Is the 3x rule really necessary?

Question

Hey all,

Yes you should always use the 3x rule when evaluating if a tenant can afford your rent. However I've come across a few very good applicants who have great credit, little debt, and solid jobs. There salary's are 2.6X's the rent, so about $400 shy. I'm looking for advice and some experience with going slightly below, good and bad. Thanks!!

Nathan Gesner · Answer

Every rule has exceptions. You should operate by the "intent" of the rule, which is to identify and mitigate risk. A married couple in their 70s that have previously owned homes for 40+ years and are now retired with no debt, no kids, and 50 years experiene as adults should not be looked at the same as a boyfriend/girlfriend in their early 20s that have never owned a home or rented together before, still paying student loans, living paycheck to paycheck, and financing that 2018 Dodge Charger in the driveway.

Alan Grobmeier · Answer

@Anthony Vander Meer, only if you want to get paid consistently. ;-)

Jay Hinrichs · Answer

I dont think these things are hard and fast.. to me look at whats left after the rent is paid is it enough to really live on.So if rent is 5k a month for instance that means tenant needs 15k a month in income pretty standard .. well that tenant now has 10k a month to live on.. most people can make due on that.so if this tenant came to me and only made 10k a month 2X the rent I know they have another 5k a month to live on so sure that works.where this is important is in lower income low rent areas were rent is say 800 a month and 3X is 2400 minus rent leaves 1600 a month for EVERY thing else can you live on 1600 a month ???So if you back off 400 from that and its 1200 a month can someone realistically live on thatso have to look at the whole picture..

Alan Asriants · Answer

If you really want to know, ask them about their expenses (should be in credit report)If there is something left over after all expenses and rent, you should be ok. If their credit score is good (700+) thats a great indicator. Usually people with 700+ credit score are serious about their finances and don't want anything to negatively impact them (late or no payments)

Drew Sygit · Answer

How many cash-challenged tenants will make their car payment before their rent payment?In most states, a car can be repossessed faster than an eviction - and most tenants know this.So, why would a landlord NOT take a car payment into consideration when qualifying a prospective applicant?Also, no one's mentioned work stability (NOT job stability!) - how can a prospect have income stability w/o work stability?

NA Catzen · Answer

The 3xs monthly rent rule is an outdated calculation from a time period where income to living expenses evened out. When rent was not double to triple a mortgage payment. The most important factor should be rental history and affordability. Most people will work OT to make ends meet but that's not factored in, and truly, it shouldn't be a factor. How one pays their other bills is not on a renter, the only factor the renter should he focused on is: can they afford the rent, and does their rental history reflect that.

Corby Goade · Answer

Sounds like you are self managing- correct?If that's the case, I'd highly reccomend that you come up with objective screening criteria that every tenant must meet, no exceptions. Once you start changing the rules because you get good or bad vibes from a potential tenant, you can get yourself in serious hot water and end up in court for a fair housing violation. I wrote an article about the screening process for BP, you can check it out here.To directly answer your question, we require 2.5x the rent for gross household income. There's obviously more to the screening process and management than that, but our eviction rate in-house is 1 eviction for every 750 leases signed. Best of luck!

Drew Sygit · Answer

@Nathan G. is 100% right, but we'll add that it depends on the Class of the rental and corresponding tenants.The better the class, the more you can "bend" your requirements. The lower the class, the more reason to stick to your requirements (which should match the market).

Dillon Cook · Answer

@Anthony Vander Meer$400 off is a lot in that price range. You could ask for additional upfront deposits (double deposit, last months rent) if you're confident, but I wouldn't unless they were $100 or $200 off the 3 times rule.

Jill F. · Answer

For my sub 1k per month properties (all of them), income less than 3x rent is THE MOST IMPORTANT indicator that a tenant will struggle to pay rent. I can see how this might not apply the same way in high priced properties but down in the cheaper properties it matters a lot.