3 X the rent on lower income?

Question

I hear a lot of landlords on here talk about tenants needing to make 3x the rent to qualify. Is this rule still a reasonable expectation in lower income areas?

About the unit I'm renting: I think I can get 1000 a month for it, according to rentometer and other properties I've looked at.

Michele Fischer · Answer

In my low income units we require that rent not be more than 50% of income, and as high as 59% if it is non-taxable income such as SSI or disability. We give them extra points on our screening point system if they can hit 28-31%, but rarely see that. I'd love to require more, because any hiccups and they are in trouble, but we like to keep them rented too. The poor have tremendous skills and ingenuity at stretching funds and bartering to make it through the month.

But I am talking about units with rent of $395-525, not $1,000/month.

Account Closed · Answer

My question is. If a lender say you need 3x times the payment in order for you to buy a home and to get it finance would you agree with the lender.

Joe Gore

Joe Butcher · Answer

Bill Gulley Thank you. Sorry for the misunderstanding.

Joe Butcher · Answer

Bill Gulley

You said "Joe, reread what you posted, as I read it, you painted the picture of raising rents on what pretty much sounded like lower income tenants."

I re-read what I posted. I never alluded to raising rents.

Are you possibly under the impression that I am asking if I can charge 3X the going rent?

Thats not what I'm asking. One of the things I see here on BP a lot in reference to tenant screening is that the potential tenant must make 3X the rent (gross income) in order to qualify. I am asking if that rule still applies in lower income areas and I think @Steve Babiak and others answered that question.

As Steve said, I think giving some leeway on the 3X rule seems fair if they don't have excessive debt and have a history of paying similar rent.

I do know this: If my rent is that far out of line I seriously doubt anyone would rent it.

@Michele Fischer  $395-525 is very cheap rent. Your area is probably a lot different than mine, but in Dallas if a 3/2/2 brick ranch rents for $395......RUN!!!!!   : )  I am a bit jealous as I imagine the 2% rule works in your area, which it doesn't here.

Joe Butcher · Answer

Bill Gulley

The 1K is based on comps pulled by a realtor, rentometer, Zillow and Craigslist. Houses of similar size are going for $950-1100. There is a larger 2 story a few blocks away currently rented at $1200 for the last two years. The ones that are going for $950 were dated and gross. I think the level of rehab in mine is nicer than the ones that were $1100.

It's a working class neighborhood. Not a war zone. The people there are not destitute. The houses in this little pocket are all 3-4 bedroom, 2 bath, 2 car garage. Average about 1600 sq/ft.

You said "You might get a grand from someone making 24K".....I didn't suggest that and I'd be very interested as to where you got those numbers from.              3X the rent would be 36K......thats what I'm asking about.

With all due respect: You have a right to your opinion. You don't have the right to invent a narrative about a total stranger.

@Bryce Y. The title of the thread says "lower income" not "low income." Maybe an error on my part (subtle distinction?), but I know the neighborhood quite well. The next subdivision south from mine is a different story.  The subdivision just north (closer to I-30) is somewhat up and coming....I'm hoping that eventually spreads my way, as the houses have potential.

Cheers!

Steve Babiak · Answer

As Bill Gulley has mentioned, HUD uses 30% of income for the contribution from their Section 8 tenants; that is pretty close to 3x so we use 3x to keep the math simpler.  Then HUD allows up to 40% of Section 8 tenant's income to be contributed toward rent (for tenants who are looking at properties with rents above the HUD allowed FMR); 40% is 2.5x income.  I go that low when the tenant has a good history of paying at least that amount for rent previously AND that tenant has not suffered a decrease in income.  I will go that low also if the tenant has very low debt so that their income isn't being stretched.

A good related read:

http://www.biggerpockets.com/forums/52/topics/114033-gross-income-3x-rent-too-simplistic

Frank M. · Answer

Joe, like any rule of thumb, this is a starting point.

The 3 to 1 is one thing for a single person who is hopping the bus (no car at all) to go to work, and another thing altogether if it's a couple with 2 kids and two cars. One is likely flush with cash, the other, struggling to get by.

I'd break the rule only in limited cases. Combine that with the full credit report and use good judgement.

Bill Gulley · Answer

That implied to me you were raising rents Joe, not many would think about lowering rents and think they could get a lower amount than has been charged.

It all sounds much better the more you've explained it. Good luck with your quest. :)

Bill Gulley · Answer

Joe, reread what you posted, as I read it, you painted the picture of raising rents on what pretty much sounded like lower income tenants. Understand my comments weren't totally directed at you, I know you're a newish LL, others were mentioning 50%.

Sec 8 is localized and local authorities have leeway in qualification, as Steve mentioned HUD goes to 40%, in some cases it's 42% and if you look at HUD guidelines for a loan it goes to 42%. 30% is easier math. Some also use two ratios in line with the old 24/36%-38%. Talking about split ratios the housing cost is the first, 24-33% the second is rents or housing and all other consumer debt of 36-42%.  Now, they have taken housing to 42%.

Any rents that are in line with HUD lending guidelines are acceptable. The issue comes in when you have lower income tenants that I believe Joe mentioned or eluded to. When you say low or lower income, that has a definition, you'll be talking about those with 50% of the median income in that area. Then you have very low income around 30% as I recall of median income. These levels change with economic conditions and incomes. In most areas of the country, $1,000 is to high for low income persons, which is the basis for my comments above.

Something to be aware of, is your median income and rent levels. In areas that have rent controls you'll be familiar with these income levels but there are none in Mo. that I'm aware of. :)

Bryce Y. · Answer

1k/month in DFW I wouldn't consider low income.  That said, I'd require 3x rent...

3 X the rent on lower income?

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