire Fastlane. These are very different books, actually opposing opinions, and I like them both for different reasons.

So good they can’t ignore you talks about exploiting your strengths, and how to stand out from the crowd. The Millionaire Fastlane is an in-your-face book about choosing a Fastlane way to build wealth as opposed to the ‘slow lane’ way with businesses that aren’t scalable.

What haven’t I asked you that I should have?

Other than real estate, what are your passions?

To this, I would answer small life hacks that really add up. For example, I use travel reward credit cards for our renovations, which allow us to travel with perks (airport lounges, hotel status) and major discounts and even sometimes free.

I also use some grocery hacking techniques to save on our grocery bill by shopping once a week and using apps such as Fetch Rewards, Ibotta, Checkout 51, and coupons.com. For every dollar we save on groceries, I look at that as another dollar that can be invested in real estate.

You can learn more about Jennifer Beadles at her site www.REImillionaire.com. She shares a wealth of information about real estate investing and real estate journey. 

Save up for a home and put 20% down is common financial advice. Well, I have news for you. This is bad advice. You should buy a home with a low down payment as early as possible. Buying a home with an FHA loan is great if you want a low-interest rate and do not have a lot of cash for a down payment. However, this advice should not be taken at the expense of losing your emergency fund or taking on too large of a monthly payment.

I’ve wanted to share this post for over a year. This will actually be the first of a several part series. Each post will run through a different scenario. An FHA home loan allowed me to buy my first property. Buying a home with an FHA loan may be a great option for you to house hack or buy your first home as well.

Buying a house with less than 20% down

A 20% down payment on a home is known as conventional financing. Anything less than a 20% down payment will require Private Mortgage Insurance (PMI).

Private Mortgage Insurance, or PMI for short, is an extra expense built into the monthly mortgage payment for homebuyers who put less than 20% down. Lenders require borrowers to pay PMI until the borrower has at least 20% equity in the property. PMI was designed to mitigate a lender’s loss if there is foreclosure. Many financial experts recommend avoiding PMI. However, I firmly disagree with this belief.

A borrower may request for a lender to stop charging PMI. The borrower will need to demonstrate there is at least 20% equity in the property which will require a new appraisal. Most borrowers get rid of their PMI from a combination of the home appreciating in value and paying down their loan over time. Generally, refinancing the loan provides the best execution for getting rid of PMI.

In summary, PMI is an added expense to your monthly mortgage. This expense is tax deductible. You can get rid of PMI once you have at least 20% equity in your home. We will walk through several scenarios to show how long it takes to get rid of PMI payments.

Why you shouldn’t wait for 20% down payment

Saving for a 20% down payment takes a lot of time and discipline. Meanwhile, while property values are probably increasing while you are saving up for your down payment. This means you need to save even MORE than you originally thought. Heck, by waiting for a 20% down payment you may have missed the boat in some markets and end up priced out of owning a home.

The earlier you buy a home, the earlier you can start building equity. While renting provides flexibility, you will never see your rent money again. As a homeowner, a portion of your monthly mortgage payment goes towards repaying the loan. This is forced savings.

Waiting to buy a home with a 20% down payment means renting for a longer period of time. This likely means you are saving less since its cheaper to own than rent in most of the country. This means less money is working for you. Your landlord(s) will be happy with you renting longer, but you shouldn’t be.

Buying a home with an FHA loan will get you into homeownership and out of renting earlier.

Buy vs. Rent a Home Debate

In 2017, the median rent in the United States was $1,492 per month for an unfurnished apartment. This means half the country pays more for rent and half the country pays less for rent. Obviously, every city and state will have different rental rates. Some places like New York City and Washington, D.C. have much higher rents. Other places like Greenville, North Carolina have much lower rents.

Often, owning is actually more affordable than renting. This is location dependent. However, we will expand on this in the base case and future scenarios.

According to a recent Zillow report, the national average break-even point for buying a home verse renting a place is 1.97 years (1 year 11 months). This means if you plan to live somewhere for two or more years it makes sense to buy.

