How To Tenant Screen Like the Pro’s – Part 1: Benchmark Metrics

Ever thought about trusting your gut on an applicant, wondered how professionals screen their applicants, or wanted help to create or enhance your screening criteria?  You’re not alone.

Although we probably universally agree that great tenants are the foundation of great properties, there is also a widespread tendency to stretch a bit when it comes to vetting applicants, or to assume it’s pretty easy stuff.  

In this blog series, we’ll help you build confidence and enhance your tenant screening strategy by:

1. Understanding high-level, national tenant screening metrics — Part 1
2. Creating a foundation of strong tenant screening processes that the professional use in their vetting processes — Part 2
3. Developing great tenant screening standards (aka “screening acceptance criteria”) — Part 3

Use these tips to build a foundation or improve your processes, and know that you should customize these over-arching thoughts to your specific property and circumstances. 

Tenant Screening Metrics You Can Benchmark Against

Fundamentally, screening deals with people.  So, while at times it can seem easy, there are bound to be unique situations or times when you’re just not that confident how to handle the situation.  Based on the metrics, you’ll come across a unique situation probably 2 out of 10 times, so it’s best to get educated before you’re in that pinch.  

Here are some high-level metrics you can benchmark against:

Applicant Decline Rates and Hit Rates

A good rule of thumb that property management companies and large tenant screening companies use is that a 20% decline rate is about right.  Here’s how that breaks down, nationally:

1. A typical hit rate on a national eviction search is ~2-3%.  Assume nearly a 100% decline rate on eviction hits
2. A typical hit rate on a national criminal search, including a sex offender search, is ~7-8%.  Assume a 50/50 split decline rate on criminal hits
3. Credit report factors account for the remainder (and bulk of) declines

Occupancy Rates

While more applicable to the multi-family space, a widely used rule of thumb for ‘an about right occupancy rate’ is 95%.  The multi-family space mainly toggles the occupancy rate against rental rates, in effect testing the rental rates to see how high they can be driven.  Similarly, depending on market conditions, Multi-Family owners/managers will adjust their screening criteria depending on occupancy rates.

Eviction Costs

An average eviction cost tossed about nowadays is $3,500.  These costs vary widely by state – in general, assuming filing and court fees, attorney fees, and opportunity cost on missed rent – $3,500 is probably the middle of a range.  

Rent to Income Ratio

The general rent to income ratio standard is 3x —  specifically that gross income (not take-home pay) should be at least 3x the gross rent (including any extras such as pet fees, utilities etc).  For C or D properties, sometimes this requirement is dropped to 2.5x or 2x.  You’ll also find property owners or managers who use take-home pay income (net income) instead of gross income.

So how can these metrics help you:

1.  Notably, it’s important to decline applicants that don’t meet your criteria

• Independent by nature, we are tempted to bend the rules or help an individual out.  The professionals have no problem declining applicants, and the applicants tend to understand
• In fact, if you don’t find yourself declining loosely 2 out of 10 applicants, you might ask yourself why

2.  Consider some of the below examples when evaluating and updating your tenant screening strategy:

Apartments and/or large property management firms will consider the below adjustments when occupancy rates are lower than target. You could apply occupancy rates of your own portfolio or apply overall occupancy rates of the broader market in your locale:

• Consider tweaking acceptance criteria to accept more applicants without taking on substantially more eviction risk.  This could mean slightly lowering standards around credit, criminal, or eviction criteria
• Consider lowering rental rates substantially
• Lower the Rent To Income requirement, say for instance if employment in the immediate area has taken a real hit
• A combination of the above tweaks

Conversely, examples of adjustments to consider if occupancy rates are higher than the target rate, or broadly speaking very high in your area, include:

• Tweaking acceptance criteria to decline more applicants, thereby lowering eviction risk
• Increasing the rental rates substantially
• Increasing the Rent To Income requirement, say for instance if employment in the immediate area has risen nicely
• A combination of the above

In summary, understanding these metrics that apartments and/or large property management firms use can help you manage your portfolio like the pro’s.  Whether you’re just starting out or an experienced veteran, knowing these metrics and how to apply them to your circumstances will help you find better residents, faster.

In Part 2 of this series, we’ll share process tips from the pro’s that will help you:

1.  Avoid costly mistakes
2.  Be more efficient 

By implementing these tips, you’ll be in great shape to improve and/or scale your portfolio.