How to Screen Potential Tenants for Your ADU in 2022
Last week, we talked about the best way to find good tenants for your ADU. If your brand new ADU is your first-ever rental unit, then you have a lot of work ahead of you. As mentioned, there are numerous ways to get in touch with potential tenants. But how does one pick the person (or people) who will basically live in their backyard? How do you make the best choice?
Well, it’s not easy, but with proper screening, you can find your perfect match. You just have to work for it. To make things more straightforward for you, we’ve created this easy 6-step guide! So let’s unpack this, shall we?
Renting Out Your ADU
Those who have managed a rental unit before know just how hard being a landlord is. You’re basically inviting strangers into your life and your property, hoping that everything will turn out alright (and earning an income out of it, of course).
However, the process of renting out an ADU doesn’t have to be a hard one.
Building an ADU and then renting it out to make a passive income is a great idea. That’s especially true in these turbulent times.
Over 114 million people lost their jobs during the first year of the pandemic. Of course, the majority of those people returned to work or found other jobs at some point in 2020 and 2021. However, that doesn’t diminish the fact that they were jobless and, thus, without income for a significant period.
Although the situation is somewhat stabilized now, the unemployment rate is still higher in 2021 than in 2020 (pre-pandemic). The unemployment rate was at an all-time high in April 2020 (14.8%), but it’s showing signs of a steady decline. Still, in February of 2021, the rate was still significantly higher than in February of 2020 (so, in the pre-pandemic times) — 5.4% compared to the previous 3.5%.
Real Estate Investments
So, it’s clear that the economic situation is far from stabilized. That’s why having a second income or a passive income is something many people are striving for.
But investing in real estate isn’t really that easy. It requires a lot of money and know-how. It’s not like you can just buy a second house willy-nilly, right?
True, but that doesn’t mean you don’t have options. An ADU is a perfect solution. One of the benefits is that it can generate a passive income without demanding a lot of maintenance resources (in terms of time and money).
Since ADUs are pretty much the ideal alternative housing solution, you won’t really have a lot of trouble finding potential tenants. But, as we said before, finding the perfect tenant, or at least one that won’t make your landlord days difficult, is a bit trickier.
Why Screening Tenants Is Important
Just because you have an ADU available for rent doesn’t mean you’ll be a successful landlord. Having a good understanding of what you’re offering (and what you’re asking for in return) as well as a good, comprehensive screening process is vital.
There are quite a few risks to being a landlord. However, screening tenants can help you minimize some, if not most, of them.
Screening Tenants — an Easy 6-Step Guide
But how does one screen tenants? In general, the six easy steps of the tenant screening process are:
- Do an initial screening by placing a well-written ad
- Implement a rental application process
- Always do a criminal background check and a credit score check
- Check in for potential issues with previous landlords of potential tenants
- Check in with the employers of potential tenants
- Conduct an interview
Initial Screening (the Tale of Honest Ads)
Although the goal is to find the perfect tenant, you can’t find one out of all prospective tenants that is the ideal candidate in general. You should keep in mind that you need to find the perfect one for you and your ADU. That means that the screening process has to start before you actually get in contact with anyone.
This initial screening is reflected in how you write your ad. You have to be honest about what you’re offering and what you’re looking for. That’s the only way to profile potential tenants that will potentially pick up the phone and contact you.
Don’t exaggerate or embellish when you write your ad, and don’t be vague when it comes to your terms and regulations. It will save time (both yours and other people’s).
Having your potential tenants fill out an application is an excellent idea because it standardizes the screening process and makes things easier for you. Many rental listings have direct links to applications because they are extremely easy to make and implement.
Generally speaking, the application is the most crucial step in the screening process. However, it’s only effective if it’s all-encompassing. So, make sure it includes questions about everything that you as a landlord need to know about prospective tenants:
- The state of their income (a good rule of thumb is that a tenant should have an income three times as much as the rent)
- Relevant financial information (outstanding debts, credit card balances, monthly payments, and other information that will paint a comprehensive picture of the person’s financial means)
- Employment history and other relevant information (as well as the contact information of their employer)
- Credit history or a credit report
- Questions regarding criminal history
- Lifestyle information
It’s important to note that you should thread lightly with lifestyle information. You can ask whether the potential tenant has pets or if they’re a smoker. As per Anti-Discrimination Housing laws, you can’t (and should never) discriminate based on other criteria such as race, gender, sexual orientation, disability, marital status, etc.
Running a credit history check as well as checking for outstanding debts is always a good idea. This information is crucial because it will tell you how your prospective tenant handles their financials. As a rental property owner, you want to look for credit history regarding monthly rent payments — how diligent a person was regarding payments, if they were ever late, if they had any financial delinquencies, etc.
When it comes to background checks, you want to look for the following information:
- Whether the person was ever evicted from a rental property. Now, this doesn’t necessarily have to be a deal-breaker, but it’s a red flag that you may want to inspect further.
- A criminal record should always be a red flag. Any tenant screening service will tell you that you need to be on the lookout for this. Again, it doesn’t have to be a dealbreaker, but it’s definitely something you’ll want to talk more about with the prospective tenant.
- Public records — if the tenant has been sued (or is currently being sued) for outstanding rent debt, child support, or other money-related transgressions, you might want to pass on their application.
Checking in With Previous Landlords and Employers
It’s always a good idea to check in both with previous landlords and with current (or past) employers of a potential tenant. Landlords will tell you exactly what to expect in terms of the professional relationship you’ll have with the person in question. Their employment history or their employers will tell you just how steady the tenant’s current job and income are.
When talking with previous landlords, ask about the following:
- Outstanding debt (for rent, maintenance, etc.)
- Potential damage in the previous rental unit
- Late payments
- Security deposit
- Overall demeanor
Always Conduct an Interview
The last step in tenant-based screening is an interview. If you’ve made it in the right way, the application should help you weed out the people you definitely don’t want to rent out your ADU to. Then, credit and background checks will help you cut the list of prospective tenants even further. However, to actually figure out if a person is a good fit for you, you’ll have to talk to them.
Although the interview doesn’t have to be formal, you should have a list of questions prepared. Asking the right questions can make a difference between finding the perfect tenant and accidentally ending up with a nightmare tenant.
Ask your potential tenants about:
- The exact move-in date that would work for them
- How many people would live in the unit
- Their lifestyle choices (whether they have any pets or if they’re smokers)
- Their daily routines (don’t forget these people will live in your backyard. It’s essential that your schedules align or at least complement each other.)
- The reasons behind their move (why are they leaving their previous unit)
- Previous broken rental agreements
- Potential overnight guests
Find Tenants With Cedar Dwelling
Being a landlord may sound like an easy “get rich quick” scheme, but it’s actually hard work. If you’re interested in renting out your ADU but don’t know where to start, don’t worry; you’re not the only one.
That’s precisely why we offer renter help. If you’re not sure how to become a landlord because you don’t know which rules and regulations to set or how to find tenants, we can help.
Cedar Dwellings offers turn-key solutions, which means we take care of everything that you need — from getting permits, making plans, and doing the construction, to helping with interior design, financing, and making sure your investment was worthwhile.
So call us today and book your free consultation. Let’s build you an ADU of your dreams and secure that passive income everyone’s dreaming of!