4 Ways to Evaluate a Prospective Tenant’s Finances

4 Ways to Evaluate a Prospective Tenant’s Finances

3 min read
Larry Alton

Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment, and technology.

Experience
Larry started his career with Demand Media. There he contributed to and edited nearly every type of business-related content from real estate investing to software and digital media.
Since then, Larry has worked as an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include top-tier publications like Entrepreneur Media, TechCrunch, and Inc.com.

When he is not writing, Larry assists both entrepreneurs and mid-market businesses in optimizing strategies for growth, cost cutting, and operational optimization.

As an avid real estate investor, Larry cut his teeth in the early 2000s buying land and small single family properties. He has since acquired and flipped over 30 parcels and small homes across the United States. While Larry’s real estate investing experience is a side passion, he will affirm his experience and know-how in real estate investing is derived more from his failures than his successes.

Education
Larry graduated in the top 2% from Iowa State University’s Ivy School of Business Management.

Follow
www.LarryAlton.com
Larry on Entrepreneur
Larry on Huffington Post
Larry on Business.com
Larry on Inc.com
Larry on TechCrunch

Read More

As a landlord, you can’t just assume that an applicant can afford to live in your property. In order to increase your chances of getting paid on time and in full, you’ll need to do some due diligence and uncover more information about their financial situation.

How to Evaluate a Prospective Tenant’s Financial Situation

Real estate investing—and landlording, in particular—is all about cash flow. In order to pay down your mortgage balance and cover costs like insurance, property taxes, and utilities, you need income.

Having a tenant who doesn’t pay on time or in full can be catastrophic. Thus, it makes sense to carefully evaluate a prospective tenant’s personal finances before entering into a lease agreement. Here are some ways to go about it.

1. Verify Income

As part of your rental application, you should be asking applicants how much monthly income they’re bringing in. But don’t take them for their word. Many people find it tempting to fudge the numbers a bit to secure a property they really like.

It’s completely legal for you to request income documentation. You can ask the applicant to photocopy a paystub, provide a W-2, or present a bank statement that shows recurring direct deposits.

For individuals who are employed (as opposed to self-employed), you can even take things a step further and contact their employer to confirm that they’re still on the payroll. This is known as an employment verification request.

Poor credit score report with pen and keyboard

2. Pull a Credit Report

It’s always smart to pull a credit report to see how financially healthy a prospective tenant is. A credit check will show you an individual’s credit score, how much debt they have, whether or not they’ve ever filed for bankruptcy, and—most importantly—whether they’ve ever been evicted.

Related: The Tenant Screening Process: Credit Check & Background Check

3. Use Common Sense

With an applicant’s income and debt information on hand, you should use some common sense to determine whether or not you think they can reasonably afford to pay the rent.

According to Credit Loan, the average American family spends $18,886 per year on housing—or roughly 25 percent of the average pre-tax income. This can be used as a reference point. You may also want to calculate an applicant’s debt-to-income ratio, which gives you an idea of how much income they have left over after making minimum payments on existing debt each month.

4. Speak With the Previous Landlord

As part of the application process, you should be asking applicants to provide the names and contact information of previous landlords. Though some landlords view this as a formality, consider it an excellent opportunity to explore a prospective tenant’s past financial behaviors.

Call up the landlords listed and ask them questions about how often rent was paid in full, if it was ever late, and whether there were any red flags about that person on the money front.

Related: 13 Principles for Being an Incredible Landlord

tenant-red-flag

Follow Landlord-Tenant Laws

Tenant screening is a sensitive topic. Many landlords are so fearful of it that they’ll accept almost anyone who fills out an application.

But don’t let it be a scary thing. By learning the rules, you can protect yourself and your investment. You are legally allowed to choose among prospective tenants as long as your decision is based on legitimate criteria.

“You are entitled to reject applicants with bad credit histories, income that you reasonably regard as insufficient to pay the rent, or past behavior—such as property damage or consistent late rent payments—that makes someone a bad risk,” attorney Janet Portman explains. “It goes without saying that you may legally refuse to rent to someone who can’t come up with the security deposit or meet some other condition of the tenancy.”

With that being said, you’ll get in trouble if you make inferences. For example, you can’t assume that someone is in an illegal line of work and that’s how they’re generating income. Without any evidence to suggest such a thing, you could face issues with discrimination. You also can’t make assumptions about someone’s income based on their skin color or the car they drive.

To deny someone for financial reasons, you need factual evidence to support your decision. As long as you’re able to point to something objective, you don’t need to worry.

rental property investing book ad

Do you have any further questions or additional tips with regard to evaluating a prospective tenant’s finances? 

Comment below!

 

As a landlord, you can’t just assume an applicant can afford to live in your property. To increase your chances of getting paid on time and in full, you’ll need to do some due diligence and uncover more information about their financial situation before entering into a lease agreement. Here's how to go about it.