One of the biggest factors in managing a successful CRE property is finding the right tenants. Good tenants can supply you with a reliable income from your investment property. Bad tenants can cause major financial and logistic headaches.
It’s about more than just filling a vacancy. Ideally, you want to look for tenants who are in it for the long haul. So while it’s important to cover the basics (can they pay their rent on time each month?), you’ll also want to seriously consider their long-term business potential and their individual character qualities. This extra effort and due diligence on your part will help reduce vacancies and turnover, boosting the property’s overall value and profit. Plus, establishing a positive working relationship with a tenant now can lead to a mutually beneficial long-term partnership — a strategic move for an industry that’s all about relationships.
Here are 5 ways you can vet a potential commercial real estate tenant.
Send an Application
Send your potential tenant a commercial rental application to fill out. This will give you a quick look at the tenant’s basic information, including their business background and financial situation. This will help you quickly determine if the tenant is a good fit for your property and if you would like to move forward. If you need help sourcing one of these documents, reach out to the NAI Mid-Michigan team.
Find tenants who are agreeable and easy to work with. Meeting a potential tenant face-to-face can help you determine if their character and personality are a good fit for you and your property. This step is especially important if you are your own property manager since a bad tenant can take up more of your time, energy, and resources in the long run. Meeting with them face-to-face gives you an opportunity to ask follow-up questions about their finances, their rental history, and any other details you may want to know from their commercial application. If the business is a startup, consider asking to see their business plan and learn more about their investors. If they have an established organization, ask them questions about why they left previous lease agreements and their long-term business plans.
Conduct a Credit Check and Background Criminal Check
Use a business credit bureau to conduct a credit check on the business itself. In addition, it’s helpful to consider running a personal credit check on the business owner. If the business goes under, the owner will be responsible for paying the commercial rent until the business moves out. In addition, run a background check to make sure there aren’t any red flags or criminal activity.
Keep in mind, you’ll need to find a background check provider that is Fair Credit Reporting Act (FCRA) compliant. If you screen tenant candidates with a non FCRA-compliant provider, you could open yourself up to legal trouble.
Lastly, go to the Secretary of State’s office to verify that the business is appropriately registered with the state. If applicable, check in with licensing offices to ensure that the business has the appropriate documentation and licenses to conduct business.
If the applicant is moving in from a different CRE property, speak to their previous landlords. Ask if the tenant was easy to work with. Did they pay rent on time? Did they take care of the rented space? Why did they leave? Taking the time to speak with previous landlords is one of the most important steps as it can give you a clear picture of what you may be walking into.
Make a Final Decision
If you have multiple good candidates in play, try to strike a balance between finances, references, and pure gut instinct. If you have existing tenants in an adjacent space, consider how this new tenant’s business may complement them. Prioritize the ability to pay rent and good character above other small details.
At NAI Mid-Michigan, our property management team can help you navigate the complexities of finding and onboarding new tenants. We have decades of experience in office, retail, medical, financial, and industrial properties. Let us handle the day-to-day management of your property so you can focus on your next investment opportunity. Contact us today to find out more!