Tenant Screening: 3x rent vs DTI
Today we thought we would give you a break down of two different tenant screening methods we use as property managers. Almost everyone who owns rental property knows the golden rule of "3 times rent", meaning whatever you're asking for your rental, a prospect needs to earn 3 times that amount and it's generally a given that they can qualify for the apartment.
This method works in high income neighborhoods, A class buildings...but it doesn't work so well in C class properties or lower income neighborhoods. As a matter of fact, if you own in those less desirable areas and you're trying to apply this square peg, round hole method, you will have a tough time filling your rental property.
Debt to income approach, otherwise known as DTI, is a great way to evaluate a prospect who has income that is less than 3x rent. When a bank qualifies a person for a mortgage, they evaluate both the monthly income earned and the monthly debt service. Typically a bank will go up to 38% DTI but on sub-prime loans they will go as high as 45%. If a bank is willing to do 45%, why can't you as a landlord?
How to calculate DTI
It's very simple. Take all of their monthly income. W2 job, 1099 job, if it's a cash job call their employer (you should call their employer regardless to confirm they still work there) and verify how much they make a week. Ok, so now you have their income portion.
Now take all of their monthly debts. You should be able to find this in their credit report. That's minimum credit card payment, car payment (proposed rent payment), child support payment, etc.
MONTHLY INCOME/MONTHLY DEBTS = DTI
If this number is less than 45% you can consider approving them. If it's higher than 45%, some low income landlords will go as high as 50% DTI but I personally think that is playing with fire.
THE LAST INDICATOR TO USE TO VERIFY IF THEY CAN AFFORD YOUR APARTMENT
One of our favorite questions to ask: how much in rent do you pay now? If the numbers are really close but the tenant has been living in their current residence for several years at the same rent, or even higher rent, then chances are they can afford your place.
Like all things, there is no black and white way to qualify someones income on a rental but hopefully this article has opened your eyes to the various methods you can use to qualify someone.
If you rather let someone else deal with doing all of this, consider hiring a property manager like us! Feel free to contact us for a free rental evaluation on your home!