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How to Avoid Tenants Who Can't Pay Rent

Juan Martinez • January 22, 2021

Properly renting a home is an act of good decision-making for both parties. Tenants are responsible for searching rental homes and finding a few they could be happy and successful living in. Landlords and property managers are likewise responsible for approving tenants that will be good to the house and pay their rent on time.

For both parties, the right decision requires careful consideration, full understanding of the risks, and research to confirm the fact. As the landlord, the final decision on which tenants to move in will ultimately rest on your shoulders. Your choice should be based on three key elements:

The tenants seem well-behaved and will treat the property with respect
The tenants are pleasant and communicative
The tenants have the ability to pay rent

The final point, the ability to pay rent, is the most important. While a rental home can withstand a little damage and many landlord-tenant relationships have very little communication, rent is what holds the entire rental home system together. Your tenant's rent covers the expense of maintaining the house along with the slowly-built revenue to re-invest in home upgrades or repairs. Tenants who cannot pay rent ultimately hurt both their credit and rental histories and your financial revenue stream at the same time. So how do you avoid accidentally renting to otherwise-pleasant tenants who can't pay their rent? We are happy to explain the technical process and methods you can use to quickly and accurately assess tenant viability.

Why Tenants Apply to Rental Homes They Can't Afford

Ideally, tenants would only apply and accept rental homes that they could live in comfortably - and afford to pay rent for. However, not all tenants are good at finances or are good at predicting their future expense-to-income needs. Inexperienced tenants may not understand how their income will be impacted by the total rent amount. Some people are known to spend frivolously and sometimes don't calculate for rent before their paycheck is gone. Some tenants experience major life changes while living in your rental home and their ability to pay rent changes with their personal circumstances.

It's important to be prepared for each type of tenant non-payment and use the available predictive methods of tenant-screening to avoid tenants unable to pay rent whenever possible. Here's how to do just that.

Tenant Screening for Ability to Pay Rent

Tenant-screening is a natural part of home rental. Every tenant application should be screened to determine both if tenants are a good lifestyle match for the house (ex: enough bedrooms, parking spaces, accessibility) and their ability to cover the rent for every month of the following year. Our screening tips today will focus just on income and ability-to-pay confirmation.

Rent to Income Ratio - 30%

Your tenant application should include a space where tenants share individual and/or household income. If the rent is more than 30% or about 1/3 fo their income, then it may be too high for their ability to pay. If the rent is lower than 30% of the family income, then the application can be screened further.

Require Proof-of-Income and Job Confirmation

Next, confirm that the reported income is true. It's not uncommon for tenants excited about a house to over-eagerly list the income they need to be approved - not the income they have. So require proof-of-income. This could be pay stubs, a bank transaction record of regular income deposits, or last year's tax records.

Also confirm that your applicants still have the jobs they are reporting. Especially with recent industry shake-ups, it may be worth your while to call references and simply have your applicant's current employment status confirmed.

Check for a Responsible Rental History

Most tenants have a clean rental history - meaning that they have never been evicted or sued for damages. A simple rental history check during the screening process can quickly identify any tenants who are known troublemakers or who have critically failed to pay rent in the past. A clean rental history takes you along to the credit and background checks.

Perform a Landlord Credit Check

The credit check is one of the most important screening steps -especially for confirming a tenant's ability to pay rent. Credit score indicates a tenant's overall financial responsibility and how consistently they pay their credit cards and other debts. However, a low credit score with few or no outstanding demerits may indicate other non-issues like a past medical debt or student loan that will not indicate inability to cover rent today.

Consider any Criminal History in the Background Check

A landlord's background check is simple and covers local criminal history. This gives you a quick overview but many landlords have found that not all criminal records mitigate a tenant's ability to be a good resident and to pay rent. Consider both the nature and the age of any past crimes.

Ask About Life-Changing Plans in the Next Year

Finally, if an applicant has passed all other screenings with flying colors, ask them during your walkthrough or tenant interview about any future plans. Just as you might ask whether the tenant is planning to get a pet, also ask if they have any major financial changes (like a new job or divorce) on the horizon. Ask politely without inquiring specifically about family status or other protected factors.

How to Handle Tenants Who Stop Paying Rent

If you have signed a lease and moved in tenants that are no longer paying rent, it's important to approach the situation with both delicacy and firmness. Their rent is the livelihood of your housing business, but they also may be going through difficult (and hopefully temporary) financial difficulties.

First, reach out via email, phone, and/or door note (two out of three minimum) to inquire about the situation. Be polite and do not take a harsh tone at first. The tenant may say it's been a crazy week and pay you immediately, then all is well. The tenant may say that they are experiencing difficulties but will pay the full amount soon. If so, add any lease-defined fees and give them a month to sort it out. If the tenant is evasive, begin preparing actions for financial remedy or eviction but wait to see what happens.

Tenants experiencing financial difficulties may appreciate you offering an extended or rearranged payment plan, while tenants who fall into arrears may need to be politely faced with the process of eviction. You are on solid ground by keeping your cool and simply being firm about the necessity of either paying rent or facing eviction court proceedings.

Preparing Your Lease for Rent Non-Payment

As you may have guessed, the terms in your lease are extremely important as to your options when dealing with rent non-payment. It's vital to define late fees, deferred and payment plan options, and what precipitates eviction in the lease so that the tenant is clear on policies and is held legally binding responsibilities.

Property Management for Tenant Screening and Rent Remediation

Choosing the right tenants and then managing tenants who stop paying rent are both serious responsibilities for any landlord. Many investment homeowners choose to offload this task to the experts - property managers who have an effective system already in place. The Century 21 property management service can expertly screen tenants to the full extent of their income confirmation and background checks to prioritize only the most reliable tenants. In addition, property management offers an established and even friendly process for dealing with tenants who stop or cannot pay their rent partway through the lease.