The break-even point varies across the country just like rental rates. The Los Angeles market has the highest break-even point; it will take homeowners 3.7 years come out ahead. Meanwhile, Memphis boasts the lowest break-even point. Homeowners in Memphis enjoy a breakeven point of 1.32 years.

FHA loan requirements 2018

Having a limited credit history naturally leads to a lower credit score. Buying a home with an FHA loan is a great option for those with a limited credit history or those with less than stellar credit. The FHA loan credit score minimum is 500. In order to qualify for the minimum down payment of 3.5%, you will need a minimum of a 580 credit score. However, some lenders may require a credit score in the 600-650 range.

Lenders will also look at your income and debts to determine if you can qualify for a loan. Debt to Income ratio or DTI is the metric used by FHA loan underwriters. The FHA debt to income ratio in 2018 is 43%. However, borrowers with good credit may be approved with debt to income ratios as high as 50%.

Several cities and states also offer first time home buyer programs. The first time home buyer programs offer loan options with low or no down payments. Check to see if your city or state offers a program for first time home buyers.

The base case for buying a home with an FHA loan

The Base Case for buying a home with an FHA loan. This scenario will use national average/median data for rents, home prices, rates and other metrics.

According to the National Association of Realtors, the price of existing homes increased by 5.4% annually between 1968 and 2009.

This growth rate accounts for the booms and busts in the real estate market. Our base case will use the 5.4% average growth rate from the past 40 years. Future scenarios will look at a slightly lower growth rate, no growth (flat market), a ‘booming’ market and a ‘bust’ market.

This may be a simplistic way to look at real estate and housing market, however, it provides a general picture of homeownership in the United States. New York City’s real estate reacts differently than Miami. Both of these cities’ real estate experience different variables than Kansas City. No one scenario will work for all markets.

As of March 2017, the US Existing Home Median Sales price was $236,600. Buying a home with an FHA loan requires a 3.5% down payment.  A prospective homeowner would need $8,281 for a down payment if they were buying a home with an FHA loan.

The table below breaks out the down payment, loan amount, and monthly mortgage expenses associated with buying a home with an FHA loan. The FHA loan interest rate is lower than a conventional mortgage by 0.25% to 0.50%. This is because of PMI.

For comparison purposes, a prospective homeowner would need $47,320 for a 20% down payment. That’s $39,039 MORE than what it would cost to buy a home with an FHA loan.

Ask yourself, how long would it take you to save an additional $39,000?

Depending on your savings rate, it may take you between 3 years and 3 months or over 30 years to save up for a 20% down payment. Buying a home with a low down payment is starting to seem more attractive, right?

That’s because it is. But this is not the only factor to consider. While savings for your 20% down payment, more of your income is going towards rent. While you are renting time is still moving forward. As time passes by, property values are generally appreciating.

Using the same assumption as before, the table below will show how much you may spend on rent while you save up for the down payment. The rent calculation assumes today’s median rent of $1,492/month. This figure does not include any rent increases or account for inflation; you will likely pay more given rents go up over time.

Likewise, property values generally increase over time. Sure, there will be peaks and valleys. However, over a 40 year period, home values increased by 5.4% annually.

Let’s assume you have enough money saved for a 3.5% down payment based on today’s median home price. However, let’s also assume you wanted to put 20% down instead of buying a home with an FHA loan. Today you have $8,281 but you would need $47,320 to avoid PMI. This means you are short $39,000.

Let’s also assume you can save $500/month towards your down payment. At this pace, you will reach $47,320 in savings in about six and a half years. A lofty goal, but not unreasonable if you are dedicated.

But, during the same time property values continued to grow. The median home price is no longer $236,600. While you were saving for the past six years the median home price increased to $324,383. This means a 20% down payment is now $64,877.  You are now $25,838 short of having a conventional downpayment and avoiding PMI.

The table below shows how much more you’ll need to save based on your savings rate:

Now, let’s take a look at what would have happened if you bought a home today instead of waiting for a 20% Down payment. The table below shows how much principal, interest, PMI, taxes, and insurance were paid for each of the first three years.

