How to screen a tenant in Canada | find the best tenants!
Note that the information provided herein should not be considered financial advice. I am not an accountant, and recommend seeking professional guidance specific to your personal circumstances.
Disclosure: This post may contain affiliate links, which means if you click on a link and make a purchase, I may receive a small commission at no extra cost to you.
Selecting a tenant can be an intimidating prospect for new real estate investors. After all, these are the people that will be responsible for the daily care of your property, and will be the people that you depend on for the success of your investment. If you happen to own a duplex or larger, your decision will also impact your other tenants that will have to share a wall with them. It is an important decision, and one that is critical to get right.
The best way to screen a tenant is to set clear criteria in advance, and then stick to those criteria in the selection process. You will need to evaluate a tenant on their income, their credit rating, their prior rental history, criminal record, and ability to meet other property requirements such as pets and smoking.
The criteria that you set will also provide you a framework for your tenant selection. You will be able to use this to pre-screen individuals that do not meet your requirements, without resorting to your gut feel. Your instincts will play a part, however I have personally found that my gut feel is not always right - I need a framework to help me make the best fact-based decisions. In todays post I will share my personal framework with you.
Income and employment requirements
An ideal tenant should be able to afford their rent on both good months, and on months where they are faced with unexpected expenses. I typically set a guideline rent to income ratio of 30% (rent is 30% of gross income or less). A tenant will typically provide their income information, however you should always verify it with their employer.
It is important to note that rent to income ratio is not the only factor that may influence prompt and timely payment of rents. There are many other factors at play, and this metric alone may not always fairly evaluate individuals of differing backgrounds. For that reason, you should use this ratio as a guideline, and understand how it fits into the larger application picture.
Income is only one part of the employment picture. You should also consider the consistency of employment. Note - you can not discriminate based upon the source of income as long as it is legal (drug dealing is not considered valid). You can however, prioritize someone that has full time employment versus inconsistent income sources. Ask them (and verify) how long have they been in their position, and if it is a temporary position or full-time. I like to see at least 6 months in a current position, combined with a favourable reference from their employer. Understanding their employment picture will help you to paint a clearer picture of what to expect in the future.
Credit check
When I started out, I had some hesitancy in pulling a credit check on prospective tenants. After all, who was I? Certainly not a bank or any kind of financial institution. A credit check seemed so personal - it gives you an inside look into another persons financial life. However, I quickly learned how critical the credit check can be. It is an excellent indicator of a persons ability to meet the financial commitment of renting a property. Bottom line - it is crucial to get right. A tenant that can handle the payments will make or break your investment, not to mention will relieve stress for both you and them. Here are a few tips that will help you make sure that you get the most out of your credit checks:
Pull your own report: a credit report is easy to fake. Those that have nothing to hide will have no issue with this. If you list with Rentfaster.ca, they now offer this service directly to make it simple to pull, and applicants generally see this as a simple and trustworthy source.
Set your score threshold: for me it is a score of 600 and higher (Equifax), which works out to a C+ rating. This of course may differ depending on the type of neighbourhood that your property is located in. For reference, a C+ Equifax score equates above the 51st percentile.
Look beyond the score: the report should paint a picture breaking down the debts kept in student loans or revolving credit, as well as providing information on late payments, bankruptcies and collections information. This overall history will give you the best indicator of an applicants future behaviour.
Rental history
A verification with a previous landlord will be able to share a wealth of information with you. In my experience, landlords have been extremely open in sharing their past experiences. After all, we are peers in the industry, and we usually do not want to see someone else go through a bad experience that they’ve already endured. That is, with one BIG exception. A current landlord may be willing to provide a positive review if they are looking to get rid of an undesirable tenant. For that reason, it is much better that the landlord reference not be their current landlord. That is, a reference from the landlord prior to their current one.
It is also important to verify that the landlord is who they say they are. Whether it is an individual or a property management company, there are a few ways to do this. First, take a look at the phone number provided by the prospective tenant. You can do a Google or a Facebook search to see if that number is public on the internet and tied to the landlord in question. If that checks out, verify a few things about the property with the landlord to ensure that they are who they say they are. For example, ask if they are the owner or with a property management company. Then follow up with additional detailed questions to validate this information. A few simple steps like this will often catch someone that has tried to use a friend as a landlord reference - and yes, this does happen!
To get you started, here is a sample of the questions I ask a landlord during the reference check call:
Are you the owner or are you with a property management company? What is the company?
What is the address of the property?
Did tenant stay for stated period?
What was the monthly rent?
Did the tenant always pay rent on time?
Did anyone else live with the tenant?
Did the tenant ever receive any legal notices (late rent, noise, unauthorized occupants, notice to vacate, etc.)?
Did the tenant have any pets?
Did the tenant smoke on the property?
Did the tenant maintain the home in good condition (housekeeping, lawn, etc.)?
Did the tenant give proper notice before vacating?
Did the tenant receive their entire deposit back after vacating?
Would you rent to the tenant again?
I am typically looking for a positive review from the landlord, along with confirmation that the tenant stayed at least 12 months, paid on time, and was not evicted. I am also looking to confirm that the information provided is consistent with what was provided on the rental application form. If you have any specific limitations such as pets or smoking, this verification a great place to verify that they can meet them.
Criminal record check
A common misconception is that you are always able to run a criminal record check for prospective tenants. This is not the case, as most a criminal record is considered personal information and thereby protected under the Personal Information Protection Act (PIPA). There exists only limited exceptions, for which you should validate first with your legal counsel. One example may be that the unit exists on a property that holds a child care facility, which makes a criminal record check a necessity.
If you believe you still require a criminal record check, once again, check with your lawyer!
What you can’t do - tenant protection
With all of this said, it is extremely important that you follow the tenant protection laws in your district. In Alberta, the Alberta Human Rights Commission has a great online resource to help understand our local requirements.
There are a number of factors that you must not discriminate against. Discrimination can not only be using that factor to make your decision, but also requiring certain information from an applicant based upon that factor. For example, you can not request a credit check from applicants based upon their source of income, or any other factor that I’ve listed below.
race
colour
ancestry
place of origin
religious beliefs
gender / gender identity
physical disability
mental disability
age
marital status
family status
source of income
sexual orientation
criminal record, as mentioned above
Set your framework, your thresholds, and stick to it!
With all of this said, it should be clear that having a defined framework to evaluate new tenants is incredibly important. Choose which criteria that you would like to evaluate on, and set your thresholds across each of them. Then, stick to it. One thing that I’ve found in myself is that I like to see the best in people, but this clouds my ability to be able to rely on my “gut feeling”. For that reason, I need my framework. I need the ability to objectively evaluate people across the same set of responses. So far, this has worked for me. I’ve ruled out some people that could have become very problematic. And as a result, I’ve had fantastic tenants. I hope you can take something from this post and find great tenants for yourself too!
So, did I miss anything? Is there anything on your framework that I should consider adding? I’d love to hear in the comments!