Whether your rental property is a house or a big-box single-tenant net leased property occupied by an Office Depot or Whole Foods you have qualified a tenant and executed a lease.
In part 1 of our focus of discussion was for a residential tenant, which is usually an individual or several individuals.
Qualifying a tenant of this type is a simple process where you have the applicant complete an application, and as the landlord, you obtain credit, eviction and criminal reports as well as contact their employer, past landlords and references.
The process is not foolproof, and speaking from experience you can occasionally make a mistake. Even if an applicant meets your guidelines, you never know what may happen down the road.
The “smart” cannabis grower
Years ago when I had rental houses (now I only have commercial investments) I leased to a husband-and-wife who met all my guidelines.
Jump forward a year; my tenants soon learned that I performed annual inspections upon renewal of their lease. Shortly after my inspection, the tenants decided to venture into the agricultural business growing cannabis inside the house.
Unfortunately, they were good at hiding this. And when I did discover their business, it was too late.
The electrical system of the house was in shambles as well as the flooring among other issues. My recommendation to you if you own residential rental property is to perform inspections more than once per year.
And then there’s Orchard Supply Hardware
With commercial real estate, you either have rated or non-rated companies as tenants.
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A rated company, usually listed on a stock exchange, is easy to qualify because all the information is readily available.
It can get complicated when you consider subsidiaries and parent companies, but, overall, a landlord can be reasonably secure when dealing with “national credit tenants.”
However, consider Orchard Supply Hardware (OSH), a subsidiary of Lowe’s recently shut down by its new CEO. What happens to the store leases is unknown, but Lowe’s could be on the hook for a period to continue paying the rent.
When Lowe’s purchased OSH in 2013 from bankruptcy, all the leases may have been updated and provisions could have been included allowing Lowe’s to terminate a lease under certain circumstances.
The non-rated company is not all that bad
A non-rated company could be a sole proprietor, limited liability company or a corporation. The difference is they are private companies and public information may not be available.
A landlord will need to thoroughly vet a tenant by obtaining a lease application along with several year’s financial records, payment track record and rental history.
It would also be prudent to examine their service or product thoroughly and the industry as a whole to determine if it is growing and thriving or has the potential for imploding.
Finally, there are the more subjective aspects of tenant qualifications we look at, which is their business acumen, attitude, determination and willingness to work with you.
Rated or non-rated, we could argue the many attributes both negative and positive for each, but it comes down to who as the landlord you feel best fits your strategy for your investment property.