Thorough evaluation and vetting of potential tenants is the most crucial step in minimising the risk of problems during the tenancy – not only non-payment of amounts owed, but also disregard for your property.
I’m sure we all know this – or at least this makes sense to most of us, but do you realise that it’s becoming more and more important?
Here’s why . . .
In a recent post on The Rental Market in the Western Cape, we referred frequently to information contained in the PayProp Rental Index Report for the Third Quarter of 2015.
Included in this report was a specific section entitled ‘Tenant Health’, based on data abstracted from real tenancy applications processed by PayProp’s clients who manage over 75,000+ rental properties throughout the country.
This section made for very interesting, but also rather concerning, reading . . .
From the available data they drew their first important, and concerning, insight concerning the relation between tenant income and debt repayments.
Over the past three quarters a concerning trend has been emerging that shows tenant incomes declining while debt repayment commitments have been increasing. As a result, tenants are currently spending close to 37% of their income on repaying debt, as opposed to 32% at the beginning of this year (otherwise known as the debt repayment ratio).
Thorough financial vetting of potential tenants is not only very important, but it’s becoming even more critical if you want to avoid future problems! These days you simply cannot feel bad about asking for proof of income and doing a credit check on potential tenants should be a no-brainer.
To get an idea of the type of information that we require, take a look at our Rental Application Form that we require all applicants for a rental property to complete. No applications are even considered unless this form is completed in full and signed by all applicants and, equally as importantly, all supporting documentation is submitted.
You simply cannot work on a verbal confirmation of an applicant’s income – you need proof! If you feel uncomfortable asking for this type of proof, you should really consider rather appointing an agent to assist you with sourcing and vetting potential tenants.
As you have probably concluded from the information above, it’s not only income that’s important – with the increase in a typical tenant’s debt repayment ratio, a credit check, including a tenant’s current level of indebtedness (versus isolated debts focused on by traditional credit checks).
This information can be accessed by PayProp clients, like ourselves, in the form of their PayProp Capital’s Tenant Assessment Report (TAR). The Tenant Assessment Report uses a model that draws on masses of actual PayProp transaction data to predict probable payment behaviour of individual tenants, and directly queries the databases of their major credit bureau partner, Compuscan.
Of course, financial analysis is not the only factor when vetting a potential tenant – you also want to know about their rental history, employment status, etc.
To give you an idea of a process to follow to thoroughly vet a tenancy application, take a look at the tenant application evaluation process we follow, as well as the reference check process we follow.
If you have any questions in this regard, please feel free to post a comment below, or contact a rental agent at one of our offices, or click here to request us to contact you and assist you with either the management of your rental property or to source and evaluate a new tenant.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Errors and omission excepted. (E&OE)