A common rule of thumb is making sure the applicant has 3x the amount of rent for income each month. I call the applicant’s job and verify their income. I’ve also had people show me pay stubs too. I’m ok with that as well. Most of the people I’ve had problems with for payment have just barely met my income requirements. When you’re dealing with cheaper properties where the rent may only be $500-600, even 3x the rent for income doesn’t leave much left over for all the other normal living expenses.
I use the 1/3 rule. I don’t find that I have just one reason to turn down an applicant though. This is an easy rule to have in place because it’s not subjective. If you turn down someone because of that there is no claims of discrimination because of some protected class they might be a member of.
You can set your requirements wherever the market will allow, and you should set them as high as possible. The market will tell you, if you’re too high, because people will walk away at a certain point and especially the AA clients, whom have options, will walk at a certain point. Frankly I pretty much scare off the AA clients, as you see why in a moment.
Meantime, I’m sophisticated enough now as a professional investor, that I don’t like renting to the clients with good credit and good incomes. They can pick and choose what they’ll accept and often think they’ve got me over a barrel with it comes to conflicts over the lease agreement. That, and I can’t make as much money off of them.
Worse, AA clients can turn into DD clients in just a couple of months with the loss of a job, or some circumstance out of their control. Well, if the AA clients ‘does’ turn into a DD client what then? The average landlord is screwed. Why? Because the former AA clients didn’t put up huge deposits, and now could care less if you trash their credit, because it’s already damaged. How’s this, you ask.
The former AA client will miss credit card payments, and then the card payments and interest rates skyrocket …until it’s impossible for him to maintain things. Now, if the late fees aren’t enough the card companies are now reporting late payments and his rating is headed into the toilet. So what’s an eviction at this point? He’s lost his job, his credit, his dignity, and now the rent will ALWAYS seem to be a last priority.
I’ve lost track of the numbers of ‘good tenants’ that went ‘bad’ on me, where I had no leverage in the situation, except hope, pray and try to negotiate the possession of my property without a fight, or major credit loss. Forget that.
So, what’s the solution? Regardless of whom you rent to, he must have something to lose in the transaction (beside credit). Gigantic deposits work very well, and even better when coupled with cosigner and huge late fees. Together these fairly eliminate my management problems as far as vacancy and credit losses.
In 2008, I had a prospective renter offer me $6k as part prepaid rent and partly as a deposit to ‘overlook’ her sorry credit and sketchy income (for a house in a 55+ community).
I would have taken her up, but this property belonged to a church, and I couldn’t put the church at risk of a headline saying “Church takes advantage of the elderly. Film at eleven.” See below how this might look bad for me in a situation where I’m dealing with the aged, despite having crappy credit.
Anyway, I rented it for the biggest deposit I could (legally in this situation), and settled for excellent credit and a stable income. Sure the rent comes in before it’s due every month, but I’m also netting about $200/mo less than I was offered by the credit risk client I turned down earlier.
So …you ask for either what the law allows in deposits, and/or the biggest deposit the market will bear. Then, have either the biggest late fees allowed by law, and/or what the market will bear. In either case, you’ll find that credit challenged renters with big deposits and/or cosigners, facing huge late fees, will create the Trifecta for practically risk free management, if not more profits for the same rental space.
As an aside, my late fee is $150 after the 1st. I have charged a daily late fee, too. I have set the ‘contract rent’ to about 30% above retail, and then offered a discount for on-time payments, which are in effect only 20% above retail, and based the deposits on the higher ‘contract rent’ not the “on-time” rent. What does this look like, you ask.
If the market rent is $1000/mo then I want $1200 in on-time rent from a credit challenged renter (I’ve outlined my schedule here before), but I want the “contract rent” to be something around $1500 or 33% more than retail.
