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Should You Rent to a Self-Employed Tenant?

Some landlords get nervous when they hear the words “self-employed” or “freelancer.” Indeed, approving a self-employed rental applicant can prove to be a tricky process for landlords. That said, there are great income opportunities for self-employed individuals. However, for landlords, the challenge becomes finding ways to verify income stream when there is no verifiable employer reference. After all, deciding to accept an applicant with a fluctuating income could be a risk. Thankfully, there are many ways to screen a potential renter claiming self-employment that will help you decide whether they are fit for your rental property or not. Continue reading for the essential self-employed screening criteria below.

Why is Tenant Screening Important?

The first line of defense a landlord has regarding protecting their investment is thorough tenant screening. The important thing to remember is to follow Fair Housing Laws and consider the full picture of an applicant’s financial and personal background. Common screening criteria include a credit check, background check, income verification, employment, rental history, and references. Let’s review the benefits of proper screening procedures.

  1. Screening Protects the Property – Learning about past offenses and prior property damage incidents can predict a greater risk of future issues. So, by identifying problem tenants early, owners can reduce liability.
  2. Tenant Screening Protects the Property Owner – Ensuring the applicant has sustained and verifiable income is critical to approval. Furthermore, including a credit report in your tenant screening process can determine whether the applicant is financially responsible. Reference checks and verifying rental history also help avoid tenants with a history of evictions, non-payment, or property damage issues. For a small, one-time fee, you have the option to use the eviction database system to screen a potential tenant for past evictions.
  3. Screening Protect the Community and Tenants – While checking an applicant’s criminal background is not the only factor determining approval, it is an important one. This screening type looks for violent crimes or individuals on various watch lists such as the Sex Offender Registry, Terror Watchlist, or INTERPOL. Identifying these potential issues can help keep you, other tenants, and the community safe.

How to Verify Income for Self-Employed Rental Applicants

proof of income

For self-employed applicants, verifying income can present the biggest challenge for landlords. However, that does not mean it is impossible or that these applicants are not as qualified as any other.

  1. Bank Statements
  2. Tax-Related Documents
  3. Credit Check

Bank Statements

Requesting a potential renter’s bank statements is one of the easiest ways to verify the amount of money that is available monthly. Furthermore, landlords can gain insight into the ratio of incoming to outgoing finances for this applicant. In turn, this will either provide comfort in knowing there is adequate income flow or point towards rejecting the application.

Like PayPal or WePay, other digital processors show regular cash flow through an account for the self-employed. There are many instances where a self-employed tenant may use such services when dealing with their business income. So, requiring those account statements will help clear up any issues.

Tax-Related Documents

Self-employed tenants will not have a typical W2 Form to verify that they indeed have a regular income. That said, both the state and federal levels require that self-employed individuals file their exact income annually. Landlords can obtain a self-employed tenant’s tax returns in two ways should you want official copies of the returns –

  1. Form 4506 – This form allows owners to request an individual’s official federal tax return. The return can be delivered directly to the tenant and then given to a landlord, or it can be designated to be received by a third party. However, the downside to using this form is that it can take up to 60 days for processing. Most landlords do not want to wait this long to verify a potential tenant’s income while leaving their rental property vacant. Also, there is a fee involved for each return requested.
  2. Form 4506-T – A more popular option is to request a transcript of the potential tenant’s previous tax returns. Although not the official tax return, this will give you information regarding the previous year’s filing. These transcripts are free to request and usually arrive within 24 hours of the initial request.

Keep in mind that a self-employed tenant’s income can vary greatly from year to year. So, it might be wise to request a couple of years’ worth of tax returns to get a better idea of the actual income that is being received annually.

Credit Check

Running a credit check is something that all landlords or property management companies must do during the screening process. Credit checks provide an overall credit score, debt amounts, number of open accounts that may be delinquent, liens or judgments, and even prior evictions. Landlords can also use this information to get an idea of the person’s debt-to-income ratio. Thus, it will help show whether the individual is financially sound enough to afford the rent and pay on time. Utilizing a credit check is good for a variety of reasons –

  • Potentially revealing any false information on the rental application.
  • Showing all past addresses no matter the circumstances for leaving. This way, a potential tenant cannot “leave out” their eviction addresses.
  • All accounts are ranked on a scale of 1-9 (1 is the best, 9 is a probable collection agency).
  • It shows other credit inquiries that have been requested, such as collection agencies or creditors.
  • The actual credit score will provide a clear idea of a person’s credit and tenant worthiness.

However, credit scores do not always paint a clear picture of a person’s entire financial health. Some circumstances such as divorce, school loans, or past medical bills could negatively affect a tenant’s credit score. These circumstances do not necessarily equate to an inability to pay monthly rental payments. So, it is important to consider an applicant’s credit score but also have some discussion regarding their financial situation.

What if the Applicant has Insufficient Income?

When a self-employed tenant meets the criteria but has insufficient income, there is still an option available. For example, landlords can require a co-signer. A co-signer signs their name to the lease and agrees to take responsibility for missed payments should the tenant’s income level prevent them from paying. That said, the co-signer does not occupy the property; they simply accept financial responsibility should the need arise.  However, when accepting a co-signer, it is important to screen them to determine their income level. Keep in mind; they need to make enough to cover their own obligations plus the rent if the tenant falls behind. Therefore, we recommend that a co-signer make at least 6 times the monthly rent to qualify.

The Pros and Cons of a Lease Co-Signer

  • Pros – A cosigner helps protect landlords against possible non-payment of rent. Additionally, this policy allows owners to rent to individuals who are great candidates but fall slightly short on verifiable income or credit history. A good example is college students or younger individuals that have not built their credit history yet. So, if you feel that the security deposit is not enough to recoup losses in the case of non-payment or damages, accepting a cosigner might be a good option.
  • Cons – While a co-signer helps provide financial security, it cannot predict tenant behavior. Therefore, landlords may still face other issues that can lead to complaints, headaches, and even eviction. This is why it is vital to complete a comprehensive screening process and weigh all of the applicant’s attributes. That way, you make an informed decision and remain comfortable with the amount of risk you are willing to take.

No matter how you screen applicants who are self-employed or otherwise, remember, do not discriminate. Make sure you are aware of the Fair Housing Laws that govern discrimination prevention. Landlords cannot legally deny a person(s) from renting a home based on race, color, religion, national origin, familial status, or age (including families with children under 18 and pregnant women), disability, handicap, or sex. Additionally, depending on the location, local jurisdictions may have additional protected classes.

Protect Your Investment with Full-Service Property Management

Successful investors know the key to having a suitable tenant in your rental is proper tenant screening. Whether a person is self-employed or not, there is a risk any tenant may be unable to fulfill their monthly rental obligations.

Completing tenant screening is just the beginning of a landlord’s responsibilities. Thus, having an experienced property management group on your side can make all the difference. Bay Property Management Group can verify an applicant’s income and complete a thorough screening while assuring state and federal compliance. Once the tenant moves in, our work is just beginning. Our local property managers handle everything from rent collection to tenant communications and maintenance needs. Are you ready to take advantage of Bay Property Management Group’s full-service approach to rental management? Give us a call today for a free no-obligation rental home analysis.