The tenant screening process is stressful, but you need to know that the people living in your properties can cover their monthly rent. If they can’t and a breach of contract leads to eviction, it’s a traumatic and emotional event for both you and the tenant. And, it’s definitely a costly headache for you. Evictions can cost a landlord many thousands of dollars in legal fees and court costs, lost rent, property turnover costs, etc. For the screening process, you’ll need to know how to verify employment, as well as do a full background and credit check. Knowing a would-be tenant’s income means you’ll see if they can afford their monthly rent. A traditional rule of thumb is to calculate that their rent would be 30 percent or less of their gross monthly income.
Keep in mind that in high-rent markets like San Francisco or New York City, this rule is difficult to follow. In fact, a Harvard Joint Center paper on housing affordability found that the number of renters paying more than 30 percent of their gross income on rent comprises more than half of all renters.
Your ultimate goal with income verification is just to see that the prospect has a steady source of income and will likely pay the rent in full and on time.
How to get started verifying a prospective tenant’s income
You could either ask for documentation or call a prospective tenant’s employer to verify income. But it’s worth your while to do both. For one, employers are not obligated to answer your questions. They may choose not to respond for legal reasons or to protect themselves from a possible breach of employee privacy.
You should do the employment verification once the rental application is completely filled out and you can see the self-reported income, at least, is going to cover monthly fees. Do the verification before heading into a background check in case there are any red flags. If there are, you might skip the background check and save yourself some time and money.
What to ask if you call your prospective tenant’s employer
First, make sure the tenant has given you the name of the correct person to contact. In a larger company, it’s likely the human resources department or payroll. You might take a quick check on the company website to make sure. In a smaller company, you might just speak with a direct supervisor. In some cases, there will be a specific phone number or email address for information on who handles employment verification.
Once you introduce yourself to the person on the phone let them know who you’re calling about and why you need the following information: job title/what the person does for the company, date of hire, employment status, salary. Be sure to document the name and contact information of the person you ultimately receive the information from. In fact, you should document the entire screening process by keeping all your notes and emails.
Note that some employers may only acknowledge employment status and dates of employment.
What documents will verify employment?
Pay stubs are the most common proof-of-income document. Ask to see several months since many people get paid twice a month. But there are other documents that a prospective tenant may use to prove income:
Income statement
People who work for an employer can verify their income by showing a W-2, which is the federal government’s form for showing wages and taxes. Self-employed people (freelancers and contract workers) will have 1099-Misc or 1099-NEC (non-employee compensation) statements. From these, you can glean how much pay your prospective received by various clients, which will give insight into monthly or yearly income.
Employer letter
You can ask a prospective tenant to send you a salary verification letter written and signed by his or her employer. It’s possible that the prospect could fake a salary verification letter. Require a work phone number and relevant employer contact information.
Social Security benefits statement
If a prospective tenant is on Supplemental Security Income (SSI) or receives disability payments, you can ask to see a benefit verification letter from the Social Security Administration.
Worker’s compensation letter
Perhaps a tenant receives income from a current or previous employer because they suffered an injury on the job. While you can see the tenant has steady wages, keep in mind this form of compensation is likely short-term.
Unemployment statement
Yes, this does prove income, but just as with worker’s compensation, it will likely end after a certain amount of time.
Bonus and incentive payments
If your renter has a commission-based job, he or she may receive bonus checks periodically. While their income may seem inconsistent, look at their income over time to see if they will be able to pay the rent each month.
Income tax returns
Looking at a return will show you how much your renter earns regardless of whether they’re a salaried employee or have 1099 compensation.
Bank statements
While this may seem intrusive, this form of income verification works well for a tenant who’s self-employed. You’ll be able to see monthly income deposits, which can help you determine if the person can afford the unit.
How can I tell if a prospective tenant is not being honest about employment verification?
It’s possible that a would-be tenant might give you a fake reference. They may have someone offer false employment verification. Or, they may even create fake wage statements.
Look closely at all the documents you’re given. For example, fake income statements may have all-around numbers, something that’s atypical. Look for typos, and these documents should look professional and not messy. Check that the letter “O” hasn’t been used for the number “0″ and vice versa. Make sure the Social Security numbers match. And, of course, verify the information on the document with the employer.
Verification is good for all
Knowing how to verify employment of a prospective tenant’s income is just one element in your arsenal as you prepare to allow someone to rent your property.
Checking a would-be tenant’s background and making sure they can afford the monthly payments is important for you as a landlord, as well as for the tenant. A tenant buried by rental payments can lead to all sorts of headaches.
Source: rent.com