{"id":110580,"date":"2019-05-09T12:00:12","date_gmt":"2019-05-09T18:00:12","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=110580"},"modified":"2021-03-16T14:53:46","modified_gmt":"2021-03-16T20:53:46","slug":"evaluate-prospective-tenants-financial-situation","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/evaluate-prospective-tenants-financial-situation","title":{"rendered":"4 Ways to Evaluate a Prospective Tenant\u2019s Finances"},"content":{"rendered":"

As a landlord, you can\u2019t 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\u2019ll need to do some due diligence and uncover more information about their financial situation.<\/p>\n

How to Evaluate a Prospective Tenant\u2019s Financial Situation<\/h2>\n

Real estate investing\u2014and landlording<\/a>, in particular\u2014is all about cash flow. In order to pay down your mortgage balance and cover costs like insurance, property taxes, and utilities, you need income.<\/p>\n

Having a tenant who doesn\u2019t pay on time or in full can be catastrophic. Thus, it makes sense to carefully evaluate a prospective tenant<\/a>\u2019s personal finances before entering into a lease agreement. Here are some ways to go about it.<\/p>\n

1. Verify Income<\/h3>\n

As part of your rental application<\/a>, you should be asking applicants how much monthly income they\u2019re bringing in. But don\u2019t take them for their word. Many people find it tempting to fudge the numbers a bit to secure a property they really like.<\/p>\n

It\u2019s 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.<\/p>\n

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\u2019re still on the payroll. This is known as an employment verification request.<\/p>\n

\"Poor<\/p>\n

2. Pull a Credit Report<\/h3>\n

It\u2019s always smart to pull a credit report to see how financially healthy a prospective tenant is. A credit check will show you an individual\u2019s credit score, how much debt they have, whether or not they\u2019ve ever filed for bankruptcy, and\u2014<\/em>most importantly\u2014whether they\u2019ve ever been evicted.<\/p>\n

Related: <\/strong><\/em>The Tenant Screening Process: Credit Check & Background Check<\/em><\/a><\/p>\n

3. Use Common Sense<\/h3>\n

With an applicant\u2019s 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.<\/p>\n

According to Credit Loan, the average American family spends $18,886 per year on housing\u2014or 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\u2019s 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.<\/p>\n

4. Speak With the Previous Landlord<\/h3>\n

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\u2019s past financial behaviors.<\/p>\n

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.<\/p>\n

Related: <\/strong><\/em>13 Principles for Being an Incredible Landlord<\/a><\/em><\/p>\n

\"tenant-red-flag\"<\/p>\n

Follow Landlord-Tenant Laws<\/h2>\n

Tenant screening is a sensitive topic. Many landlords are so fearful of it that they\u2019ll accept almost anyone who fills out an application.<\/p>\n

But don\u2019t 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.<\/p>\n

\u201cYou are entitled to reject applicants with bad credit histories<\/a>, income that you reasonably regard as insufficient to pay the rent, or past behavior\u2014such as property damage or consistent late rent payments\u2014that makes someone a bad risk,\u201d attorney Janet Portman explains. \u201cIt 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.\u201d<\/p>\n

With that being said, you\u2019ll get in trouble if you make inferences. For example, you can\u2019t assume that someone is in an illegal line of work and that\u2019s how they\u2019re generating income. Without any evidence to suggest such a thing, you could face issues with discrimination. You also can\u2019t make assumptions about someone\u2019s income based on their skin color or the car they drive.<\/p>\n

To deny someone for financial reasons, you need factual evidence to support your decision. As long as you\u2019re able to point to something objective, you don\u2019t need to worry.<\/p>\n

\"\"<\/a><\/p>\n

Do you have any further questions or additional tips with regard to evaluating a prospective tenant’s finances?\u00a0<\/em><\/p>\n

Comment below!<\/strong><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

As a landlord, you can\u2019t just assume an applicant can afford to live in your property. To increase your chances of getting paid on time and in full, you\u2019ll 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.<\/p>\n","protected":false},"author":59534,"featured_media":110581,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5183],"tags":[],"class_list":["post-110580","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-landlording"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/110580","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/59534"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=110580"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/110580\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/110581"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=110580"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=110580"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=110580"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}