Property Management Tips – How To Best Verify Your Prospective Tenant’s Income and Why It’s So Important…
When you own a rental property, there is a lot of information that you will need to gather from prospective tenants. You might be tempted to overlook some things including their proof of income, especially if you have verified their place of employment and completed a credit check. Verifying their income is an essential part of a thorough screening that should be completed prior to having them sign a lease agreement. Here are a few reasons why proof of income is a must, things to look for, and how to respond if your prospective tenant does not have a traditional income.
Importance of Ensuring Tenant’s Proof of Income
Verifying proof of income helps to protect you from losing money. Not only will it protect you but it can help you avoid having to evict your tenants because they are unable to afford rent. You must understand that the majority of people do not intentionally fail to pay their rent. They also do not sign a lease with the idea that they are going to help live in your rental property for free but life happens. Having proof of sufficient income will help both parties ensure that the tenant can afford to live in your property. This can significantly reduce the risk of eviction which can cost you thousands and is never fun.
Use the Three Times Income Rule
Proof of income is not just to verify that your prospective tenant has a stable source of income. You are also ensuring that they are able to meet the three time income rule which is a recommendation for landlords. As a landlord, you should make sure that your prospective tenant’s annual income is three times higher than the rent that you are charging. There are a few exceptions to this rule: your tenant has good credit, a consistent employment history, or a cosigner. For most this might only mean looking at a few recent pay stubs, but for students, retirees, and others without a typical income, you might have to find another way to verify their income. In today’s world, there are a lot of people who turn their side hustles into their full time gig. In 2017, approximately 10 percent of the population in the United States had atypical employers per the Bureau of Labor Statistics. Others supplement their full time source of income with a side gig like Lyft and InstaCart.
Verifying Income for Prospective Tenants Who Do Not Work Traditional Jobs
You should always verify your tenant’s income but this is especially true for prospective renters who do not work a traditional job. These include those who are…
- Self-Employed – Tenants who are self-employed and run their own business will not have a pay-stub nor will they be able to provide you with a contact number to their employer. You will have to take other steps to verify their income so that you can be sure that they have a steady cash flow.
- Cash-Only Employees – As with those who are self-employed, cash-only employees will lack a paper-trail that will provide you with a clear income verification. Many struggle to come up with their proof of income. Cash-only employees include: waiters/waitresses, landscaping employees, gym instructors, artists, childcare workers, and more. You will likely have to contact their employer directly.
- Commission-Based Employees – Retail employees and sales representatives often work on commission and incentives. While many landlords only ask for a couple pay stubs for traditional workers, in this case you might need to see a yearly statement of income to ensure that the tenant makes enough.
- Retirees – In this case, you are able to check their social security card, retirement accounts, and pensions.
- Students – Students always need a co-signer. If that is the case, you might also ask the renter for proof of income.
Proving Tenant’s Income
No matter the position they hold or the type of job they work, you should still ask for documentation for proof of income. Here are a few ways that you can do that..
- Pay Stubs – Salaried and freelance workers that have filed their W9s are able to provide you with a pay stub as proof of income. Freelancer pay stubs will not provide you with all the information that you need so you will need more documentation in addition to their pay stub.
- W2 or 1099 – W2 will show you exactly how much a salaried employee earned in the last year. If they do not intend on switching jobs, you will be able to determine if they meet your income requirements. Freelancers file 1099s which will provide you with the same information but their income might vary in the future.
- Employer Verification – An email, phone call, or letter from an employer is another way that you can verify your prospective tenants income. This is beneficial for those renters who receive cash only as payment for their work.
- Tax Return – As with W2s and 1099s, tax returns will let you know what that person earned the previous year. You will have to determine whether or not their job or other factors pertaining to their ability to afford your rental have changed.
- Offer Letter – If your prospective tenant recently switched jobs, ask for a copy of their offer letter. This will have their salary listed.
- Retirement, Pension Distribution Statement, or Social Security – If the tenant is a retiree, their pension fund, retirement fund, or distribution statement from social security will verify their income. You might need to get all three of these to determine if they are financially able to afford living in your rental.
Working Around Lack of Funds
If your prospective tenant does not meet your income requirements, you should not turn them away immediately. If everything else seems like a match and you believe that they would be a good tenant, there might be a way another way that you can make it work. Have you considered all of their sources of income? If they are retired, have you collected information from all of their retirement accounts? For salaried employees, do they have any side gigs that you might help them qualify? If you want to make it work, ask them if they have any other source of income that they have not yet included on their application. If these appear to be a steady source of income that they intend on keeping, you should definitely include them as a part of their gross income. If their income is still not enough on paper, ask if they have anyone that might cosign. Many landlords require this for students, typically a parent or legal guardian will offer cosign. Other renters might be open to this if it means securing a nice place.
There is a lot that goes into verifying income on a tenant. That is why it is important you work with a local property manager, like Real Property Management, who understands the community surrounding your property. You will not regret it.
Contact us (866-500-6200) for more information today!
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