Landlording & Rental Properties

4 Ways to Evaluate a Prospective Tenant’s Finances

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate News & Commentary, Business Management, Real Estate Deal Analysis & Advice, Real Estate Marketing, Mortgages & Creative Financing
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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.

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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


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.

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

Comment below!


Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include
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    Katie Rogers from Santa Barbara, California
    Replied over 1 year ago
    “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.” Good point, but keep in mind that average includes all the costs of housing. Tenants usually pay most of the cost bundled in the rent and some costs separately especially when some or all of the utilities are separately metered. Consider too, that the typical tenant makes less than the typical homeowner. Rents should be respectful of this fact. It used to be the rents were determined as 1/4 to 1/3 of the typical tenant income with adjustments for size, location and condition of unit. These days many landlords try to determine what the market will bear and require that tenant make three times that amount. The tactic turns the guidance upside-down and the result is that half the tenants in the US are now cost-burdened, defined as paying more than 1/3 of their income to rent. Half of cost-burdened tenants are paying more than 50% of their income to rent. What the market will bear is not necessarily fair market rent. I charge fair market rent. I like to use the HUD determination of fair market rent. HUD makes these determinations at zip code level (but you have to root around on their website to find it). This tends to be somewhat lower than so-called “market rent.” It also gives you a larger pool of prospective tenants, and allows you to be more selective.
    John Teachout Rental Property Investor from Concord, GA
    Replied over 1 year ago
    When we evaluate a tenant’s income, it’s to determine whether or not they can afford to rent our particular property. We don’t base our rent prices on the income of the potential tenants. If someone’s income is too low, they rent a cheaper property. If their income is much higher, then likely they wouldn’t be looking at our property as they could afford something bigger/nicer. In our part of the state, the types of properties are all mixed and it would not be uncommon to find a double wide mobile next door to a million dollar executive estate. So the income isn’t really able to be determined by zip code. Sure, an average, but not specifics. I also believe that it IS the market that determines rent prices and they go up and down accordingly. Our rental business is a business and not a non-profit. That said, I worked for a non-profit organization for 20 years. We rent out houses to make money, that’s our primary purpose. We’re selling a commodity at the current market prices based on supply/demand.
    David DuCille Residential Real Estate Agent from Tampa, Florida
    Replied over 1 year ago
    Agree fully, my rents are always highest in the neighborhoods I’m in but my houses are always the nicest. Fully renovated, stylish, landscaped, etc. I do t have to rent my house to 10 people, I just have to find one person that is willing to pay my asking price.
    David DuCille Residential Real Estate Agent from Tampa, Florida
    Replied over 1 year ago
    I would also add in regards to checking past landlords, you are relying on info the.prospective tenant has given you. Oldest trick in the book is they give you the name of a friend and say it’s the old landlord. I check public records and verify the owner if the property is the name given on the application. It’s not 100% foolproof, sometimes property is in an LLC but then I attempt to research the officers if the LLC. Other times it’s a property managers name not actual owner but then i take steps to verify the management company is legit. People try all sorts of ways to scam these days
    Corey Buller New to Real Estate from Douglassville, PA
    Replied over 1 year ago
    It’s probably fair to say “Verify everything on the application” even their name.