Dec 10
9
How to Screen Rent to Own Tenants
Howdy! Do you miss us?? We’re in Mexico right now enjoying some fun, sun and relaxation!! But we definitely did not forget about our loyal and awesome blog readers … nope … just cause we’re taking some time off doesn’t mean we aren’t still taking care of you!! We lined up a couple of extra special posts for you … this one is from Canadian rent to own investor and best selling author, Mark Loeffler. He’s got some great tips on how to screen rent to own tenants. Check it out – and if you have questions post them in the comments. I will make sure he gets on over here to respond to you folks!! 
by Mark Loeffler
Finding the right tenants for any property is never easy, but it’s a critical part of your job as a real estate investor.
Many investors view their tenants as business partners, and the more time and energy they invest in finding and qualifying good tenants, the more dividends it pays throughout the rental term, in the way of fewer headaches, well maintained property and rent paid on time.
All of this is doubly true with the rent-to-own investments, since the whole strategy is designed to have the tenants take over as owners in a period of months or a couple years. In this scenario, they truly are partners, in that they are more like owners-in-the-making.
The key difference with rent-to-own is that prospective tenant-owners typically have poor or damaged credit, and other circumstances that require attention or repair during the “rental” term, until they are in a position to take over ownership of the property. This puts more emphasis on you, the owner-landlord, to do your due diligence.
So, how best to screen prospective rent-to-own tenants?
Once you find what you believe to be a qualified tenant, you still have an important job to do in making sure everything the applicant has told you is legitimate. The onus is on you, the investor, to cover your bases and verify all the information – for your own protection. The goal is to gather the necessary documentation you need to feel comfortable entering into a rent-to-own arrangement, and to make sure they are disclosing all of the facts of their circumstances.
To screen your rent to own tenants, get the following documents:
1). The job letter
Each applicant should provide you with a letter from their employer which outlines that they are, in fact, employed there, for how long and their rate of pay.
2). Notice of Assessment
The Notice of Assessment, or NOA, is a document provided by Canada Revenue Agency (CRA) after a tax return is filed. Each applicant should provide their notice of assessment for the past two years to prove their income and if they have back taxes owing. Besides verifying income, these documents also prove the applicants have filed their taxes for the past two years. If a taxpayer owes money to the government, this is always the first priority for payment, which can leave a landlord in a sticky situation if the government comes to collect through “involuntary” means.
3). T4s
Request the past two years of T4s so you can verify the income a potential tenant is claiming in their application. All applicants should provide T4s for all of their jobs in the past two years.
4). T1s
If an applicant is self-employed, they will not have T4s. Instead, request the T1 forms for the last two years of their tax return, which indicates what they declared as income.
5). Identification
Request two pieces of identification for each applicant, at least one being photo ID. The applicant can photocopy or scan the identification and send it to you, but make sure you specify the forms of identification are readable and clear.
6). Pay stubs
Request the two most recent pay stubs from each applicant. These will not only ensure the applicant is gainfully employed, but will also prove the income they claim on their application.
7). The credit bureau
You will need to see the credit bureau of each applicant for two reasons. First, you need to see their credit score to determine their rental term and to make sure their credit is repairable. Second, you must cross-reference the debt load they declared on their application with the information found in their credit report to ensure they have disclosed a true account of their debt.
Having the applicant pull their own bureau is the first step in any credit repair process; after all, if a tenant doesn’t know what’s on their bureau, they cannot take the necessary steps to fix it.
They need to become familiar with the process of pulling their own credit as they will be reviewing it at least every three months with you or their designated credit repair specialist.
8). Employment verification/reference check
Check their references, just as an employer would verify references of a job applicant. Call their employers to make sure their employment is valid. When calling to verify the job, don’t automatically dial the number provided on the letter. Instead, dial the main switchboard, which can usually be found simply by looking up the company in the phone book, at www.canada411.com or on the company’s website. Ask for the human resources department.
You may also want to get other documents, such as bank statements and references from former landlords. If you’re feeling unsure of any part of their application, trust your instincts and ask for additional information, if for no other reason than to set your mind at ease. If the applicant is being entirely truthful with you, they will have no problem backing up their claims.
One final note: don’t rush the process. You’re taking on a business partner in a tenant, so make sure they are up to the challenge.
Mark Loeffler is an experienced real estate investor with more than 13 years in the business, specializing in the tenant-first rent-own-strategy. A graduate of the University of Western Ontario, Mark bought his first investment property at 19 years of age, using the traditional buy-hold-rent method. Mark has been featured in Canadian Real Estate Magazine and has appeared on numerous TV and radio programs and in other media. Through his own seminars, a regular blog and website, guest-speaking engagements and author of best-selling Investing in Rent-to-Own Property: A Complete Guide for Canadian Real Estate Investors
Also Mark didn’t include it in his bio for you, but he also blogs over at the Versatile Investor. Be sure to stop in there and see what he’s up to!
First Image Credit: © Luisa Venturoli | Dreamstime.com Second Image Credit: Amazon.ca
