How to verify income for self-employed? First time landlord needs help!
Member since 2011 · 9 posts · 2 votes
Hello, I am a newbie landlord and is wondering how to verify income for self-employed people? Tax return? Please advise!
I'm sure that there would be executive rentals and commercial properties where a business owner will provide last 2 years tax returns and current income statement. These should be gathered directly from the IRS or the accountant.
If there is a CPA, you could send a verification of income for the past two years, as a letter and have them fill in the blanks and sign it and mail it back to you, then follow up with a phone call to ensure they mailed it.
For smaller business folks, lawn care guys, construction etc. I can look at a credit report, last 6 months bank statements and credit card statements and see how they live. If there are lots of ATM withdrawls for $20 and charges for hamburgers, they are poor money managers. If I see charges at Judy's Bar 4 times a week, they have a problem.
I also ask for three business credit referrences and send an authorization to release credit information and follow up with a phone call. If the guy is in the lawn business and has a small acount at Joe's Lawn Mower Shop, that is probably not reported credit.
I also ask for a business card. Many printers in my area will verify the business before printing cards. A quick search on line to the Secretary of State tells me they have filled and are in good standing.
So your perspective tenant simply signs some verifications and authorizations and gives up some statements, not a big deal, if it is, you don't want them. Good luck
... Base your decisions on a fair and equal analysis as you would any W2 employee. One does not request tax returns or bank statements from W2 employees, nor should one request them from the self-employed. If you run a credit report on a W2 employee, then run one on the self-employed. Don't be someone who discriminates against the self-employed.
So let's get back on topic for this thread - "how to verify income (for self employed)". So let's start with a W2 tenant - how do we check that person's income? We look at the W2 form (doh) and we request recent pay stubs to confirm income hasn't declined, and some of us even do an employment verification in addition to that.
So, how does the self-employed tenant provide those forms of proof? Oh yeah, that's right, they can't. So what are we supposed to do to qualify the self-employed tenant in a manner similar to what we subjected the W2 tenant to? Please tell us how - or otherwise we are then discriminating against the W2 tenant by having them comply with a proof of income.
Seems that the federal gov't entities have identified a way to assess the income of those who are self-employed (see post by @Chris M.), and using those methods certainly cannot be classified as discriminatory.
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If you only ask for a W2 from an employed person, but ask for bank statements and tax returns from a self-employed person, it's doubtful a court would find that equal treatment, or find that the extra burden was reasonable. (Remember, the reasonable test is not on whether it is reasonable to safeguard your income, but whether it is reasonable based on being equal to both prospective tenants.) However, if all you asked for was one year's tax return from the self-employed person, a court will likely find that an equal burden, of like documentation, to serve the same purpose was placed on both types of prospective tenants. The rule of thumb is to treat differently situated persons equally.
So, you really must not have read my former post, or did not pay close enough attention to it. I have a W2 person submit to not just examination of the W2; they supply the W2 (or a tax return that shows the W2 amount), recent pay stubs AND employment verification. So let's look at a self-employed type such as those who posted in this thread. They might or might not have some 1099 statements; whether they do or not the tax return will contain that information. So what is equivalent to recent pay stubs? The 1099 only comes once a year, and that is at the beginning of the NEXT year, so that won't be equivalent. Well, their income should flow into some bank account unless they are purely cash and never bank any of it - so requesting bank statements is probably as close to getting a gauge of recent income trend as we can expect to see. And as to employment verification - they might be on a long term placement at some employer so that might be doable in those cases, but that certainly would be a high expectation to meet.
So, please tell us how to properly obtain information from the self-employed that is actually equivalent to what I stated that I request of the W2 tenant. Just willy nilly throwing around the word "discriminate" just doesn't cut it.
My objection to your post is contained in the statement that you saw too many $20 ATM withdrawals and too many purchases for hamburgers. You would not, I presume, have that information handy from a W2 applicant. Thus, making a judgement based on $20 ATM withdrawals and hamburger purchases would be treating the two applicants unequally.
Reviewing bank statements solely to determine income might be equal treatment. Combing through the self employed's bank statements to extrapolate personal behavioral habits is clearly not.
There you go - proof that Stephen C. did NOT read what I had written; somebody else wrote that they look at $20 withdrawals - it was not me. And didn't even answer the specific question that was directed to him, instead diverting the discussion (to statements I had not even made). That sort of behavior IMO shows he is here to TROLL.
So why don't you truly read what I wrote, and reply with answers that actually cover what I asked of you.
Have I mixed up members in my replies? My bad. I apologize. My primary reasons for replying on this thread was the member who recommended deciding based on ATM/hamburgers and the member who declared they did not rent to the self employed. I felt these two cases unfairly discriminated against the self employed.
As I stated earlier, if your treatment of two differently situated applicants is equal, or if the inequality is reasonable (in the legal sense of the word), then you are not discriminating, neither in the legal nor the ethical sense. But if your demands of the applicants is such that they are subjected to unequal tests of their qualifications to be your tenant, then that is discrimination (whether legally sanctioned or not).
In your example, an employed person is asked for a W2, tax return, pay stubs and employment verification. It is not unreasonable to ask a self employed person for a 1099, tax return, bank statements (covering the same period required as pay stubs) and perhaps verification of one or two clients. This is relatively equal treatment, requiring like documentation, serving the same purpose; thus any slight inequality of treatment is based solely on meeting the same requirements, and applying an equal test to their qualifications, because they are differently situated persons; and is therefore reasonable.
Let me be clear. I am not opposed to requesting bank statements or any other requirements to test for credit worthiness. I am opposed to applying blatantly unequal tests to the self employed, because that is discrimination (whether the self employed are recognized as a protected class or not). Discriminating against a class of people because you have prejudged them to be less credit worthy is the very definition of prejudice.
You guys are a bunch of clown landlords that have no idea what you're doing. You're making this WAY more complicated that it really is. $20 ATM withdrawals? C'mon.
Get a couple months of bank statements to show income and run a credit report and see if there are any evictions, broken leases or bad credit history. If there are, straight-up ask the person what's up or move on to another prospect. Since there are bad tenants with good history and good tenants with bad history, you HAVE TO use your spidey sense. If you don't trust yourself to accurately assess people, you shouldn't be a landlord.