Screening new tenants for your rental property is probably one of the most important tasks you will have as a landlord. There are many aspects of a tenant application to consider and several Philadelphia tenant laws to be aware of. For that reason, we’ll be doing a three-part series to make sure you have the most up-to-date and complete information on the tenant screening process. In this installment, we’ll be covering everything you need to know about income verification.
New Tenant Application Form
Many property owners begin the process by having applicants complete a landlord-tenant application. We prefer to start with a pre-screening of the tenant to narrow down the available properties and units that will match their needs. Questions include income levels, credit ratings, and background information along with family needs and desired amenities. If the prospect is a good fit for any of our available units, the next step is a tour so the applicant can find one they can call their own.
Only after the pre-screening process is complete and the tenant has found a suitable unit will we begin the in-depth process of screening the prospect. Following this procedure helps reduce the amount of time spent screening as there’s no need to verify people who won’t end up leasing one of our properties.
Income Verification Scenarios
Completing the new tenant application form is simple for prospects and should take only about ten minutes, provided they have all their information and attachments (such as pay stubs) handy. On the other hand, the landlord can spend several hours to thoroughly screen a prospect in some cases. The best scenario for the landlord is when the potential tenant works for a well-known company, and pay stubs from a payroll service are available. In that case, verification through the company’s human resources department can be completed with a single phone call.
Of course, people find employment in a variety of scenarios, and not all income is as easily verified as that which comes with a pay stub or a W-2. Independent contractors, freelancers, and people who own their own companies can be a little more time-consuming to verify, but the process is certainly doable. For this group, the first document to ask for is the Schedule C from their most recent tax return. This document is provided to the IRS to document their income so that appropriate taxes can be collected. If the prospect is unable to submit this form, the process should result in denial as it usually means the person is trying to hide something.
Keep in mind that a company will go through ups and downs over the years, and several months can have a huge impact on the health of the business. For that reason, we ask for a deposit transaction ledger from the applicant’s bank account for the three months prior to the application. This will show how much and how regularly the person is being paid through the company. We may also ask for a year-to-date profit and loss statement from the company to see the complete picture, as well.
For any applicant who is paid in cash or via a cash app, bank statements will also be required. We also ask this group for the Schedule C form from their most recent tax return to verify that the income has been approved by the IRS. We do, however, tend to be more critical when putting together the entire tenant application for approval of prospects with difficult-to-verify cash income.
When to Require Additional Security
Collecting rent in full and on-time is critical to the success of your investment property. Every prospect whose income verification process has left behind any question marks should be required to provide additional security to the landlord that the rent will be paid. One option is to request an additional security deposit or prepaid rent to minimize the chances of losing money on a tenant who becomes delinquent. Another option is to require a co-signer or someone who agrees to pay any debts if the person becomes delinquent on their rent.
We hold co-signers to an extremely high standard as they must have enough income to cover their own residence as well as the expenses of the person they are co-signing for. In general, a good co-signer is one with excellent, established credit and a high income that can be verified. Co-signers do not have to be local, but they must be available to sign the lease themselves as it is a binding, legal agreement.
Income is the Critical Factor
Ultimately, the proof of income is the most important factor for every prospect who has applied to lease one of your units. There are many variables to consider when selecting the right tenant, but reliability is paramount as failure to pay will result in stress, hassle, and loss for all involved. Many property owners living in the Philadelphia suburbs, Chester County, PA, and the surrounding areas prefer to work with a professional management company, especially in a hot real estate market. Bay Management Group has been helping landlords screen tenants for years, and we know all the red flags to look for along with a thorough understanding of local and federal laws so you can rest easy knowing you have the right tenants for your properties.