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How to Validate Tenant Income

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As you probably already know, your investment property success is largely dependent on two things: finding good deals to buy, and efficiently and effectively managing your properties.  And a huge part of the second category is making sure that only the best tenants move in to your apartments.  As such, any landlord must become proficient at tenant screening, which encompasses verifying employment, income, credit, and prior tenancies.  The goal of this post is to discuss best practices for validating an applicant’s income.

The first part of this equation is figuring out what the acceptable income level is in the first place.  Generally, a good rule of thumb is that the tenant’s rent should be no more than 33% of his or her gross monthly income.  Of course this percentage might vary slightly from market to market, so you’ll want to understand the ideal ratio in your specific local area.  Then, once you figure out the percentage, make sure that you stick to it for all applicants.

The next part of the equation is having a rental application that asks for this information.  Ask for specific information on all sources of income, whether it’s originating from a job, welfare, unemployment, or anywhere else.  Your application should also have a section at the end that asks the applicant to declare that all his or her answers are accurate, and that spells out the consequences of lying on the app.

The next step is to ask for supporting documentation, such as the last 3 paystubs, tax documentation, or letters from government agencies where applicable.  You could even request bank statements if you feel the need.  The bottom line is that the tenant is responsible for coming up with the supporting documentation – no matter where the income comes from – before you do anything.  And if he or she fails to provide this information you can eliminate him or her from consideration pretty much right out of the gate.

Finally, making contact with the applicant’s employer to validate everything is usually worthwhile.  This is akin to a ‘check and balance’ approach, because in rare situations you may find that an applicant has provided phony or doctored income documentation.  By calling the employer (or government agency), you can have total peace of mind that all of the tenant’s stated income information is 100% legit.

To sum it up, validating an applicant’s income boils down to figuring out the ideal rent-to-income ratio in your local real estate market, asking for all the income information on a well-written rental application, requiring physical documentation to prove the income, and calling the employer as a final check.  If you put these tips into practice, you’ll never have to worry about moving in a tenant who cannot afford your rental rate.  Good luck!

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