The table also shows the loan balance decreased while the property value increased over time. Based on this scenario, the homeowner would achieve 20% equity somewhere between years two and three. This would allow them to refinance their loan and get rid of PMI which would result in monthly savings of $133.

At the end of year three, the homeowner would have $61,278 of equity in their home. This includes $8,281 from their down payment, $40,436 from the property appreciating in value over three years, and $12,561 from paying down their mortgage

After three years the homeowner would have paid their loan down to $215,759 and the property would be worth $277,037. The homeowner’s loan to value (LTV) is now 77.9%. This means the homeowner now qualifies for a conventional loan and can refinance to get rid of their monthly PMI payments. Heck, the owner could even refinance the closing costs into their loan and pay no out of pocket costs.

In this scenario, buying a home with an FHA loan now would have been better than renting.

The renter would have spent $1,488 more on rent over three years than the homeowner spent for their mortgage payment (principal, interest, taxes, insurance, and PMI). The renter also missed out on over $40,000 in equity through appreciation. Additionally, the renter will never see their rent money again. The homeowner was able to pocket $12,560 by paying down their mortgage. After three years of savings, the renter still may not be in a position to make a 20% down payment on a home.

Buying a home with an FHA loan or a low down payment has many benefits. In the future, we will continue to explore other scenarios.

Future posts will include the following scenarios:

Slightly more conservative case:  Modest (less) appreciation

The Flat Scenario: No inflation

Booming market: The Austin Housing Market

Making Extra Payments

House Hacking Scenario

House Hacking and Extra Payments

The Bust Case: When the housing market corrects

Doomsday Scenario

Selecting the right tenant will lead to great success, riches, and happiness as a landlord or property manager. The wrong tenant can unravel all of your hard work, cause headaches and make life unbearable as you quickly reach for the ‘for sale’ sign.

Over the years of being a landlord and managing properties for others, I’ve enjoyed great success in screening and selecting tenants. We were managing over 50 properties before I stepped away from the property management business. During that time I successfully placed and managed hundreds of tenants.

Most of our tenants were very pleasant and great to deal with. A few tenants were high maintenance and dealing with them was difficult. Despite the rare ‘diva’ tenants, we seldom had a vacancy.  None of our tenants trashed their place. We managed a 100% collection rate (for rents).

In the past, we have discussed how to fill a vacancy at rental properties. But what do you do once someone is interested in renting your place?

Rental Applications and Screening Tenants

Screening potential tenants is a must as a landlord or property manager. Common sense dictates an inspection when buying a home. Why wouldn’t you do the same with tenants? You don’t want to be stuck with a bad tenant.

Spending a few extra minutes up-front may save you from countless headaches. I’m not suggesting you make your tenant have a physical. Rather, I am referring to your screening process, rental application, and rental criteria. Not all tenants are created equal. Learning how to screen bad tenants is important.

This post will show you what information to collect in your rental application. Additionally, you will learn what to do with this information, or if you should move forward with a potential renter. We will discuss everything from previous landlord references to employment verification and credit and background checks.

Conducting proper due diligence will greatly increase your success as a landlord or property manager. Failing to do your homework may leave you exposed to many risks.

Your rental application should include the following sections:

The Rental Application

Below, you will find information to create your own basic rental application. You do not want to jam too much information into the rental application. Personally, I prefer a simple rental application; most applicants do as well.

