November 14, 2023 • 5 min read
You know you must do your due diligence to approve tenants, ensuring they have the funds to rent your property. However, this process can get a little sticky if your applicant doesn’t have a traditional employer. What kind of income verification documents can you request?
Imagine, for a moment, that an A-list celebrity approaches, asking to rent your property. You likely won’t be able to ask them for their W2 or paystubs, yet, you know they have the resources to afford your rent — and then some!
While it’s unlikely that Taylor Swift or George Clooney will walk into your leasing office, you may face many high-quality renters who are similarly unable to produce traditional income verification documents.
This post covers five options for income verification documents you can accept! We’ll discuss the pros and cons of each type of documentation, giving you all the information you need to easily verify applicant income and complete your tenant screening processes.
Collecting income verification documents is a vital part of the tenant screening process. But before we dive into the types of documentation you may consider accepting, let’s discuss why this is a fundamental part of the application process… and what could go wrong if you skip this step.
First and foremost, income verification helps you and your applicant determine if the rent is affordable. Many property managers abide by the 30% rule, suggesting that tenants should ideally spend no more than 30% of their gross income on rent. Collecting income verification documents allows you to calculate whether the applicant's income aligns with this guideline.
Related Read: When to Use a Guarantor Application: 4 Examples
One significant concern for property managers is receiving rent payments on time and in full. Income verification acts as a safeguard against delinquent or delayed payments. By confirming the applicant's income, you reduce the risk of leasing to someone who may struggle to meet their monthly rent obligations. This, in turn, helps you maintain consistent cash flow and minimizes the stress of chasing down overdue rent.
Another reason to ask for income verification documents is to mitigate your risk of evictions. Evictions can be costly, time-consuming, and emotionally taxing for both property managers and tenants. Ensuring that your tenant has a steady income significantly reduces the likelihood of future eviction proceedings.
On the other hand, skipping income verification can lead to additional financial strain on you as the property manager. If you end up with tenants who can't meet their rent obligations, you might find yourself covering the mortgage, maintenance, and other expenses out of your own pocket. This impacts your bottom line and can create significant stress and frustration. Collecting income verification documents mitigates this risk and creates a more stable and sustainable rental property management business.
With this in mind, let’s examine some of the various types of documentation you may consider collecting to verify income for your applicants.
One of the most common income verification documentation types is paystubs. Paystubs are documents an employer provides to employees detailing their earnings for a specific pay period. This document is especially relevant for tenants with traditional W-2 employment, such as salaried or hourly workers.
Pros: Paystubs offer real-time, easily verifiable proof of income. This document shows the tenant's gross income, deductions, and net income, providing a comprehensive picture of their financial stability.
Cons: Paystubs may not capture fluctuations in income over time, like bonuses or commissions, and may not be applicable for self-employed individuals or those with irregular income sources. Additionally, tenants could provide fraudulent or outdated paystubs, so verification is essential.
You can also request that applicants supply copies of their annual tax forms. Employers provide W-2 or 1099 forms to employees or independent contractors to report their annual earnings and tax withholdings to the IRS. Tenants may supply these documents as a summary of their yearly income, typically from traditional employment.
Pros: Annual tax forms offer a comprehensive overview of a tenant's annual earnings, including any additional income sources reported. This document type is less prone to manipulation or fraud than more frequently generated documents.
Cons: These forms may not provide a real-time view of the tenant's current financial situation, making them less suitable for assessing short-term income stability or recent changes in employment. Also, similar to paystubs, this type of documentation may not apply to self-employed individuals or those with complex income sources.
The third type of income verification document you may accept are bank statements. Bank statements record a tenant's financial transactions, including deposits, withdrawals, and balances in their bank accounts.
Pros: Bank statements offer a detailed view of a tenant's financial activity, which can help assess their overall financial health rather than simply their income. They can reveal consistent income deposits and patterns of spending.
Cons: Bank statements may not distinguish between income and other transactions, so scrutinizing them carefully is essential. Additionally, tenants may choose to provide selective statements that do not reflect their true financial situation.
Another option for income verification is to go straight to the source: a statement from your applicant’s employer. This document verifies a tenant's employment status, income, and other relevant details directly from the employer.
Pros: Statements from employers are generally highly reliable and difficult to manipulate since they come directly from the source. They offer real-time information about employment and income.
Cons: Some employers may be reluctant to provide such statements due to privacy concerns or company policies. This document may not be readily available for self-employed tenants or those with multiple income sources. You will also want to ensure you put processes in place to receive the statement directly from the employer rather than through the applicant, who could forge this type of document.
The last type of document we’ll discuss in this post is a profit and loss statement. Self-employed individuals or business owners typically provide profit and loss statements. They outline a business's revenues, costs, and expenses, ultimately indicating the profit or loss generated.
Pros: For self-employed tenants or those with businesses, profit and loss statements are a valuable source of income verification. They offer insights into the financial performance of their business, and, in turn, the applicant themselves.
Cons: These statements are only applicable for self-employed applicants. Additionally, they can be subject to manipulation, so careful scrutiny and verification are necessary to ensure accuracy.
When running your property management processes, it’s important to remember that flexibility is key! Not every applicant will have paystubs or standard tax forms, but that doesn’t mean they are a poor applicant.
Thinking outside the box regarding income verification documents can ensure your applicant pool is as wide as possible while still screening those applicants appropriately.
However, it can be challenging to collect and store a wide range of sensitive documentation securely. The right application and property management tool can make it easier!
Intellirent lets you digitally accept and store all your application forms and documents. You can rest easy knowing that the files are safe and secure, compliant with all regulations, and easily accessible when needed.
To see if Intellirent is the right tool to help simplify your income verification processes, create a free account today!
November 14, 2023
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