How do you determine if a tenant will be able to afford to
rent your home? Generally, the rule of thumb in the industry is that rent costs
should not exceed 30% of the tenant’s take home pay. In theory, this gives them
enough money to afford the other costs of living expenses (food, clothing, gas,
creditors, electricity, etc).
However, a recent survey by the Rasmussen Reports for
Country Financial found that more than half of all Americans spend more money
than they make for several months out of the year. Also, only half of all
people surveyed say they actually have a monthly budget in place.
This takes us back to our original question – can your
tenant REALLY afford the rent?
Biggerpockets.com recently recommended that landlords screen
their tenants financial records like a lender would at a bank. That means in
addition to verifying income, perhaps landlords should also have tenant’s
provide information such as:
·
Bank balances & other assets
·
Monthly expenses (living)
·
Liabilities – including monthly payments and
time left to pay off (credit card debts, auto loans, alimony, student loans,
judgments etc.)
By gathering all of this information, you will have a much
clearer picture of your tenants financial responsibility, and be able to
determine if in fact they have enough means to pay their rent on time. If you
find their debt-to-income ratio is just too high (i.e. monthly debt payments
exceed 36% of monthly income) then perhaps it might be a good idea to pass on
the applicant at this time.
For this and more information about interpreting credit reports, and screening tenants please contact ATS Inc. today!
Since 1988, ATS Inc has been a
leading provider of tenant screening services for Landlords,
Property Owners, Property Managers and Real Estate Professionals.