Applicant

The applicant section should capture all personal information of the applicant or co-signer. The information collected in this section of the rental application will be important for pulling credit reports and conducting criminal background checks. The applicant section should include:

• First, middle, and last name
• Social Security Number (vias number, a copy of the  visa and a copy of applicants passport for international applicants)
• Date of birth
• Current address including city, state, and zip code
• Email address
• Personal phone number
• Work phone number

Current Residence

This section will capture all the information related to the renter’s current living arrangement. You will also use this section for a landlord reference. This section of the rental application should include the following:

• Is the current residence rented or owned
• Monthly payment
• Length of time at current residence
• When the lease ends
• If notice has been given
• Current landlord name
• Current landlord contact number
• Reason for moving

Previous Residence

This section will be very similar to the current residence section of the rental application. I aim for two or three residences listed in the rental application. Note, younger applicants may not have as long of a rental history. Be sure to include:

• Was the previous residence rented or owned
• Monthly payment
• Length of time at the previous residence
• When the lease ended
• Was notice given
• Previous landlord name
• Previous landlord contact number
• Reason for moving  

Occupants

This section of the rental application should list every person that will live at the property. I recommend everyone over the age of 18 be on the lease; minors are not required on the lease but should still be listed on the application. This section should include the following:

• total number of occupants
• each occupant’s full name and age
• Pets – yes or no
• What kind of pet, breed, weight, age

Employment

The employment section will outline the applicant’s employment information. This section will be helpful for verifying employment. The employment section of the rental application should include the following:

• Employer’s name
• Type of business
• Address
• Position/Title
• Length of employment
• Name of supervisor
• Supervisor’s contact number

Income

This section will show the applicant’s income. Knowing an applicant’s income will help determine if they make enough to pay the rent. The income section of the rental application should include the following:

• Salary (annually, monthly, bi-weekly, or weekly)
• Commissions/Bonuses (if applicable)
• Other income

Assets

Income may not be the entire story for a renter. Some examples may be retirees, students or self-employed. The asset section of the rental application allows applicants to list other assets. This allows applicants to further prove their creditworthiness as a renter. The asset section of the rental application should include the following:

• Checking account
• Saving account
• Retirement account
• Stocks/Bonds
• Other

A prime example of when assets make up for income – I use to manage a penthouse apartment (condo actually) in the city. A guy and his girlfriend applied to rent the place for two years. Their income was just below a level where we felt comfortable with them as tenants. However, the guy had a trust fund worth over $8 million. Given the assets, we were ok his income was a few grand short of our income requirement.

Emergency Contact

The emergency contact section of the rental application should include the following:

• Name
• Relationship to applicant
• Address
• two contact numbers

Questions

• How did you find this property?
• Have you ever filed for bankruptcy? If yes, please explain
• Have you ever been sued for non-payment of rents or evicted of non-payment? If yes, please explain. (personally, I will never rent to anyone who has been evicted. I do not recommend you rent to someone with a previous eviction.)
• Have you ever willfully refused to pay rent when due? If yes, please explain
• Are there any current judgments, lawsuits or bill collecting proceedings against you? If yes, please explain.

Bonus section

Be sure to include your rental criteria in the rental application. Clearly state your income and debt requirements. Be sure to include the minimum credit score and rental history requirements.

Income

I personally look for gross annual income (income before taxes) to be no less than 42 times the monthly rent (3.5 times). Some landlords may have a different opinion, however, 36-48 times the monthly rent is common.

For example, if the rent is $1,000 a month, I want to see an annual income of at least $42,000/year or a monthly income of $3,500/month.

If a tenant does not meet the required income, they will need a co-signer or be able to show substantial liquid assets.

Debt

The total amount of the tenant’s monthly debt (credit card payments, car loans, etc.) plus the monthly rent should not exceed 36% of your gross annual income.

For example, if the rent is $1,000 a month. The applicant’s only debt obligation is a car loan for $500/month. In this instance, I want to see that all of their obligations is less than 36% of their gross annual income.

So, $1,000 + $500 = $1,500 / 0.36 = $4,166.67/month in pretax income

Or on an annual basis: $1,000 + $500 = $1,500 x 12 = $18,000 / 0.36 = $50,000 in annual pretax income

Credit History

All applicants must have a satisfactory credit history and your rental application should state this. You should also state that you will obtain a credit report on all adult applications. Reports supplied by applicants will not be acceptable; make sure to obtain the reports from a third party vendor.

I also recommend stating that credit reports must not show any defaults, consistent late payments, outstanding judgments or collection items. Additionally, Co-signers are not permitted for applicants with bad credit.