Again, when the tenant pays on time, his rent is ‘only’ $1200/mo. So, if my renter is late…I tack on $150 dollars, plus I want the full $1500 for that month, since it was paid late. That’s a $650 profit to me which I gladly accept if my renter ever decides he needs to pay someone else before me. Do I get these kinds of rent in reality, you ax. Yes.
The downside… Renters rarely pay late. It’s just too expensive. Am I this anal, in real life? Yes, but… if the renter calls me a week, or more, before the rent is due, and wants to make arrangements to pay after the due date, I will agree to that without penalties. However, if they blow past the deadline, I want all the fees and penalties.
As an aside, you MUST give everyone equal consideration and an option to pay late without penalties if they call you in advance. This caveat is spelled out in the lease agreement. It’s not just a coincidence that a renter calls me a week before the rent is due to make arrangements. They want to avoid paying late fees.
The extra money, on occasion, is why I don’t like settling for AA renters.
Oh, and the reason I didn’t take up the $6k deposit offer, is because I was going to have to set the rent at 1500/mo with a -$600/mo discount ($900/mo) for paying on time. This deposit was technically two month’s worth of ‘contract rent,’ or $3000, but was effectively 3.3/mos worth of prepaid, on-time rent …$6k okay! Anyway,this phonied-up, uber rent, used to get around the legal limits on a deposit, was just a lawsuit waiting to happen for the church, even though there’s no rent control in this situation. But if the lady got in a jam, and somehow decided to make it a huge deal, or some goody-goody elder-advocate got a hold of this situation, it would have just been the worst PR situation for the owners.
Nonetheless, you can see here that this tenant had read some creative material on how to get around bad credit. Just offer the landlord a wad of pre-paid rent and a huge deposit. It works… unless your landlord is a church…
However, on my rentals…I will accept these terms in a heartbeat.
The Board of Inquiry found that minimum income criteria or rent to income ratios constitute discrimination on the grounds of race and age, and are prohibited under Ontario’s Human Rights Code. The ruling is significant because the board rejected arguments from landlords and from the Ontario Human Rights Commission and agreed with CERA’s position, that amendments to the Ontario Human Rights Code and a Regulation governing tenant selection adopted by the Conservative Government in 1998 DO NOT permit minimum income criteria such as the common rule that rent must not exceed 30% of income.
There really is no “hard and fast” rule. You need to look at all elements of prospective tenant’s financial picture (i.e. employment history/job stability, credit, and obviously income). Where you live is also an important factor in this consideration. That being said, I like to have prospective tenants submit a basic income and expense statement with supporting documentation along with a recent credit report (this way, you can make sure all of the credit accounts listed in the credit report are itemized on the income/expense sheet and by looking at a recent statement for each account you can verify the monthly expense). Additionally, I always contact the employer to verify pertinent information (length of time employed there and income details). Once you know their income and expenses, you have to assess your own risk tolerance as to the rent to income multiple you are comfortable with. This is just how I do it.
No, that’s just short-hand for ‘bad credit’ vs. ‘good credit’.
If you search this forum section, you’ll find my list of criteria for how I determine what hoops the prospect has to jump …all depending on their situation. Meantime, essentially I want enough money up front that the tenant will think twice about screwing me; more so, that he’ll do what he has to, to get his money back at the end of the lease.
What I didn’t mention is that I want 24/mo contracts if I’m taking on a risky prospect (which is as often as possible). This sounds counter-intuitive, but once I get somebody trained to pay me on time, I want the extra rent money for a while. Of course tenants can break leases at will, but I’ve got theoretical leverage when negotiating an early termination. And frankly, I am deliberately helping these people overcome a bad reputation as renters. Once they’ve survived my management approach, they’re going to be model tenants for the rest of their lives… and will appreciate how I can help them when it’s time to find a cheaper place to live (assuming they can get their credit, job and rental histories cleaned up)
If you find my previous posts here on this, you discover that I never turn down an applicant. Most (all) fly-by-nights and dead-beat wanna-bees (and AA applicants for that matter) find other options than to give me bigger deposits, co-signers, and/or pay premium rents. That’s fine.
