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 Property Management
score and credit history as well as debt-to-income ratio. In addition, you will need to look at other factors to properly evaluate the potential renter. These include employment history, rental history, and criminal record. You will also want to consider references that are provided and consider lifestyle factors like pet ownership, smoking, and other requirements for the property, like lawn care.
It is important for you to develop and implement a consistent screening process for all of your applicants in order to avoid charges of preferential treatment or discrimination. Knowledge of and compliance with fair housing rules and regulations for your market is easier when you have a well- defined screening process in place.
Calculating the Rent-to-Income Ratio
There are two different ways to calculate the Rent-to-Income ratio depending on where you are in the tenant approval process. One is based on the property itself and the rent you would like to charge. The other is based on the gross income of a renter who is applying for a lease on your property.
Property-Based Calculation
You have analyzed a rental property’s potential to determine the rent you can charge based on the property’s features and your local market. Based on this, you decide that you can charge $1500 per month for rent. In order to estimate what your ideal tenant’s gross monthly income will be, multiply the rent you are planning to charge times three to get a rough idea of the correct ratio.
Example: $2,000 rent * 3 = $6,000 gross monthly income or $72,000 gross annual income - Now, when you are reviewing a rental application, you can tell at a glance whether your potential tenant is in the correct ballpark financially for approval.
Income-Based Calculation
Another way to calculate the Rent-to-Income ratio is to start with an applicant’s income and determine how much rent he or she can afford. In order to do this, you will multiply the tenant’s monthly income by 30% or .30.
Example: $4,500 gross monthly income * .3 = $1,350 rental payment - This allows you to work with a potential tenant to find a property that is affordable. This can be a smart way to calculate Rent-to-Income if you are managing a number of properties at a variety of price points since it allows you to help applicants find properties that fit their budgets.
What is a good Rent-to-Income Ratio?
Overall, the figure of 30% rent as a percentage of income is considered a good standard to shoot for, and indeed it appears to be about the right percentage on average, according to census data. Much of the “ideal” Rent-to- Income ratio is dependent on where you live since major
metropolitan areas may see much higher ratios, sometimes as much as 50%.
Also, remember that Rent-to-Income ratio is a single criterion to consider when screening potential tenants. An applicant with a 35% Rent-to-Income ratio and a stellar record of on-time rent payments from a past landlord is certainly preferable to one with a 25% ratio who is habitually late with the rent or has a credit history filled with late payments. In the event that a renter’s Rent-to-Income ratio is higher than you would prefer, you have options for helping them to qualify for the property. These could include the following:
• Ask for an increased security deposit to help your renter keep additional funds in escrow in the event of non-payment.
• Charge the monthly pet rent as an up-front pet deposit, reducing the rent due month to month.
• Ask for a co-signer on the lease and use their income as additional consideration for the prospective renter’s Rent-to-Income ratio
Remember to make your decisions based on a well- defined screening process. If you would offer an alternative arrangement to one rental applicant, you will need to offer that same alternative to all applicants in order to ensure a fair application and screening process.
What Types of Income Should You Count?
Payroll can be verified through bank statements reflecting direct deposits, paycheck stubs, W-2 statements, tax records, or a verification of employment letter from the employer which includes salary information. Beyond that, there are a variety of types of income to consider as you verify income for your rental applicant. When considering a tenant’s income, do not forget to look for the following:
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