Rental History

Tenants must have a satisfactory rental history. State that you will conduct a nationwide check of Landlord/Tenant court records. Make sure you use a vendor and check this information. A few minutes of your time upfront can save you some serious headaches down the road. Personally, I recommend avoiding any applicant that has been evicted in the past.

Fair Housing Act

Perhaps the most important part of your application – be sure to include language that states you will comply with all aspects of The Fair Housing Act. An overly simplified summary of the Fair Housing Act – you cannot discriminate based on race, color, religion, sex, handicap, familial status, or national origin. You may face fines and legal troubles for violating the Fair Housing Act.

Screening Tenants with the rental application

The real fun begins after your potential renter completes a rental application. The three steps below will tell you a lot about your applicant. Based on the information you will need to make a decision to accept or reject the application.

1.  Credit and background check 
2. Employment and income verification
3. Landlord references

Personally, an application is not complete until all tenants in the party have submitted the rental application and paid the application fee. This Important to consider when you have several applications for a high demand property. We typically operated on a first come first serve basis.

Credit check

Once a rental application is complete, you should submit all the necessary information to your vendor for the credit and background check. This is a VERY important step in screening your tenants.

First, a credit report and credit score are like an ‘adulting report card’. A quality credit report with a reasonable credit score and a track record of on-time payments is a strong indicator the potential tenant will pay their rent on time. Alternatively, A poor credit score and a track record of delinquent payments may be a red flag and indicate the applicant may not be financially responsible or unable to pay their rent on time.

Don’t skimp on the credit report.

Background check

Second, run a background check. See if the applicant has a criminal history or a history of being evicted. Avoid applicants with a history of evictions. Use your best judgment when looking at other crimes.

For example, some may be ok renting to someone who was busted for underage drinking in college. However, most people would probably not be comfortable renting to those who were convicted of more serious offenses.

Employment and income verification

Contact the applicant’s employer. Verify that the applicant is in fact employed by the company. Ask the employer questions like:

• How long have they been with the company?
• What is their role/position?
• Character reference.
• Are they responsible? Do they show up on time?
• Would you rent to them?

If you have reservations about the applicant’s employment or income, you may ask for them to verify their income. Landlords commonly ask for the two most recent paystubs for verification.

Google is also your friend. Google the applicant. Many people are on LinkedIn or their company’s website. Check to make sure the employer contact information is not actually a friend or relative.

Landlord references

Speaking with the applicant’s previous landlord is a must. You will learn a lot from a previous landlord. This may help you avoid a bad apple. I’ve had bad tenants in the past, but I am not going to pawn them off on a landlord that is willing to do their due diligence.

Likewise, I have avoided a ‘professional tenant’ by checking on a landlord reference. The applicant in question had not paid rent for the previous six months to his current landlord and was in the middle of an eviction battle.

When calling landlord references, check to make sure you are not talking to a friend or family member of the applicant.  Check public property records to verify the owner; a quick Google search will produce the owner’s name. Additionally, google the contact information provided by the applicant; you may be shocked by what you find.

If the tenant currently lives in an apartment building, be sure to talk to the management company.

When speaking to the current or previous landlord, ask the following:

• Have they been tenants at [insert address or building name]?
• What has their rent been and for how long have they been living there?
• Have they paid their rent on time?
• Have they taken good care of the property?
• Have there been any unusual repair request or noise/sanity violations?
• Would you rent to them again?

Making a decision

Performing a credit and a background check on potential tenants is a must. Be sure to include these two steps in your tenant screening process. Verifying an applicant’s employment and income will allow you to make an educated decision on the applicant’s ability to pay the rent. Reaching out to the applicant’s previous landlord may be very insightful.

In my experience, applicants who pass all three stages turn into great tenants an overwhelming majority of the time. You may get the occasional bad apple or high maintenance tenant. However, this process will help you avoid nightmare tenants. Never skimp on your due diligence. As President Ronald Regan once said, “trust, but verify.”