At least I don’t have to call up any applicants and inform them we went with the previous applicant who had a co-signer, is paying us $1200/mo instead of $1000/mo, has an eviction on his record, and gave us a $4,000 deposit, instead of a $2000 deposit.
No, we just sign the bigger offer and everyone moves on.
A DD client might be one whom has an eviction, a 420 credit score, no job history, no rental history (or rented from his mother, same thing), and barely has 2x’s the *rent in income (*on-time rent, not retail rent).
An AA client might be one whom has no evictions, a 720 credit score, at least five years on the job, and five years at the same address, and 4x’s the rent in income.
You want to initiate the process as soon as possible. The renter is either going to pay, or not going to pay. You need to know which it is, as soon a possible.
This brings up another point… we are businesses that offer a valuable service, and we do what we say, do it when we say we’re gonna do it, and otherwise create and maintain trust with our customers. Why is this important?
Because if the tenant knows that we keep our word, you can imagine how seriously they will take the due date, and as seriously they will take a notice to pay rent or quit.
Meantime, the best way to undermine that trusting relationship is to get sloppy and not do what we say we’re gonna do.
So, if the rent is due by the first, then by gawd it’s due on the first, not the second.
The tenant has had a whole month to get his rent together. It’s not like the due date is ever a surprise. So, if the rent is not paid on time, it is therefore late. However, if there’s no consequence for it being paid late, naturally then, the renter will pay whenever he feels like it …and will scream like a stuck pig if you randomly and/or arbitrarily enforce your rental contract.
So, if you have a strong penalty for late payments/payers and consistently enforce the terms of the contract, you’ll have way less ‘opportunities’ to worry about posting notices to, ‘pay or quit’ regardless of how soon you should do this.
In my state, I can post a pay or quit notice the day after it’s due me. However, as a practical matter, I don’t camp on the issue, unless there’s been a history with this customer of paying me late. Meantime, we won’t post a notice to pay or quit immediately, if the tenant has called us well before the due date and made arrangements.
I used to post the notice regardless of arrangements made, but this seemed to counter the terms of the agreement. So I usually only post when the tenant doesn’t make arrangements before the due date. Otherwise, you can’t initiate eviction proceedings without first posting the pay or quit notice
You might not be surprised that my rents often come in a week before they’re due. I have practically no late payments, but I do get calls to arrange for a late payment to avoid paying late fees and penalties, since I make that provision. This becomes rare with tenants who are settled in and know the routine.
This is the risk with getting new tenants…not knowing if they’re going to behave or not. If someone usually pays on time and hits a rough patch, I’ll work it out. They’ll still pay extra, but I won’t boot them. If I have a new tenant who acts up, there’s no history there so I don’t give them much leeway. I currently have a deadbeat who has only been there for a couple months, but she’s been a complete pain in the butt and gives me a ton of excuses. She’s getting evicted next week. She had an appointment with a local hand-out agency recently. They didn’t help her so that was pretty much the last straw.
I could say that I would post notices on the 8th day of the month, but I don’t. I’d kick out a good amount of tenants if I booted them at the earliest possible time. I don’t put up w/ much crap. I know who to go after.
Justin, I think you just made my point about low end rentals being inherently more risky and management intensive. 3x’s the rent at 550/mo is just 1,650/mo income. That’s just not enough margin for the renter himself to ‘live’, much less pay 1/3 of that income to maintain a roof over his head.
If the rents were 1,000/mo and there was a minimum requirement of $3,000 take home, this would be less of an issue. That still leaves 2,500/mo for living expenses. It’s still tight, but not on the edge.
Another question I would want answered is, will I be able to find enough prospective renters, in the 550/mo rent range who actually take home 2,000/mo? And the next question is, would they also have the deposits and prepaid rent I want, to make sure they are invested in the contract?