Minimum income requirements for SFR rental - all adults at 3X?

Question

Hello!

I recently acquired my first rental property in a nice Milwaukee suburb. It is a 4-BR SFR that I think I can rent for $1400-$1500/month. Rehab is almost complete and I'll be listing soon, so I'm cramming on my tenant screening education.There are two basics that I keep running across: 1) Make sure income is at least 3X monthly rent, and 2) Make sure each adult-age occupant submits an application. What isn't clear to me is whether the COMBINED income of the adult occupants is sufficient, or if they EACH should have 3X rent minimum incomes. On the one hand, I'd want the security of knowing that if one moves out (divorce/breakup, job relocation, etc), the other can still pay rent. On the other hand, it seems a bit extreme to essentially require 6X rent for a family unit. Turning down a nice family with excellent combined income and credit history seems a little nuts to me. But I'm new so what do I know!

Any advice for this newbie landlord? Thanks!

Marcus Auerbach · Answer

Great question, does not get asked enough! We usually require credit score of 550 or better and household NET income three times the rent. However there is some room for interpretation on both. On credit score we look more for a pattern of responsibility - for example, do they pay WeEnergies like clockwork, but their credit got dinged by medical bills? Reliability and responsibility is what we are looking for. I like people that are picky about the house. It tells me that it matters to them. So the more they complain about some things not being perfect the better I like them. Flipside - if someone barely takes a look at every room and just wants to fill out an application: run, they will not care for the house. We usually run credit only on the stronger breadwinner. If thats shaky we run the other one too.

On income, the point is to make sure that there is enough money after expenses for paying rent. Most tenants live paycheck to paycheck. If they get paid a day late, I will know about it. Even if they make good money, most will manage to spend all of it and live without reserves. But if they have anough income they can absorb financial issues by spending less and will recover quickly. Most will meet the 3x requirement, only very few are over 4x. Teachers, policemen and bank tellers usually make less then 3k net a month, so they will need a second income to get to $4500 net for a 3x of $1500 rent - and they would all make perfect tenants.

The 3x rule is also very rough, because a single person with only one car will be financially much more stable than a family with 3 cars and 2 kids to feed - they have much higher living expenses. So it's important to speak with them and make sure they are financially comfortable with the rent and not over extended. How much do they spend at their current home?

Aside of current income we look for job security. Does have someone a professional career and has been in that role for a long time or do they have various jobs and chnage every 6 months? If someone is hard working and has a career I am not too worried about them loosing a job, they will quickly find a new one.

Marcus Auerbach · Answer

@Matthew Olszak reflecting on your comment about ambiguity - I agree with you on some flexibility and common sense, but don't forget about fair housing laws. You have to have written requirements and adhere to them. If you accept someone who does not meet you minimum requirements (maybe just by a little bit) and you turn someone away who would meet the criteria and is a member of a protected class you might get yourself a discrimination complaint.

Protected classes: (there are federal protected classes and state laws. In Wisconsin: race, color, national origin, religion, sex (including pregnancy, childbirth, and related medical conditions), disability: physical or mental, age (40 and older), genetic information, marital status, sexual orientation (includes having a history of or being identified with a preference), arrest or conviction record, military service, off-duty use of lawful product. --- Milwaukee also adds on top of that: source of Income.)

Shawn Ackerman · Answer

@Mike Lauer 3x rent is a solid rule of thumb.  however as we all know, it's not what you make, it's what you keep.  See if you can get a clear look at the expenses.  Also you may want to run their information through the Milwaukee court records site.  You'll be amazed at what a person court file will dig up.  All the best

https://wcca.wicourts.gov/simpleCaseSearch.xsl;jse...

Matthew Olszak · Answer

@Mike Lauer Be ambiguous in what you tell tenants as far as your requirements to give you flexibility. Consider the individual circumstances of the applicants. If its a husband and wife, chances are that even if each had 3x income individually a divorce would screw up their finances, so I'd go 3x total. But, if you get a husband/wife + adult kid/spouse or some other relationship between the occupants where a fight among them could cause someone to move out, I'd want to see more income from each rather than 3x total across all 4 people.

Of course you want all adults to be on the lease, but that won't stop someone from moving out nor will it force them to pay. I do make extra clear when we are signing a lease with roommate situations, even if they are family, that everyone is responsible for the lease and monthly payment irregardless of if everyone but 1 person moves out - however they want to split the rent is between them, I need 1 money order every month for the total.

Dawn Anastasi · Answer

My rule is 3x the amount of rent + water (I add on about $50 a month to compensate for that -- the tenants pay their own water). I want to make sure the tenant has the best chance of being able to pay rent.

Michael Henry · Answer

I like to be at 2.5X the rent amount in Milwaukee for the price range of $100k. It just senses like anything more the tenant can buy the place themselves.

Thomas S. · Answer

As indicated you will need to assess your requirements based on the dynamics of the total tenant group. I many cases where unrelated individuals rent together you will need to require 3X for each tenant. In other cases where applicants are married with children 3X may not be enough and you will need to bump up the income amount to protect yourself.

For a SFH I would not accept any applicant with a credit score below 650 regardless of the actual circumstances of their credit history.

Shawn Ackerman · Answer

@Mike Lauer Anytime my friend.  All the best!

Mike Lauer · Answer

@Thomas S.@Dawn Anastasi@Michael Henry@Shawn Ackerman you guys thank you all for taking the time to share your thoughts (and wisdom!) on this post. This is really helpful having these perspectives and some real practices happening right here in town. Appreciate it!

Mike Lauer · Answer

@Matthew Olszak thanks so much for your reply. Everything you said here makes perfect sense! I guess I wasn't thinking about building in some wiggle-room on this. This is really helpful. Thank you.

Minimum income requirements for SFR rental - all adults at 3X?

Most Popular Reply