How do I verify a tenant that is Self-Employed?

16 Replies

I am looking to fill my first rental! I have a potential tenant that has been self-employed for the past few years. She claims $4,000 monthly income. How would I verify that? Am I allowed to ask for tax returns, bank statements, etc.? 

She just sold her home that she owned a few months ago, so any thoughts on verifying residential history on clients that are new to renting would be great as well!

Thanks!

Yes you can and should ask for several years of tax returns. If she sold her home it was likely due to financial problems. Self employed applicants really have no guaranteed income and it can fluctuate wildly over time. They also often have bad credit scores if they are bad at managing a business. Your screening should find out everything you need to know.

I personally will not rent to anyone self employed. Their landlord will be the first to go unpaid and they will constantly ask to pay late so they can pay creditors first.

They are high risk and should be avoided, pass them on to a less qualified landlord.

While I agree with @Thomas S. about screening and learning everything about a self-employed tenant, I don't think you should not rent to someone because they aren't self employed.

I've been self employed since I was 18, and finding a place to rent was one of the most difficult obstacles I had to hurdle. Now knowing that I could afford rent, I would be willing to show everything such as bank statements, checks, references, anything that would show that I am financially capable of paying rent.

Now if there is a red flag, or if the tenant feels uncomfortable with your screening process, then I wouldn't hesitate to move on to the next.

Occasionally you will get people who are 1099, retired, trust funders... I would get previous tax returns, a couple of months bank statements, previous employment references what ever it would take for you to feel comfortable. 

In addition to doing income/employment verification also get previous rental history (this may not apply to this particular person), credit checks (can also help if income is hard to verify), personal reference, pet reference (if applicable), criminal background checks

You may also be able to charge first months rent, security deposit, and last months rent (for more security if your worried about there ability to pay)

I found that going through the whole application and talking with references, checking credit, criminal background you tend to get a "feel" for how the person would be as a renter. Some applicants are no brainers and others you end up wavering a bit. If the market was such that there wasn't many people looking I would charge a last months rent for that person I was wavering on. And then keep an eye on them, make sure rent is always on time, and do regular checks on the unit to make sure there is no damage. After a couple of months you'll become more comfortable (hopefully). 

She hasn't even responded to my request for credit and background check yet, so I'm taking that as a sign she may be coming from financial difficulties, hence the selling of the house maybe? Anyways, good to know I can request taxes, I had no idea. Thanks for the advice! I really appreciate it!

@Brad Crosby - for the house sale, ask for a copy of the HUD1. 

Originally posted by @Thomas S. :

I personally will not rent to anyone self employed. Their landlord will be the first to go unpaid and they will constantly ask to pay late so they can pay creditors first.

They are high risk and should be avoided, pass them on to a less qualified landlord.

LOL! You realize most landlords, and I'm guessing probably you yourself, are considered self employed, right? Personally, I've never had a "real" job in my life. I've been running my own businesses since I was 12. I've never been given a dollar but now I have plenty of them to spend along with a perfect credit score. 

If somebody can be self employed and prove they are making income, I consider that to be much more of an accomplishment than somebody who just works for someone else.

It all comes down to mitigating risk. Self employed is a higher risk. It's as simple as that. An employee can of course lose their job, and find another, but someone that is self employed and is a tenant is highly questionable. You do not rely on their employer to make their rent you are relying on the individuals business abilities alone. Personally I place a higher value on a known employer than a total strangers business abilities.

As a landlord you choose your tenants based on lowering your risk. I am never desperate to find a tenant and can afford to be extremely selective.  

You have absolutely no evidence that shows a self employed person who can prove enough income is a higher risk. Most people on this website are considered self employed, and the fact that they are here in the first place says they are more sophisticated than the average paid monkey on the assembly line.

The fact that they are self employed means they can't be fired or "let go", if they have maintained income for the past 2 years there is no reason to think they couldn't continue to do so. I would consider a self employed applicant to be more qualified.

Statistically speaking self employed are riskier because of the difficulty to establish credit and credentials.

But you still need to do due diligence, and often times, due diligence will satisfy you that the self employed applicant is more than qualified.

Statistics are good indicators, but nothing replaces good due diligence.

Originally posted by @Account Closed :
Originally posted by @Greg S.:

I personally will not rent to anyone self employed. Their landlord will be the first to go unpaid and they will constantly ask to pay late so they can pay creditors first.

They are high risk and should be avoided, pass them on to a less qualified landlord.

LOL! You realize most landlords, and I'm guessing probably you yourself, are considered self employed, right? Personally, I've never had a "real" job in my life. I've been running my own businesses since I was 12. I've never been given a dollar but now I have plenty of them to spend along with a perfect credit score. 

If somebody can be self employed and prove they are making income, I consider that to be much more of an accomplishment than somebody who just works for someone else.

I strongly agree .  For someone with a regular job , it only takes 1 person to fire them .  Self employed it may take a hundred .

Plus a employee may work for business owner ..................who is  " self employed "

Originally posted by @Donald Dickerson :

Statistically speaking self employed are riskier because of the difficulty to establish credit and credentials.

Once you have proven income, say 2 years of tax returns, and a good credit score, then "statistically" the risk is not any different whether self employed or paid monkey.

I do agree it can be harder for a self employed person to prove certain things. If they cannot, then yes they are a bigger risk.

@Brad Crosby I'm okay with self-employed tenants as long as they show me at least 3 months of bank statements. I don't usually care for tax returns since it doesn't truly reflect their income. I also pay particularly more attention to their credit. If their bank statements show good income but their credit is bad then I would likely request a double deposit. 

If she doesn't have a long history in business then I would request a few months of rent up front in addition to the double deposit but this is case by case and usually only if my gut instinct says that there's an elevated risk of default on the lease. I hope this helps!

@Brad Crosby I'll definitely do tax returns and bank statements to make sure she is legit.  Good Luck!

to each their own.....but this site is dedicated to people who are, or want to be self-employed. Not trying to twist anyone's tail but it almost seems hypocritical to want to make the majority of our money through self employment but then indicate that others who do the same are unworthy as renters or tenants.

I would ask for bank statement and tax returns. However, as for bank statements, it’s important to not request a full history, but instead specifically request a financial history of incoming business payments to verify income.
Run a credit check as well. It is important to consider a person’s credit score, but some discussion may need to take place regarding their actual financial situation.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here