If you make your living as a landlord for a rental property, making sure that your tenants pay rent in full and on time is one of your most important duties. Unpaid rent can put a lot of financial strain on landlords, and if you find yourself having to evict a tenant due to many months of unpaid rent, you may have to spend over $3,000 on eviction costs.
There are a variety of reasons tenants can fail to pay rent on time, but landlords can do their part to prevent unpaid rent before it happens by establishing income requirements for all potential tenants. In order to do this, you’ll have to create a rent-to-income ratio that works for you and your needs as well as the needs of your future tenants.
What Is a Rent-to-Income Ratio?
A rent-to-income ratio is the comparison of two important figures relating to your tenant’s finances: how much they will pay in rent each month and how much they make each month in income.
If you have multiple tenants who will be sharing rent costs, such as a married couple, a partnership, or roommates, their incomes will be combined to establish the income total in this ratio.
In general, a ratio of about 30% rent cost to 100% of income is considered to be reasonable. However, this may vary slightly based on median rent costs for the real estate market in your area as well as typical income levels within your region.
How to Determine Income Requirements for Tenants
There are multiple ways to determine the exact income requirements you require during the screening process for potential tenants.
First, you can take the industry standard of 30% of your renter’s income going toward housing costs and multiply that by their gross income over 12 months. The figure you end up with is how much you should be charging this tenant for rent each month.
Another way to establish an income requirement is to multiply the amount you’d like to earn in rent from your tenants by a ratio multiplier.
The standard ratio multiplier in the home rental industry is three, which means that your tenant should be making three times their monthly rent in income in order to be able to comfortably afford their housing and not put the landlord at risk of unpaid rent or eviction responsibilities.
Taking Market Standards into Account
What if the goal at hand isn’t to create a rent-to-income ratio for your specific property but to understand the median rent-to-income ratios present in your real estate market today? This information can help you make a more fair and reasonable rent-to-income ratio for your own property.
Do some research on the median household income in your area as well as the median rent in your local housing market.
There are many great resources that can help you find this information quickly and easily. Once you have the approximate totals for each, divide the median market income by the median rent to find the market rent-to-income ratio in your specific area.
Why Are Renter Income Requirements Important for Rental Property Owners?
Different landlords will require varying levels of specificity from their potential tenants when it comes to their income sources and how much they make in an average month.
Regardless, it’s important for all landlords to set up some kind of income requirement before renting their property to tenants. This will reduce the likelihood of missing rent payments or having to evict a tenant who just can’t pay.
Even the most responsible tenants with steady incomes may face issues in their personal and professional lives that prevent them from paying rent on time once in a while. However, the more you can ensure that your tenant’s income is well over their rent cost, the more you can avoid costly issues during their tenancy.
There are other ways to protect yourself financially as a landlord. Some of these include thoroughly screening tenants and their rental history, asking for the maximum security deposit that is allowed in your state, requiring a cosigner on the lease, and using online rent payment platforms for increased ease and convenience.