Income Requirement For Renters - Combined Amongst Tenants or Not?

Question

Hi everyone,

I'm pretty much a newbie when it comes to tenant screening. I have "book smarts" on the topic, but no "street smarts". In finding a new tenant for a unit in my duplex, I've come across a few questions. I follow the standard rule that a prospective tenant's gross income must equal 3 times the rent plus utilities. Now, say there are 3 applicants over 18. According to your standards, does each applicant have to earn 3x the monthly rent plus utilities? Or does the combined total of the 3 applicants have to be 3x the rent plus utilities?
	
	Also, do you pick the first qualified applicant (is this PA state law?) or do you set a deadline, and review all applicants after that deadline and choose the best one?
	
	Thanks!

Roy N. · Answer

Account Closed

Ideally you would want any one of the co-tenants to be able to carry the lease - after all they are jointly and severally liable for the obligation.

We often encounter this situation with our student tenants, and young professionals.  In the case of three co-tenants, as a minimum, I would want to see any 2 of the three be able to carry the lease (i.e. 3 x rent and utilities).

Roy N. · Answer

Bill Gulley

I agree with your statement, and in most instances we base our qualifications on family income when dealing with a family unit.  In our universityville properties, students tend to pull together into economic households for the purpose of securing a lease.

The cohesion of these economic unions tends to be more fragile than those of a family - one finds the bathroom to gritty; one the music too loud; another sleeps with one of their housemates - and inevitably one, or more, leave over the course of the lease.  While the signatories to the lease remain accountable, jointly and severally, day-to-day practicality has taught us that things run more smoothly when the remaining housemates are capable of carrying the lease on their own.

Marcia Maynard · Answer

There was a recent forum on this topic "One occupant qualifies on their own - let the other one live there as an "occupant".  Check it out at http://www.biggerpockets.com/forums/52/topics/123802.

We use household income to qualify.  But we also look at other factors to determine our risk and hence the amount of security deposit we will be collecting.  We also have a procedure in place that the tenants must follow if they want to change the make up of the household.  It requires them to contact us if one person is moving out, or if another wants to move in.

If there is a change in the household makeup, we will revisit the original rental agreement and make adjustments.  If our risk increases, we can ask for more security deposit.  We have negotiating power since we use MTM rental agreements and our state allows us to serve a no cause 20-day Notice to Vacate if we want to clear out the unit.

An occupant will become your tenant by default if you allow them to establish residency, whether or not their name is on the rental agreement.  To avoid confusion, name them as a tenant.  It will make it easier for you to hold them accountable to the terms of the rental agreement.

Bill Gulley · Answer

Well, you're much tougher on folks than the HUD guidelines.

Tenants qualify based on "household income" not individual income.

The question is, is it "qualifying income" is that income source reliable and consistent?

If you need $2400 in monthly income to cover rents of $700, the income is cumulative among all those on the lease. Tenant one could have 1200, tenant two may have 1000 and tenant three may earn 600, they qualify!

Such is generally thought of and referred to as family income, however the definition of family has changed, from blood relations or marriage to a family unit that may consist of individuals living together.

I'd say the thing to look at is how long those individuals have been a "family"? To my knowledge there is no guideline, common sense might prevail. Did these three college students get together last month or have they lived together, say for more than two years at a previous residence?

I mentioned 2 years living together because that is the income history used to qualify, if a 3rd tenant was found last month, the "household income" doesn't have the income history to qualify.

Being too tough on income requirements can sink you as a landlord, your vacancy will sky rocket. If you're not in line with acceptable guidelines people won't be renting from you as they will go to a much nicer property, if you required all three tenants to have the qualifying amount, they qualify for 3 times the housing expense elsewhere. Granted, some may just want cheap housing, like students maybe, but most tenants thinking longer term would probably seek the nicest property that their collective income qualifies for. :)

Brock Siebert · Answer

Bill Gulley

The most important sentence you have written is-

"Being too tough on income requirements can sink you as a landlord, your vacancy will sky rocket."

The most important way to create equity and income is to have your properties rented. No tenants = making payments yourself. I am not arguing to accept the first person to want to see the place, but don't box yourself in so hard that very few will qualify to your standards either.

Account Closed · Answer

Great info everyone, I really appreciate all the input and information :-)

Account Closed · Answer

Thanks for the insight Ron!

Bill Gulley · Answer

Agreed. Why I mentioned students and have a cohesive past together as if they were a family unit, students have a high turn over, right now I have an issue of two girls and one wanting to leave dumping the rent obligation on the other one. They are learning the meaning of severally.

If it takes both to qualify it takes both to pay.

Not just students either, unrelated parties are doubling up to reduce housing expenses. Construction workers (managers supervisors) on large projects taking a year or more rent locally, pipe line/oil guys, full-part time workers passing through. lots of situations. :)

Kimberly T. · Answer

Chris, we go by household income (sum of all tenants' incomes). Here in CA especially, it would be near impossible for most low or middle income earners to qualify for a rental on their own, they have to have two or more incomes in their household to be able to pay the bills.

Now, if one applicant qualifies on their own, and they want to have a roommate, you have the option of only listing the qualifying applicant as a tenant and listing the roommate as an occupant. We are doing that for one of our AZ units - girl applied and qualified on her own and wants her bf to live with her. His credit was below our cut off but he does not have any past evictions or felonies, so she will be the tenant and he will be an occupant. You could still list both as tenants, your choice.

As for which applicant to take if you get more than one qualified applicant, it is my understanding that you do not have to take the first one. You can set a time limit and then pick the most qualified. For example, you can accept applications for 48 hours, check them all, then pick the one with the highest income, or credit score, or whatever you choose.

Good luck!

Account Closed · Answer

I tend to look at it just like Roy N said and I hit his vote box for his great reply to your question !

Income Requirement For Renters - Combined Amongst Tenants or Not?

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