Monday, August 25, 2008

Why Tenant Screening Reports are Important

Investing in real estate can be a profitable way to increase your wealth in two ways. The first is simply the gain on the property when you sell it. The second is that if the property is leased it can generate an ongoing stream of revenue. In some cases that revenue stream can be enough to pay the mortgage on the property every month.

Most commercial properties depend on rental revenue as a primary factor in their income projections. The value of the property includes the discounted value of the rental revenue in the calculation, as well as the value of the building itself and land.

Residential property, especially single family homes, usually sell on a square footage basis and don't consider any leasing income in the determination of value.

Tenant Screening is a critical aspect of successfully managing a portfolio of residential rental properties. The wrong tenant can not only result in lost revenues but property damage as well.

Different states (and countries for that matter) have different rules, regulations, and laws which determine when and how a tenant can be evicted. The process can take up to a year. Not only do you lose the incoming cash flow from the rental payments, you have the additional expenses of paying an attorney to handle the eviction. A pre-leasing investigation known as a tenant report can help you avoid this situation.

While it's important to real estate investment companies to make sure that their tenants are financially stable, it's critical for individual investors. The loss of rental income from just one property can be devastating to an individual. The property can't be leased again until the current tenant is evicted for nonpayment.

Most investment companies have a number of properties and can absorb a loss on an occasional basis. Individuals who invest in residential properties that they intend to lease must complete the required due diligence to assure themselves that the tenant is credit worthy, ethical, and doesn't have a history of property damage, a criminal record, or prior evictions. A rental application is just the first step in this process. Tenant reports verify that the potential tenant is who they say they are by checking social security numbers, driver's license, prior addresses, and of course that they have the financial wherewithal to make the rental payments.

Tenant credit reports verify any bankruptcies, short pays, loans and credit accounts, all important factors which should be taken into consideration when signing a rental or lease agreement. A tenant who has not historically been financially responsible in the past has a much higher probability of being irresponsible in the future. In other words if there have been problems in the past with making the rental payments on time and in full, those problems will most likely continue in the future.

While in most cases the landlord won't be held liable for any criminal activities that take place on their premises, their insurance will most likely increase.

If you're considering investing in residential real estate and leasing the properties, there are services which will compile a tenant report for you. It's money well spent.

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