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 Property Management
Can Your Tenants Afford Rent? How To Calculate HYour Tenant’s Rent-to-Income Ratio
This Article Was Contributed by RentSpree
ousing affordability is a hot topic Why Does a Rent-to-Income Ratio Matter?
for policymakers at the municipal, state, and federal levels. For investment property owners, property managers, and rental agents, ensuring that a rental applicant has the income necessary to pay the rent is an important
part of the vetting process. Learning how to calculate your tenant’s Rent-to-Income ratio is a first step in making sure that they can be relied on to pay their rental payments on time each month.
COVID-19 and Late Rental Payments
One of the ways that state governments attempted to help renters at the start of the COVID-19 pandemic was by putting a moratorium on evictions. This was a response, in part, to the projected rise in unemployment caused by pandemic-related company closures and an attempt to avoid widespread housing instability during the most difficult early days of the shutdown. Now, new numbers from the National Equity Atlas, a research partnership between PolicyLink, University of Southern California, and the Right to the City Alliance, show that 14% of all renter households were behind on rental payments as of late March 2021. The shortfall amounts to approximately $20 billion in late payments.
While the circumstances leading to these late rental payments are unique, the problem of late rent is not. It is essential that properly screen potential tenants in order to determine how able they are to pay their rent consistently and in a timely manner. Part of this screening process involves calculating the Rent-to-Income ratio to determine how affordable your rental property is for the individual tenant.
When looking for a new home, potential tenants often make a wish list of the ideal neighborhood, fixtures and finishes, number of bedrooms and baths, and community amenities they want in their new home. Unfortunately, they may not always focus closely on their budget or they may be convinced that they will tighten their belt and cut expenses in order to afford a nicer place to live. Life is not predictable and expenses arise that cannot always be planned for. Part of the logic of evaluating the Rent-to-Income ratio during the rental application process is to make sure that the cost of the tenant’s housing makes sense in relation to their current income. That helps to keep renters from overextending themselves and entering into a rental agreement that they, ultimately, cannot afford to maintain for the length of their rental agreement.
Whether you are an individual landlord or a rental agent, you know that vacancies are a drain on your budget. You may be worried about filling a property, choosing to overlook weak financials in order to put someone in place and hoping for the best. After all, if a renter gets in over his or her head, that is their problem, right? This kind of thinking is shortsighted since it will ultimately cost you far more to struggle with, evict, and replace an improperly screened tenant than to wait for the right renter in the first place. Make sure that you do your due diligence so that the renter you put in place will be a perfect fit.
How Does Rent-to-Income Ratio Fit Into Your Overall Financial Review and Screening Process?
For a landlord or rental agent, Rent-to-Income ratio is just one part of an overall picture that you need to develop in order to properly evaluate your potential tenant. Other financial metrics you’ll want to consider include credit
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