Should a potential tenants minimum income be 3x the rent, before or after taxes?
I do 3x gross income.
gross, most people in NY wouldn't even qualify if it was compared to net.
In my market, asking tenants to have an income of 3x the rent often isn't feasible. On the other hand, you live quite far away from me, and I've seen many American investors swear by this rule.
Theoretically, you want your tenants to have lots of income. However, when people have high incomes, they become home buyers instead. I am assuming that you want long term tenants, and most renters stay for the long term because of income limitations.
Good question. I don't use a hard and fast rule for the income portion with everyone across the board.
And there are factors to consider such as what is included in the rent..... Is it just rent and tenant pays ALL the bills or is it ALL BILLS PAID or SOME BILLS PAID type of structure??
If the unit is rent only covers rent then sticking close to that 1/3 (33%) of income number plus or minus a few points is probably the safe bet on getting your money every month. They will have to pay utility bills on top of rent.
If the unit is all bills paid then you should be more lenient with the ratio because they don't need the extra income to pay bills since you are already paying them. Maybe up to 50-55% of income is acceptable.
If the unit is some bills paid and not others then something between 33% and the 55% is more workable.
I would think as with any tenant you have to use discretion in the matter. Say someone works in a field where incomes are subject to change dramatically such as oil and gas, certain types of construction like road building etc, these people may work large numbers of hours and make good money but there is usually some level of base pay and should conditions change such as oil prices dropping or say having a wet summer where construction might be delayed for extended periods etc, you will want to evaluate a prospective tenant on a base pay as well as the highest gross income possible.
In an oil and gas situation it would be totally possible for a person/family to make $4000 a month right and your rent lets say is $1500/mo, well what happens when the price of oil drops and there is no overtime pay coming in and that monthly income drops to $2000/mo???? Will you get your rent payment or will they pay the 2 car payments and buy food and take Jack or Jill to the doctor because of the chronic bronchitis they have had since they were 2 years old......??? (just had a tenant leave yesterday in this exact situation, numbers were different and they had a new baby not a chronic health issue but the job was oil and gas fracking and income was cut in half in a matter of 60 days. They found a different job for the husband and left - leaving the security deposit behind)
These are all things that a manager or landlord needs to know about their market and who is applying to rent. Further more about knowing your market, it's not good enough at times to know employment is good right now, or that yeah other factors are good right now. You should take some time to know MORE about what drives the market you are investing in and how those drivers of the market can, will or won't change.
An example in the other direction might be that someone builds an ethanol plant on the edge of town, and yes that may be subject to fuel price, commodity prices (corn used to make ethanol) and oil and gas markets etc etc but just for the sake of the argument.... Lets say the plant is built and its a 20 million dollar or a 75 million dollar investment to come online and produce a product. Well it's not likely that someone spent all that money to close a plant in 12 months or 24 months from now and walk away, so it is probably more secure than oil and gas drilling activity. If that plant brings 100 new jobs to the area, you can probably bet they will be here next year and the year after.
Same would go for a new hospital that might now be open. You will need all kinds of people to run the facility and treat patients and that is not likely to change.
These might not be the best and most true examples one could use but it's what came off the top of my head and you should get the idea I am getting at I hope.
I use 3x gross to weed out the people who can't really afford it anyway. Throw a 600+ credit score on top of that and the rest of the unqualified are weeded out.
I use gross as a guideline; work history/how long at a job is also very important to me.
Join the Largest Real Estate Investing Community
Basic membership is free, forever.