The decision to approve a self-employed tenant to rent your home is often a tricky one.
Some landlords get nervous when they hear the words “self-employed” or “freelancer”.
The truth is, there are great income opportunities for those seeking the self-employed route, but for landlords this often means there is no employer reference, no stable income, and more challenges in verifying that fluctuating income.
However, the decision to rent to a self-employed tenant does not have to be quite as difficult as it may seem.
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.
Requesting a potential renter’s bank statements is one of the easiest ways to verify the amount of money that is available monthly.
You will be able to gain insight as to what the ratio of incoming to outgoing finances look like for this applicant and either comfort yourself in knowing there is adequate money flow, or reject the application.
Better yet, other digital processors, like PayPal or WePay, show regular cash flow through an account for the self-employed, should a bank statement not reveal what money is coming in or going out.
There are many instances where a self-employed tenant may only use such services as PayPal when dealing with their business income so requiring those statements will help clear up any issues.
Self-employed tenants will not have a typical paystub or W2 Form to submit to you to verify that they indeed have a regular income.
But there is a way around this.
At both the state and federal level there is a requirement that those that are self-employed file their exact income numbers annually. These numbers can give you an idea of what their actual income happens to be.
You 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 you to request a person’s official federal tax return. This will give you an exact copy of the tenant’s tax return from the previous year. The return can be delivered directly to the tenant and then given to you or it can be designated to be received by a third-party such as yourself or your Maryland property management group for review.
- 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.
- This form also costs $50 per return requested. This is a cost many landlords do not want to bear.
2. Form 4506-T
Another 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 as to actual income that is being received annually.
Running a credit check is something that all good landlords or their Maryland property management companies should do during the screening process of a potential tenant.
Credit checks provide a person’s credit score, debt amounts, open accounts that may be delinquent, liens or judgments against them, and even prior evictions.
You can also use this information to get an idea of the person’s debt-to-income ratio. This will show you whether you feel they will be able to handle your rental property’s monthly rent in addition to their other financial obligations.
Utilizing a credit check is good for a variety of reasons:
- It will reveal any false information on the rental application.
- It will reveal 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 will show 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.
There are some circumstances such as divorce, school loans, or even past medical bills that could be affecting a tenant’s credit score in a negative way that do not necessarily equate to an inability to pay monthly rental payments.
It is important to consider a person’s credit score but some discussion may need to take place regarding their actual financial situation.
Other Screening Tools
There are a number of other ways to prevent a self-employed tenant with insufficient income from renting your Maryland home and skipping out on payments.
- Require a co-signer. A co-signer is someone who will take responsibility for missed payments on the part of your tenant should their income level prevent them from paying. The co-signer does not have to live with the tenant. They simply accept financial responsibility should the need arise which protects you in the long run.
- For a small, one-time fee you have the option to use the eviction database system to screen a potential tenant for past evictions. While this tool may be useful in determining whether a potential tenant has been previously evicted, should you have any reservations about a person in the first place, you might consider another tenant. However, it is useful to know the option is available.
- Contact the applicant’s previous landlord(s). Many evictions or payment issues are not officially reported so the most efficient way of finding out whether a potential tenant can make timely monthly payments is to contact previous landlords. If you are unable to locate any previous landlords, apartment complexes, or property management groups remain hesitant about approving this applicant for your property.
- Request a past utility bill. Since the tenant applying to rent your Maryland home must have lived somewhere previously, especially if stated on the application, request a recent utility bill to compare to the rental application. Does it match? Check for false information written on the application.
- Do not discriminate – Make sure you are aware of the federal rules regarding discrimination. You cannot legally deny a person(s) from renting you home based on race or color, religion, national origin, familial status or age (including families with children under the age of 18 and pregnant women), disability or handicap, or sex.
The key to having a suitable tenant in your rental property is proper tenant screening. Whether a person is self-employed or not, there are always situations that can arise causing the inability to pay their monthly rental obligations.
Your Maryland property management group can assist you in verifying your tenant’s income and assure you that you are in state and federal compliance. Take advantage of Bay Porperty Management Group’s extensive screening process to help ease your mind about the tenant you place in your rental home.