What Rental Criteria Should You Use for Your Multi-Family Property
Everything You Need to Know About Multifamily Requirements
Renting out your vacant spaces to quality tenants is one of the vital elements of any successful real estate investment. It’s also a process that can be both confusing and challenging since there are several laws and regulations that landlords and managers must follow, from the federal level all the way down to the local level.
This makes it difficult to know what requirements you can enforce and what information you can and cannot ask for. As a professional property management company in Southern California for over forty years, Coastline Equity has developed an efficient way to screen applicants and lease apartments in multi-family properties, and we would like to share our process with you!
Check Each Applicant’s Credit Score
First the credit score. An applicant’s credit score is a good indicator of their previous ability to manage and pay off their financial obligations. Almost all of our residential leases require that all people 18 years or older that will be living in the unit must have a credit score of at least 650. Why 650? This credit score helps to sort out those that may have difficulty paying their monthly debt obligations, but it isn’t so high as to narrow down the leasing pool too much.
Require Separate Applications for Each Roommate
Since every adult that will be living in the space will be required to sign the lease and be held responsible for upholding the terms of that lease, it is important that each adult (18 years of age or older) provide their own separate lease application to the landlord or management company when applying for an apartment. This allows us to run a credit and background check for everyone that will be on the lease.
Monthly Income Requirements
Next are the income requirements. Having tenants that pay too much for housing compared to what they earn in monthly income can be a risky situation for both the tenant and the landlord. That’s why we work with our clients to agree on an income requirement for their rentals before we start the leasing process. This amount is typically calculated based on a multiplier of 2.5 or 3 times the monthly rent. Using 2.5 as an example, if the rent is $2,000 per month, the tenant must have a before-tax income of $5,000 per month ($60,000 per year).
If multiple people are living in the unit, the monthly before-tax income of each person 18 years of age or older that will be living in the space will be combined. In our previous example, as long as their combined income equals $5,000 per month, they will meet the income requirement.
Why 2.5 or 3 times the monthly rent? Investors and landlords want to have peace of mind that their tenants will always be able to make the payments on time and in full. As a general rule of thumb, many people feel this can be achieved if tenants keep their monthly housing costs to one-third of their total monthly income (hence the 3x multiplier). Lowering the multiplier to 2.5x has the benefit of making your unit more attainable to more people while still adhering closely to this general rule.
Look for Prior Evictions or Bankruptcies
The property management software that we use at Coastline Equity also allows us to see if a prospective tenant has previously been evicted or filed for bankruptcy. According to TransUnion, a Chapter 7 bankruptcy can stay on an applicant’s credit report for up to 10 years from the date the bankruptcy was filed, while a Chapter 13 bankruptcy will last for seven years after the filing date.1
Regarding evictions, Equifax says that “The eviction itself won't show up on your credit reports. However, a landlord may choose to seek payment by selling your debt to a collection agency. If your unpaid debt goes to collection, it can remain on your credit report for seven years...[also] Some landlords report to companies that issue tenant screening reports. Unlike standard credit reports, tenant reports might include information about an eviction even if there was no monetary judgment.2
We typically will not move forward with a lease application if evictions or bankruptcies are found. When that is the case, we are required to send the applicant an “Adverse Action Letter” explaining why their application was denied.
Criminal History
Landlords may also check the criminal history of an applicant and refuse to rent based on what they find. Just be aware that there are some types of criminal history information that landlords or managers are not allowed to consider, such as arrests that did not lead to a conviction, any record of a conviction that has been sealed by the court, or any conviction that came from the juvenile justice system.3 Landlords must also “...look at the individual circumstances involving a conviction to decide whether it is directly related to an applicant’s ability to be a good tenant.”
Along With the Rental Application
There are a number of specific things that landlords can legally request along with (or within) the actual rental application:
- Three-month’s-worth of bank statements (checking/savings) - to verify that the applicant consistently has funds available to pay monthly rent obligations
- Three months' worth of proof-of income – to verify a steady source of income. Any of these will work:
- Six (6) bi-monthly pay stubs (this is the most common thing people have)
- W-2 earnings statement
- Proof of SSI or Disability payments
- For those that are self-employed, applicants can provide one of these: last year's tax return, Form 1040, or 1099 Misc. Income Statement.
- Photo or scanned copy of the applicant's driver's license
- Photo or scanned copy of applicant’s Social Security Card (see below for exceptions)
- Three personal or professional references - this allows us to contact those references and help obtain an idea of how the applicant might be as a tenant.
- Non-refundable $52 application fee from each applicant – Note that there are no profits to the landlord or management from this fee. It simply helps us cover the costs associated with running credit and background checks, as well as encouraging only serious inquiries.
Also, landlords are a?ames, addresses, and telephone numbers of your current and past employers, a tax identification number (such as a Social Security number), and an applicant’s driver’s license number.3 Note that there may be instances where an applicant cannot provide a social security or driver license number.
According to the California Department of Real Estate, “In such cases, an applicant may provide a ‘government-issued’ photo identification such as a passport or a foreign driver's license instead, which would allow the landlord to verify the applicant’s identity without inquiring about the applicant’s immigration status, which is prohibited under the law.”
Conclusion
There is a lot that goes into the leasing process, so having a professional property management company is very helpful. For more information, you may also want to check out some other content we’ve created, from our YouTube video about doing a success unit turn (here) to a blog post we made about five tips to market your vacancies (here)!
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