If you own or plan to own a residential dwelling that you use for investment, there are two critical times in this process.  The first is before the lease is signed and the second is evicting a tenant if necessary.

This article will focus on what you need to know before the lease is signed so you may hopefully avoid the second.

Factors to be considered for approving a tenant

1. Access the prospective tenant’s credit report.  The tenant’s past payment

history is a strong indicator that your rent will be paid on time, however if you rely

on the information obtained in the credit report then you have opened a Pandora’s box

as to your obligations under the Fair Credit Reporting Act, as amended by the Fair and

Accurate Credit Transaction Act of 2003. If you reject an applicant or take other

negative action, such as increasing the rent or mandating a higher security deposit

based on his or her credit information, you must provide an adverse action report to

the prospective tenant which must:

a) include the name and address of the reporting agency that you relied on,

b) inform the applicant of his or her right to obtain a copy of the file upon

which you relied,

c) inform the applicant of the right to obtain a free copy of his or her credit

report from the relevant agency, providing them with the address. If the request is

made within 60 days of the adverse action report notice or if an applicant has not

received a free copy of his or her credit report within the past year,

d) inform the applicant that the credit reporting agency did not make the decision

to not rent to them or require additional security or higher rent and as such the

credit reporting agency is not in a position to comment or explain the reason for the

rejection/punitive action, and

e) inform the applicant that he or she can dispute the accuracy of the credit

report and/or add up to a 100-word explanation to the credit file regarding any

negative information in their file.

2. Check references.  A rental property is most likely going to be one of the more

valuable assets in your portfolio, therefore do not be lazy in your leg work to

determine whether the prospective tenant is being truthful.  Call each of the prior

landlords listed and each personal reference.  Do not accept an email, fax or letter in

lieu of speaking to each person.

3. Pets.  If you are going to allow pets, take the time to actually see the pet. 

It is interesting how many times a pet owner will refer to his or her dog as a “lap

dog” but it turns out to be a 175-pound Mastiff.

4. Verify income and employment.  This also falls under the leg work advice. By

calling the prospective tenants’ employer you can find out if his or her wages are

temporarily inflated because of overtime or because of an increase in hours due to a

seasonal surge in business.

5. Court records.  Most courts in Virginia are online, therefore it is relatively

easy to run a prospective tenant’s name through the General District Court and Circuit

Court filings to see what civil, criminal and traffic charges are on record.  I

recommend running the searches in the cities and/or counties for each of the tenant’s

last three addresses.

6. Megan’s Law.  Federal statute requires all states to keep a register of sex

offenders.  Virginia has a sex offender’s list readily available on the Internet.
7. The application process.  The key word in a smooth application process is

consistency.  Have a list of questions that you will ask each prospective tenant each

and every time and do not vary from this list.

8. Who should sign the lease.  There are three distinct roles for people that can

be on a lease.  1) the tenant, 2) an authorized occupant, and 3) the guarantor.  A

tenant has the right to occupy and quietly enjoy the premises. This differs from an

authorized occupant because he is only entitled to reside in the property with

permission of the tenant and in accordance with the rules and regulations imposed by

the landlord.  As between a tenant and an authorized occupant, the tenant retains the

right to terminate the authorized occupant’s use and enjoyment of the premises. A

guarantor has no right to occupy the premises but is responsible for the full and

timely payment of all monies owed under the rental agreement. Depending on the

prospective tenant and his or her financial situation, it may be in the landlord’s

interest to allow an authorized occupant who will presumably share in the rent and/or a

guarantor if you believe it is necessary.

9. One of the most important yet most ignored provisions of renting property is

compliance with the Residential Lead Based Paint Hazard Reduction Act. In 1996 the

Department of Housing and Urban Development and the Environmental Protection Agency

promulgated lead-based paint disclosure regulations based on the Residential Lead Based

Paint Hazard Reduction Act of 1992. This Act requires a landlord of any house

constructed prior to 1978 to provide the prospective tenant with a lead hazard

information pamphlet as prescribed by the Environmental Protection Agency. A copy of

the pamphlet is available for free at the EPA’s website http://www.EPA.gov. Additionally, if

the rental property was built before 1978 the following statement must be included in

the lease “Housing built before 1978 may contain lead based paint, lead from paint,

paint chips, and dust and can pose health hazards if not managed properly.  Lead

exposure is especially harmful to young children and pregnant women.” Complying with

the federal lead paint disclosure requirements provides immunity from civil damages in

a personal injury or wrongful death action arising from lead poisoning found in the

residence.  For immunity to attach however, the landlord must provide the tenant with

the most current EPA pamphlet for which they must sign a form acknowledging receipt of

same, must make known to the tenant any and all information the landlord has concerning

lead, lead based paint or dust from lead based paint, and must have the proper language

in the lease.  If any of these provisions are not complied with the landlord may face

serious civil liabilities.  Any rental home, regardless of when built that has been

found and certified to be lead paint free by a state or federally certified inspector,

shall be exempt from making the above disclosures.

While owning residential investment property may be a good way to diversify

your retirement portfolio and establish a positive cash flow for years to come, it does

not come without risk, therefore you should consult with a local attorney to assist in

drafting the appropriate disclosures, applications and leases to avoid liability.

Brandon Zeigler is a member of the law firm of Wolcott Rivers Gates and may be

contacted at (757) 497-6633 or .