Real Estate IRA Corner – How To Manage Tenant Selection

Most long-time Real Estate IRA investors will tell you two things: You make your money when you buy, not when you sell, and that good tenant selection is key to profitability.

Ideally, you want a tenant with three key attributes: The ability to rent for a long time (every time you change tenants, you lose rental income while you look for the new one, and it costs money to rehab the dwelling), consistent on-time rental payments, and someone who takes great care of your Real Estate IRA property.

But tenant selection isn’t easy. Great tenants are tough to find, and they’re worth keeping when you find them. The last point about taking great care of your Real Estate IRA property may be the most important, because one serious act of vandalism, carelessness or neglect can easily cost an entire years’ worth of profits – especially in newer properties you haven’t held for a long time.

A great tenant can also help preserve capital appreciation gains that should rightly be yours, as the landlord.

Tenant Screening Tips for Self-Directed IRA Owners

First, get a property manager. If you use a successful, established property management firm with a long history in your community, they will be experienced tenant screeners themselves, and their expertise can go a long way to protect you from rookie mistakes, such as accidentally exposing yourself to liability from an allegation of illegal housing discrimination.

You may have the best intentions in the world, but many a landlord has been stung with housing discrimination claims for asking innocent-sounding questions like “how old are your children?”

You may think you’re just being friendly. An alert plaintiff’s attorney can build a case around those five simple words and next thing you know you’re paying a $17,000 fine for illegal discrimination on the basis of familial status. An experienced property manager can help you avoid that mistake and get a tenant on board.

Failing that, your landlord’s errors and emissions insurance policy can help protect you in the event of a claim against you as a result of their error.

Develop Objective, Written Tenant Criteria

It’s a good idea to develop your minimum acceptable rental criteria in advance, commit it to paper, and then stick with it. Set a reasonable minimum FICO score, a minimum income (normally not less than 3x the rent from all adult occupants, combined). As the applications come in, make no written comments on them other than how they match up against your established criteria. Rent to the first person who meets your established criteria who completes ALL administrative requirements. This also helps insulate you against discrimination claims.

Do Credit and Criminal Background Checks on All Adult Residents.

You should not have any adult residents living in the property whom you have not screened yourself. All of them should pass your background check, and you should have a completed application from each of them. Each of them should also sign the lease and all addendums. The last thing you want is to have rented to a known criminal who harms other tenants or neighbors, and be faced with a major lawsuit.

Verify Income And Landlord Information                                                                     

Sadly, all too many people seek to deceive landlords by passing off fake, counterfeit pay stubs as income verification documents, or having friends and family pose as coworkers, supervisors and even past landlords. To counter this, always do your own independent due diligence on these individuals. Go back at least two landlords, if possible: The current landlord may be wanting to get rid of them and may give them a terrific reference – even though he’s at wit’s end with them. The previous landlord is likely to give you a much more balanced view.

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