Smart to get Pre-Paid Rent from Tenant Applicant ?

Question

I'm thinking about offering a lease to an applicant using a strategy done by a local PM company in my area. I would like everyone's opinion if this seems like a reasonable and/or smart way and/or legal way to handle pre-paid rent. This single family home is in Indiana.

Property's advertised rent amount: $750/month

Minimum Rental Qualification in the ad: gross income $3,000/month (4x the rent)

This applicant's income: $2680 to $2700/month

Applicant doesn't meet income requirement. If tenant is willing to pay 1 month pre-paid rent ( $750) in additional to the first month's rent ($750) and security deposit at move in, then this pre-paid rent can be spread out over 11 months to lower their monthly obligation from $750/month to $681.81 so they can meet or almost meet the rental qualification of income being 4X the rent.

It's an alternative to asking for additional security deposit.

What do you think? Pros / Cons? Here are the details ...

Total Obligation- 1 year lease - 12 x $750 = $9,000

Paid at move in (2 months rent) - $1,500

Remaining rent obligation: $7,500

$7,500 / 11 months = $681.81 per month for 11 months

Nathan Gesner · Answer

I will not bend over backwards trying to fit a square peg into a round hole. That's how people get into trouble.

Set your standards and stick to them.

Tricia O'Brien · Answer

@Colleen F. I made the qualification 4x rent because the utilities for the house usually run $280/mo to $400/mo and I thought that if a household only makes $2250/mo (3x rent) in gross income, then their rent plus utilities could easily be more than 50% of their net income. Could be too much for people to handle and pay rent in full and pay on time every month.

Bjorn Ahlblad · Answer

I have upped mine to 4x as well. Just more risk in being a LL these days. They qualify or they don't.

Wesley W. · Answer

I also require 4x rent, since the over-the-top "tenant protection" laws in NYS took away many other mitigating factors for tenant screening (we cannot collect more then 1 month's deposit, cannot screen for eviction history, etc.).

Colleen F. · Answer

@Tricia O'Brien that makes sense to use 4x. Typically when I say 3x it is for units with much lower utilities then that. I always see people saying more income is better and I have found that more income = turnover. There is a sweet spot income wise where they move in and plan to stay a couple years.

Colleen F. · Answer

@Wesley W. I prefer 3 x because its sufficient and in my experience that means they aren't as likely to leave due to the buying that house so less turnover. I see how you could see it differently depending on your rental product.

Colleen F. · Answer

@Tricia O'Brien why did you make the qualification of 4 x rent. Typically its 3 x. If you want higher just stick with it and wait. If you think lower is ok change it and tenant qualifies end of story. However you would typically just set the qualifications and stick with it.

Henry T. · Answer

4x rent, and higher rent for those in dangerous territory. Absolutely.

Craig Sloan · Answer

@Tricia O'Brien I would agree with the people saying set your standard and stick to it. The times I have gotten in trouble have been when I have compromised my standards. I live in Indiana and have been investing here for 16 years. What market are you in?

Smart to get Pre-Paid Rent from Tenant Applicant ?

Smart to get Pre-Paid Rent from Tenant Applicant ?

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