By working with a property manager, you can ensure quality tenants and avoid having to chase down or fight tenants who are not able to pay their rent. For more rental property insights, techniques, or local property management services, contact us today!

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What Does a Property Management Company Actually Do? Behind the Scenes Look

November 26, 2024

A lot of people think property managers just sit back, relax, wait for the phone to ring, collect rent, and that's it. My name is Jorge Rodriguez, president of Americana Property Management in Las Vegas, and I want to show you what really goes on behind the scenes in property management. Should You Hire a Property Manager? Whether you own one property or twenty, there comes a point when managing everything yourself becomes overwhelming. At Americana Property Management, we typically help owners who: Own multiple rental properties and can't keep up with all the demands Live far from their Las Vegas investments Want their rental income to be truly passive Don't want to deal with hiring maintenance staff and contractors Can afford to invest 8-12% of their rental income into professional management The cost of property management isn't just an expense - it's an investment in protecting your property and maximizing its value. Let me show you exactly what I mean. How We Protect Your Investment A lot of owners don't realize how much liability they take on when they self-manage. At Americana, we: Stay current with all landlord-tenant laws Use legally-sound lease agreements that protect your interests Handle evictions professionally when needed Document everything to protect you from false claims Maintain detailed records of all income and expenses Take care of tax documentation Most importantly, we act as a buffer between you and your tenants. When there's a challenging situation - like late rent or lease violations - we handle it professionally so you don't have to be the "bad guy." How We Find Qualified Tenants The number one thing is making sure we find a qualified applicant for your home. At Americana Property Management, we market homes on over 50 websites, including: Zillow Trulia Realtor.com Apartments.com We also list properties on the MLS and work with other realtors to show our homes. We've found that applications from realtors tend to be better because the realtor pre-qualifies them before showing homes. Our Tenant Screening Process When we receive applications, we put them through a very strict verification process: Background checks Credit checks Rental history verification Employment verification Reference calls We want to make sure the person we're putting inside your home is going to pay rent on time and take care of the property. This verification process is vital to successfully managing your property. Once we complete the verification process, we always reach out to the owner with our findings and get their final approval before moving forward. The Move-In Process Setting Up the Lease We draft up a landlord-friendly lease agreement that protects everyone involved - the owner, the property management company, and the tenant. This gives us a legal binding contract that we all must abide by, preventing any misunderstandings in the future. Move-In Orientation Other property management companies might call this a move-in inspection, but we take it a little further. We: Document the condition of the home with pictures Demonstrate how the home functions, including: Where to shut off water if there's a leak How to reset breakers How to reset a GFCI How to relight a water heater How to change filters How to change batteries in smoke detectors and thermostats Ninety-five percent of work orders are very small and something the tenant can take care of. By showing them how during the move-in orientation, we save our owners money on unnecessary maintenance calls. How We Handle Day-to-Day Property Management Rent Collection We make sure rent is collected by the first of the month. Tenants have until the third to pay with no late fee - that's their grace period. On the fourth, they're charged a 5% late fee. If a tenant still doesn't pay rent, we start serving legal notices and ensure we follow through on our collection efforts. Maintenance and Repairs Tenants can submit work orders through our online portal - the same place they make rent payments. When we receive a work order: We inform the owner We dispatch our vendor to diagnose and repair the issue If the cost exceeds our approval limit, we contact the owner so we can make the right decision together Our vendors provide us discounts because of the volume of work we give them. These savings get passed on to our owners - you're getting highly qualified vendors for less than what you'd pay finding someone through Google. Working with Home Warranty Companies If you have a home warranty, we handle everything: Filing the claim Coordinating with the tenant Making sure the vendor goes out Following up to ensure everything is working properly HOA Violations If your property receives an HOA violation: For tenant-caused issues: We contact the tenant and ensure they fix the violation For owner responsibilities: We communicate with you, get bids if needed, and help choose the right vendor to resolve the issue How We Save You Money with Our Vendor Network One of the biggest advantages of working with a professional property manager is our vendor relationships. At Americana Property Management: We have trusted vendors for every type of repair and maintenance Our vendors give us significant discounts because of our volume We only work with licensed, insured professionals We know which vendors do quality work at fair prices We handle all vendor coordination and payment Think about it: When you search for a plumber on Google, you're paying retail prices and taking a chance on quality. Our vendors know they'll get consistent work from us, so they give us better rates - and those savings get passed directly to you. How We Keep You Informed We believe in complete transparency with our owners. Through our online portal, you can: See real-time updates on rent collection Review maintenance requests and approvals Access monthly financial statements Track property performance View all property-related documents Every month, you'll know exactly: How much rent was collected What maintenance was performed Any upcoming expenses or needs Your property's bottom line We take care of your property like it's our own, and we make sure you always know what's happening with your investment. The Lease Renewal Process We start the renewal process 90 days before the lease expires. During this time we: Compare similar properties to see if a rent increase (usually 3-5%) is justified Inspect the property to ensure it's being properly maintained Review the tenant's payment history We take all these factors into consideration before offering a renewal, and we always get your blessing before moving forward. Most of our initial leases are for one year. This gives us flexibility - if a tenant isn't paying on time or taking care of the home, we can give them a 30-day notice to vacate instead of renewing. However, when we do find good tenants, they tend to stay in our properties between 3 to 5 years. We really try to find long-term tenants so you can make consistent income from your investment. Looking for Property Management? Our main focus is making sure your interests are taken care of. You collect a nice check every month, and we handle all the headaches. If you have any questions about how we can help manage your property, you can reach us at 702-719-2100 or email us at pm@americanapm.com.