Every real estate investor knows that a vacancy is one of the largest expenses anyone can incur on a rental property. Between the cost of fixing up your unit, leasing fees, and months of lost rent, it is tempting to rush through the screening process just to fill a vacancy and skip crucial steps that could lead to serious issues down the road. One very important step in the screening process is verification of income. A common misconception is that verifying employment or running a thorough credit check will do the trick. But one could have a good credit report and exceptional standing with an employer, yet also have an unsteady stream of income that may cost you next month’s rent.
Requiring proof of income is the extra measure of assurance that your new tenant generates enough revenue to afford monthly rent payments and in turn, greatly reduce your chances of an uncomfortable eviction process, which can cost you thousands.
When you are examining their proof of income, focus on whether or not the tenant passes the 3x income rule. What this means is that their gross yearly income is three times the rent you are charging. The simplest way to check this would be through their most recent pay stubs, but it may not always be that simple. Not everyone has a salaried job. Others work job-to-job on a freelance basis, which will require you to source their income in other ways. The “Gig Economy” is growing. According to the Bureau of Labor Statistics, “about 10 percent of the U.S. population had alternative work arrangements in 2017.” You must also consider that others work additional app jobs like Uber, Instacart or Upwork, a freelance service for creatives working in design, advertising and motion pictures, that may not offer traditional pay stubs. Asking for copies of tax returns could prove helpful in these situations.
Others like waiters, landscapers, yoga instructors and master crafts people work on a cash-only basis and don’t have a paper trail of their finances. For retirees, you could check their social security checks, retirement accounts and pensions. Students are on a similar level. They will need a cosigner, for which you would check their proof of income, rather than the students themselves who don’t have jobs.
Regardless of the situation, it is vital that you figure out some form of verifying their actual income in situations where a paystub won’t give you all that you need. Some of your best tenants could be Gig Economy workers, and finding a qualified, responsible tenant is something that can make or break your real estate investment.