As a landlord, you don’t want to skip income verification for prospective tenants. Not verifying income can turn out to be the worst mistake you’ll ever make. If you rent to the wrong tenant in the current market, where a national rent moratorium is making its way into law, you might never recover.
You’ve worked hard to establish your rental property as a source of long-term income. By the time you get your mortgage, calculate your capitalization rate, plan your marketing strategy, remodel, rehab, and hire a property manager, you’re spent.
By not verifying a tenant’s income, you risk losing everything you’ve worked hard to create. Here’s why you need to verify proof of income for every tenant without exception.
1. Friends and family might not be honest with you
The general consensus is that renting to friends and family is a bad idea. However, many people don’t listen to that advice. Sometimes it works out, but you need to treat friends and family as real renters.
Don’t skip income verification for friends and family. Sometimes people lie even to friends and family. You might think you know they have a source of income, but they might really be unemployed. Or, they might not work in the profession they claim.
Sometimes, people lead very different lives than what you see on the surface. Don’t accept pay stubs at face value. To verify income independently, landlords are now using the Work Number database to get information including:
- Employer name
- Employment status and job title
- Start date
- Pay rate and frequency (weekly, bi-weekly, salaried)
- Total year-to-date compensation
This detailed information will help you verify what your potential tenants tell you about their income.
2. With multiple tenants, one might not cover the rent
Most landlords require at least one tenant to meet their income requirements. Some let additional tenants slide when the first tenant can cover the rent in full. This seems to make sense, but it doesn’t always work out ideally.
For example, say you have two tenants living in one of your rental homes. If the first tenant has an unstable income and can’t pay their portion of the rent, the second tenant will need to pay the rent in full.
This situation can go one of two ways: they’ll cover the rent and tenant #1 will owe them money. Or, they’ll refuse to cover the other tenant’s obligations even if it means being evicted.
With multiple tenants renting one property, you can’t predict how they’ll react when one can’t pay their share of the rent. Since these dynamics are unpredictable, it’s better to verify that all tenants meet your income requirements.
3. One month of missed rent will probably turn into more
Some tenants experience hard times and miss a month of rent, but catch up the next month. However, with the unemployment rate soaring and layoffs happening at lightning speed, one missed rent payment is more likely to turn into a habit.
When you rent to a tenant with an unstable income, a new job, or a history of job-hopping, you risk falling into a cycle of unpaid rent. With the COVID-19 pandemic inspiring local and state rent moratoriums, depending on where you live, you might find yourself in a sticky situation.
4. You’ll have a hard time proving your tenant has income later
If your property ever falls under an eviction moratorium, and your tenant stops paying rent, you won’t know who to call to see if they still have a job. On the other hand, if you thoroughly verify your tenant’s income, you’ll know exactly who to call.
Don’t give tenants any possible way to take advantage of you. Verify their income before signing the lease.
5. Waiving your requirements can turn sour
Say you meet a potential tenant you really like and you decide to waive your income verification process. Maybe this tenant is just getting on their feet and has a well-padded savings account that could easily carry them for six months to a year. No matter how great they seem, you can’t guarantee they’ll get a job.
Protect your investment with income verification
You’ve worked hard to create a long-term source of income for yourself. Don’t risk losing it all just to be “nice.”
Verifying income, setting an acceptable income-to-debt ratio, and requiring gross income to be at least 2-3 times the rent are your best defences against getting stuck with non-paying tenants.