When we bring on a new tenant, you know there’s a lot of information we need to collect from them. Not to be overlooked, verifying their income is an important step before entering into a lease with a new tenant. Here’s why we get it, what we look for, and what to do if your potential renter doesn’t have a traditional source of income.
Why You Need Proof of Income
Checking proof of income protects you from losing money and your tenant from eviction, if they suddenly can’t afford rent. Let’s step back for a minute and acknowledge that most tenants don’t purposely fail to pay rent. Nor do they go into a rental agreement with the intent of living there for free. But having proof of a steady income that is appropriate for the rent we charge can reduce risk to both you and your tenant. After all, evicting a tenant is not ideal.
Determine if the 3x Income Rule Is Met
When asking for proof of income for your rentals, we’re not just verifying a stable source of money. We’re also figuring out if your potential tenant can meet the 3x Income rule. Generally, you want to take tenants only if their gross yearly income is three times the rent you’re charging. For many potential renters we just need to look at a few pay stubs, but with retirees (who are renting more and more), students, and those without your typical salaried job, for instance, we may have to find other ways to verify their income.
Verify Income for Potential Renters Without a Traditional Salary
W verify income for all renters, but it’s especially important for potential renters who don’t have your typical 9-to-5. Let’s take a look at a few of those categories.
Self-Employed: Tenants who own their own business won’t have a pay stub or an employer to call. We find other ways to verify their income and ensure that it’s steady.
Cash-Only employees: Like the self-employed, there won’t be a paper trail for these renters. And a lot of them don’t know how to show proof of income, which makes it difficult for them to rent. This group includes waitstaff, landscaping employees, yoga instructors, artists and master crafts people as well as childcare workers. We will, however, most likely have an employer we can call or email.
Commission-Based employees: Sales reps and retail employees may be working on commission or through incentive plans. While we ask to see two pay stubs for salaried renters, we also want to see a yearly statement of income to determine if a renter that works on commission is making enough.
Retirees: Retirees will have other types of income we check: social security, retirement accounts, and pensions.
Students: Student renters will almost always need a cosigner. In that case, we check proof of income for the cosigner, as well.
Ways to Determine Proof of Income
Whether they’re students, retirees, gig workers or have a salaried job, we still need to ask for documentation. Here are the best ways we do that.
Pay Stub: Salaried and freelance workers who have filed W9s can provide pay stubs.
Employer verification: A letter, email, or phone call from an employer can help us get a clear picture of finances. This is particularly helpful for potential renters who work on a cash-only basis.
W2 or 1099: A W2 indicates exactly how much a salaried employee made over the past year. If they plan to keep that job, we’ll know whether or not they meet our requirements. A 1099 for a freelancer will give us the same information, but income for the coming years may vary.
Offer letter: If your potential tenant just changed jobs, we ask for a copy of their offer letter. It should state their salary.
Tax return: Like W2s and 1099s, a tax return will tell us what someone made the previous year.
Retirement, social security or pension distribution statement: For retirees, a distribution statement from social security, a retirement fund or a pension fund will verify income.