Standard Requirements for New Tenancy Applications

Welcome to ‎Canada's Property Management Podcast, your number one resource for investing, managing, and maximizing the value of your real estate assets. And now here's your host, Carla Browne and Adrian Schulz, Canada's rental property experts.

Adrian Schulz (00:18):

On today's episode of Canada's Property Management Podcast. We're talking about standard requirements for new tenancy applications. Now, Carla, in the last year or two, a lot has changed in the economy in general, but specifically how people work, and how their income is derived, which I think makes this a very relevant topic today. Carla, what is your point of view on the minimum requirements of a new tenant?

Carla Browne (00:53):

This is so challenging right now, Adrian, in our marketplace. We used to be very standard, you have this little checklist and it would be like you to have one third income. You want their credit score to be this, you want their job income letter to come to you, you want the landlord reference to come to you, and then you can vet it out. And now we've seen we've had to kind of adjust because income isn't coming as income was coming. A lot of people across Canada have been paid by the government. They've had some kind of subsidy going on for a number of months, and we don't know exactly how long that's all going to go.

Carla Browne (01:30):

And we know that certain segments and industries of sectors of the employment markets have also been affected. So then now we're looking at where does your income come from when you go back to work and kind of going all over the place. So let's start at the first one, how much income does someone need in order to get into a rental property? So I would say, and I don't know if you agree with me, we used to say, about a third of your income, you need to have the ability.

Adrian Schulz (01:57):

Yeah. A third of income to go towards housing is a generally accepted economic principle of housing costs.

Carla Browne (02:07):

Right. That's on the sale, getting a mortgage would be about the same rates, the kind of requirements. So that works very much the same. So now we're looking for income, the ability to pay. So where that income comes from is... that's one thing you have to look at, but we're looking for that percentage of income. And then we're also looking at, what industry does this person work in? How transient are they going to be? Meaning are they going to be picking up and leaving and unlocking them into a rental lease, because we know locking them in, is only locking them in as long as they actually stay there. And then-

Adrian Schulz (02:41):

As long as they pay.

Carla Browne (02:42):

... As long as they pay, exactly. So then we're looking like, "Do you want two people moving into this property that are both from say the tourism sector?" where the tourism sector is having a harder time getting back going through this time. So we're kind of looking through all of that, but the thing that's really, really challenging is that what people don't really understand, is there is actually an act that helps govern this and that's called human rights. So you have to be really specific about what your requirements are as an investor or a property management company, you have to base everybody exactly the same way, and you have to have that documented. So tell me, do you do that in your own investment properties right now?

Adrian Schulz (03:24):

Very much so. So our criteria is that the rent be no more than one third of a family of the people living there's income. And we are usually looking for a two year income average, but the actual qualifying is based on their current rate of pay. Because as we know, if you get promoted or you change jobs and you're now earning more money, you may want to improve your quality of life, so we take that into consideration. And what we always do is we match up their working or their income history to their credit report, because the credit report from the agencies being TransUnion and Equifax, doesn't just give you, "Do they pay their bills on time?"

Adrian Schulz (04:08):

But it will also show you employment history and living history, which is a big part of the overall application process, and in our own real estate investments, we have a minimum beacon score, that's a minimum credit score of 650. I'm not suggesting that must be your minimum, but in our experience, in our city, that's the beacon that we've had the most luck with in it translating to tenants paying rent, et cetera, but I know that you have some further thoughts on beacon scores as well on different variables. Can you give us some insight on that?

Carla Browne (04:47):

Yeah. Well, first of all the pulling credit is one thing. I have talked to a number of companies that actually don't even pull credit on their prospective tenants, and that part is so scary to me. Because as we know history repeats itself, you have to know the history of this person, not just the landlord reference history, which might be a friend or family member that's actually answering those questions by the way, but actual history. And like you said, shows the employment, you can verify that to your application, shows where they've been living, you can verify that to the application. So you can see whether or not the story matches, and that's really, really important.

Carla Browne (05:24):

And beacon score, our company, we definitely will go a little bit beyond that 650ish range because I truly believe that people sometimes have some bruising in their credit, some people call it bad credit. I call it bruising, and it's happened just because something in their life that has put them there. And that doesn't necessarily define them as a bad renter. So we make sure we go through all these different checklists and there's often times that we would still will rent. Now, if you are showing on that credit report, if you are showing that you have a lot of outstanding debt that's going with that, a really low credit score, then we know like, "No, no, that's going to be a no go for us" but it's really matching the story. When you meet somebody, you want to hear their story, but you need to take note of everything they're saying, and then when you pull the credit report, you can match that up.

Adrian Schulz (06:11):

And I think most tenants, regardless of their credit report and score, most actually will prioritize their housing payment, right? I think in most cases, you're going to pay your rent or your mortgage payment. You mentioned the story, what's the background is very relevant. The one thing that I'm reminded of when we are doing our income validation and our past address validation, not actually calling the current landlord, we love to call the landlord before the current landlord, because that's where you get the full story. And you can't always do it, but I would definitely recommend to any real estate investor and property manager to consider placing that little loophole into their process.

Carla Browne (07:05):

Yeah, 100%. That definitely is a... it's a pro tip there from you Adrian, in how you're going to get this information. And getting landlord references are really hard actually. You've got to be pretty patient to get some of that inform from existing and even past landlords, people don't answer their phone, they don't check their voicemail, there's all those kind of things that happen in our world. And we have too many calls and messages coming at us. The other thing that I wanted to mention when it comes to the requirements for tenancy applications is that, I have this thing called the property management gut check. And if something seems off, it probably is off, and there's nothing better than trusting your gut. And that becomes a little tricky with the human rights part because you can't say, "Well, actually I just didn't trust my gut on them." But if you really go through all of those other pieces of the vetting process, one of those is going to be off as well, and that will help you in that decision making.

Carla Browne (08:01):

I want to go back to credit for something, because it is so important that somebody is pulling this up report and looking at it intensely. At RPM we have the ability to do credit report that checks on a number of different things, and it does what we call in fancy terms, social scrubbing. So you don't have to go necessarily into their Facebook and into their Instagram and kind of see well exactly how do they conduct themselves, it actually will pull all of that information, as well as pull information if they've been in the news. If they have any kinds of legal decisions that have been made and all of that will come up on that report as well. So it really does give us the full picture of what's happened to this person before, and that, like I said is probably what the... is a good predictor of what's going to happen in the future.

Adrian Schulz (08:43):

For those people that are self-managing, you can still do credit checks. There are readily available tools on the internet that allow you to pay a small fee to do that full background and credit check here in Canada. So don't think that you have to be professionally managed, it's certainly recommended, but the tools are readily available as well.

Carla Browne (09:06):

Yeah. Great point because I think before people used to think you had to have account of some sort with Equifax and TransUnion and it was very complex, but there are companies that will do it for you for a cost and get that... all of that information for you. So research that.

Adrian Schulz (09:21):

Well, you know what? It's never been more real to me than right now because how much things have changed in income and credit, and people's savings and liabilities, as it pertains to the way that they're seeking for their new or for their next home, this truly is real property management.

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