Owner occupancy for rental property is a primary component of the U.S. economy because 10.6 million Americans reported rental income on their tax returns. That represents approximately 7.1% of taxpayers who are landlords, making income on properties they own and operate. However, the money side of landlordship is much more complex than that. Most landlords enjoy a profit margin of no more than 10-15%, so their profits are often squeezed after paying mortgages, maintenance, real estate taxes, and other expenses.
In the meantime, the rental market remains in trouble. LendingTree author Jacob Channel reports that nearly 8 million people in arrears on payments.
“Even if U.S. home prices have cooled somewhat from their 2022 peaks, housing remains expensive. The high cost of housing isn’t just relegated to homeowners, with renters feeling the sting of rising prices. In fact, based on our analysis of U.S. Census Bureau Household Pulse Survey data, LendingTree found that more than 8 million U.S. adults live in a household not caught up on rent payments. But that isn’t the whole story — while millions of people are behind on their rent, about 3.6 million adults are living in households not being charged rent.”
This leaves both tenants and property owners in tight financial positions, as landlords depend on rental income to cover their own costs. With slim profit margins, missed payments can quickly land property owners, especially small-scale rental property owners, in financial trouble. As the rental market evolves, finding a balance between affordability for tenants and profitability for landlords is a primary housing policy and economic issue.
Owning rental property comes with risks. Tenants are either responsible and reliable or a cause of financial pressure and added stress. Some can leave too. Effective screening enables landlords to choose tenants who pay rent promptly, fulfill lease agreements, and maintain the property. Credit reports and background checks are useful resources in the process, giving information regarding a tenant’s financial reliability and rental history.
In this article we explore why background and credit checks are an essential part of the landlord’s due diligence – and how they can provide much needed peace of mind.
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Protecting Rental Income
A rental property is an investment, and any landlord must have regular payments of rent to ensure cash flow. In order to be guaranteed of dependable tenants, financial stability and general trustworthiness must be determined by landlords. That is where tenant screening enters, however, in order to be effective, screenings must be focused on two areas: a credit check and a background check.
In deciding whether an applicant is a good fit, landlords often evaluate a credit check vs. background check as critical factors in the screening process. A credit check is performed on an applicant’s payment history with utmost consideration of their ability to pay bills on time, manage debt, and stay away from defaults. A background check provides a broader picture, including the applicant’s eviction record, criminal record, and past rental history.
However, performing one without the other risks ignoring pertinent information. For true peace of mind, both are required – but they serve different purposes. A good credit rating can be an indicator of financial health, but without a background check, landlords may ignore warning signs such as numerous evictions or outstanding lawsuits.
Reducing the Risk of Eviction
Evictions are time-consuming and expensive. Court costs, lawyer fees, and lost rent add up quickly. A background check identifies red flags that can indicate a higher risk of eviction, including prior landlord-tenant disputes or criminal history.
A good screening system should include:
- Eviction History: Multiple evictions reflect a trend of late rent or lease violations.
- Criminal Background Check: Serious crimes, particularly violence or property offenses, can pose a threat to the other tenants and the landlord.
- Past Rental History: Contacting previous landlords can determine if the applicant respected lease terms and made timely rent payments.
Though errors sometimes occur, a background revealing financial instability or criminality must be weighed judiciously prior to the approval of a lease.
Providing a Safe and Secure Property
Landlords have a responsibility to make sure that they are providing a safe environment for the tenants. Background screening protects the property and the people who reside there. A background screen can uncover a criminal history that would be hazardous to the neighbors or the property.
In multi-unit structures, tenant safety is particularly paramount. Tenants must be secure in their apartments, and landlords may be liable if they fail to exercise reasonable care to prevent foreseeable harm.
Preventing Property Damage
A well-maintained property retains its value. Violent tenants cost landlords money in the form of costly repairs and lost rent. A tenant’s rental history and financial status are predictors of how well they will take care of the property.
Some signs that the prospective tenant will not take care of the rental are:
- Prior Damage Reports: Prior landlords reporting major property damage signal future potential issues.
- Neglect in Financial Affairs: If a candidate is remiss in paying bills, they might also neglect property upkeep.
- Excessive Address Changes: Changing addresses too often for no genuine reasons might signal instability or lease breach.
A good rental history guarantees landlords that a potential tenant will be a responsible caretaker of the property and will respect the lease.
Reducing Tenant Turnover
Screening and finding new renters take time and money. Turnover is costly in terms of lost rent, advertising, and property damage. Background and credit screening locate stable renters who will rent long term.
A stable tenant benefits landlords in several ways:
- Fewer Vacancies: Long-term lease contracts ensure consistent income.
- Fewer Maintenance Expenses: Well-behaved tenants leave fewer scratches and scuffs (or be responsible for more serious damage).
- Stable Community Setting: Managers or owners of multi-unit properties are able to identify long-term renters who assist in offering a stable, friendly setting.
A responsible tenant who pays rent regularly and maintains a rental property in proper condition makes the life of property owners far less stressful and more financially rewarding.
Making Informed Leasing Decisions
Each applicant is an individual, and one factor alone should not be the determining factor in disqualifying them. Credit score, rental history, and criminal records need to be considered collectively. There are some applicants with bad credit scores who have legitimate reasons, such as medical bills or unforeseen circumstances.
Landlords must also comply with fair housing laws when screening tenants. Discriminatory screening can have legal consequences. Maintaining consistent and clear approval standards for applicants avoids unfairness and protects the rental property.
Protect Your Most Valued Asset
A rental property is a valuable asset and must be handled wisely. Background and credit checks provide valuable data to allow landlords to make informed choices in selecting good renters. By prioritizing a thorough screening process, landlords can provide a safe, stable rental property that is a safe haven for residents and provides a stress-free investment for property owners.