Late, or much worse missed rent payments, are a landlord’s biggest peeve and the most common reason for tenant evictions.
But how does a landlord best prevent this from happening?
As previously discuss in our blog, one of the best way to ensure that a tenant never misses a rent payment is to perform a proper tenant screening before the tenant even takes possession of the property. This is one of the most crucial steps in the tenant screening process, and yet is commonly missed.
Many landlords aren’t sure how to best confirm a tenant’s income and won’t ask for the correct information. Also, many tenants may not intentional over estimate their income, but simple not consider their actual net earnings or all their monthly expenses.
So, how does a landlord best confirm a potential tenant’s income?
Below I have listed a few different ways to confirm a potential tenant’s income.
This document is used by the government for tax purposes, so this can give a very reliable and realistic view on a tenant’s income. However, they are not necessarily easily accessible and may not reflect recent raises or promotions.
This document is the most comprehensive document regarding every aspect of a potential tenant’s income. Also, as these are legal tax documents, the information included is very reliable.
This is easy for tenants to obtain and can also second as a reference from their current employer. It is important to double check with the employer as these can be easily forged.
With every pay period, the tenant receives a pay stub and that gives a very current look at the tenant’s income. It is important to double check with the employer about the pay stub to confirm its legitimacy.
This will give you the best picture of their current financial status. However, be cautious of commission based salaries as they vary greatly from month-to-month and a single snap shot into their finance may not give the most accurate picture.
But, I haven’t mentioned credit checks yet….
Credit checks are great for determining if your tenant is responsible with their money. However, the credit rating does not tell you if the tenant can actually afford the property. So credit checks are useful when used in tandem with one of the above mentioned methods of checking a tenant’s income.
Now that a landlord has gotten information about the potential tenants, what do they do with it?
A landlord wants to look at the potential tenants Rent-to-Income ratio.
The Rent-to-Income ratio looks at the total monthly income versus the monthly rent for the property. Most landlord want the ration to be somewhere between 2-3x. If the rent for the property is $1000 a month, then the landlord would want to see a combined income between $2000-$3000 monthly.
To get an even more accurate ratio landlord can consider the Rent-Coverage-Ratio, where the landlord can estimate a monthly expense budget and determine if the tenant makes enough to pay rent reliable. Consider the below example.
You have verified the net income to be $3,800 a month. Rent is $1,800 a month. Estimate the other expenses a tenant would have to pay monthly.
Meaning that for every $1 of expenses that tenant would make $1.30. This is the minimum rent coverage ratio that is desirable, anything higher is great but lower should be a no go!
Whichever ratio you prefer, both will give you a better understanding of the potential tenant. Also, if the ratio is giving you a number on the edge of comfort, this is the perfect time to look at the tenants credit score.
If the tenant is lower but close to your comfortable ratio number and has high credit scores, it is likely this tenant is responsible with their money, unlikely to miss a rent payment and probably an excellent tenant. Where as if you have a tenant that has high ratio numbers but low credit scores, it might cause a landlord to reconsider this tenant as they make enough for rent but aren’t responsible with their funds, and in-turn maybe late with their rent payment due to this irresponsibility.
For more ways to verify income, check out these resources below!