Real estate investing—and landlording, in particular—is all about cash flow. In order to pay down your mortgage balance and cover costs like insurance, property taxes, and utilities, you need income.
Having a tenant who doesn’t pay on time or in full can be catastrophic. Thus, it makes sense to carefully evaluate a prospective tenant’s personal finances before entering into a lease agreement. Here are some ways to go about it.
As part of your rental application, you should be asking Waikiki applicants how much monthly income they’re bringing in. But don’t take them for their word. Many people find it tempting to fudge the numbers a bit to secure a property they really like.
It’s completely legal for you to request income documentation. You can ask the applicant to photocopy a paystub, provide a W-2, or present a bank statement that shows recurring direct deposits.
For individuals who are employed (as opposed to self-employed), you can even take things a step further and contact their employer to confirm that they’re still on the payroll. This is known as an employment verification request.
Pull a Credit Report
It’s always smart to pull a credit report to see how financially healthy a prospective tenant in Waikiki is. A credit check will show you an individual’s credit score, how much debt they have, whether or not they’ve ever filed for bankruptcy, and—most importantly—whether they’ve ever been evicted.
Use Common Sense
With an applicant’s income and debt information on hand, you should use some common sense to determine whether or not you think they can reasonably afford to pay the rent.
According to Credit Loan, the average American family spends $18,886 per year on housing—or roughly 25 percent of the average pre-tax income. This can be used as a reference point. You may also want to calculate an applicant’s debt-to-income ratio, which gives you an idea of how much income they have left over after making minimum payments on existing debt each month.
Speak With the Previous Landlord
As part of the application process, you should be asking applicants to provide the names and contact information of previous Waikiki landlords. Though some landlords view this as a formality, consider it an excellent opportunity to explore a prospective tenant’s past financial behaviors.
Call up the landlords listed and ask them questions about how often rent was paid in full, if it was ever late, and whether there were any red flags about that person on the money front.Questions? Contact Dara Keo Today!