One of the most important tasks you perform as a landlord is verifying applicant’s income. Verification helps you determine whether the person is a suitable tenant based on his or her ability to pay the rent. Landlords should never rush or skip this process and should always require proof of income.
Once you have obtained proof of income from W-2 forms, bank statements, or tax records, use a debt-to-income ratio, or DTI, to determine if the applicant is a good risk. Use the same predetermined percentage for all applications to ensure that tenants have sufficient income to pay the rent and their other bills.
There’s no hard and fast rule regarding the ratio. Many landlords use 28 percent as the ideal DTI, which is the same percentage mortgage lenders prefer. Because tenants won’t be responsible for property upkeep, it's fine to increase the DTI to 33 or 35 percent in many cases.
To calculate DTI, divide the amount of rent by the monthly income. For example, if the person makes $4000 a month and rent is $1000, the DTI is 25 percent.
Consider Seasonal Employment
When verifying income, find out if the person works seasonally or if his or her income varies greatly throughout the year. For instance, a landscaper will have more work and make a higher income during the summer, unless he or she offers year-round services. A salesperson who works on commission may have bigger paychecks during the holiday season, while summer may be his or her slow season.
Seasonal variations in employment or income can impact the person’s ability to pay rent during slow seasons. Ask for tax documents that show annual income if you are concerned about the information on the previous two pay stubs or if the person lists commission-based income. You'll want to make sure your tenant's income is sustainable for year-round expenses.
Verifying income not only helps ensure that your tenant can afford to pay you, but also proves that the money comes from a legitimate source. Be suspicious of applicants with cash in hand. You have no idea if the money came from a job or from illegal activities. In fact, you may be held liable for any illegal activity a tenant conducts on your property if proper verification isn’t completed.
You don’t have to accept any income that cannot be verified. This includes child support or a second job where the person is paid in cash.
Exercise caution when calling the employer phone numbers your applicant provides, as potential tenants may ask a friend to pretend to be an employer. The friend may even work at the company listed on the application, but this doesn’t mean that the applicant works there currently or has ever been an employee. It's a good idea to ask to speak to the HR department or the supervisor of the department where the applicant claims to work. You must ask for pay stubs in addition to contacting an employer.
You can also look up the business online or in the Yellow Pages to ensure it is legitimate. Don’t be afraid to ask for the documentation you need for verification. Although you can’t discriminate against applicant, you are allowed to request any paperwork or documents needed to provide proof of income and employment.
Taking the time to verify income is the most important part of the rental process. Don’t rush through the process or assume that information in the application is correct. Make sure the income is legitimate and is sufficient to cover the cost of the rent without imposing undue hardship on the tenant. You’ll feel more secure approving an applicant when you know they can afford monthly rental payments.
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