What is Rent to Income Ratio and How to Calculate It, Winston Rowe and Associates

The Importance of Rent to Income Ratio

A rent to income ratio determines the monthly or annual gross income a tenant must earn to be able to afford rent each month. This ratio is a useful and simple tool that helps tenants as well as landlords enter into a smooth rental agreement.

Using an income to rent calculator, landlords can analyze the ability of tenants to pay rent each month. As a result, it simplifies the process of tenant screening and shortlisting applicants.

Calculating Rent to Income Ratio

Here are two commonly used ways to calculate this ratio:

Calculate net income against a fixed rent percentage

This will help you determine the maximum amount you can afford to pay in rent each month. The industry standard is 30% of your income. In other words, no more than 30% of your annual income should go toward housing costs.

Its mathematical representation looks like this:

(Net earnings per year / 12) X 0.3 = Maximum monthly rental income

For example, suppose an applicant earns $150,000 per year. The income to rent ratio will be:

(150,000/12) X 0.3 = $3,750

Now, if the rental site asks for $4,000 per month, the applicant would fail to meet this condition. This is because their maximum monthly rental income does not reach the required limit. Therefore, the landlord might not find the candidate eligible for renting.

Use a ratio multiplier

Another method to calculate the rent to income ratio is to multiply the monthly rent value with a ratio multiplier. In this method, the standard multiplier is 3. This means that the applicant should make at least three times their gross monthly income to cover rental expenses. The math would look like this:

Monthly Rent X 3 = Minimum monthly rental income

Let’s consider an example to better understand. Suppose you are interested in renting an apartment that asks for $3,000 per month. Three times this rent amount becomes $9,000. This means you must gross a minimum of $9,000 per month in income to be eligible for consideration.

Pros & Cons of Rent to Income Calculations

Each month, a tenant’s paycheck likely goes toward many different bills and obligations. By gaining an understanding on how much monthly income is remaining, you’ll get a better idea of the ability to pay.

When landlords are recruiting good tenants, the rent to income ratio plays a very important role. It is the primary way to determine income requirements to rent properties based on monthly or annual earnings. This helps ensure that the tenant is able to afford rent each month.

As a landlord, you might not want to invest your time on ineligible tenants for your property. Calculating the gross income to rent ratio is an important step toward securing the right people for your rentals. Rather than going through the hassle of the screening process, use the rent-to-income ratio as your simple criteria instead.

However, ideal rent to salary ratio situations are not always as favorable as they sound. We know a lot of people aren’t that consistent in paying rents. Whereas, applicants who may not satisfy the income to rent ratio could be more responsible when it comes to paying rent on time.

Plus, some complexes make their income to rent apartment policies 3:1 . This might look like a lucrative option but in actuality, it prompts to a significant decline. Some tenants demonstrate a consistent ability to pay rent while others, with higher rent to income ratio, fail to provide steady deposits.

On the other hand, the 30% rule is a popular guideline for determining what percentage of income should go to rent. However, there are two big flaws associated with this rule. First, it doesn’t account for inflation and rising rental prices. Although rent prices are climbing more rapidly in some areas than others, average wage growth has been relatively flat since 2007. So, while rental rates are climbing, incomes aren’t necessarily keeping pace.

The second problem with the 30% rule is that it’s not personalized to your situation. It doesn’t take into account, for instance, how much student loan or credit card debt you might be paying off. Moreover, it also does not consider how much money you’re earning, your financial goals, or the condition of the real estate market where you are planning to rent.

Alternative ways to calculate rent to income ratio

As a rule of thumb, your income should be 40 times your rent, which is basically the same as 30% of your total salary. Almost every rent to income ratio calculator you find online uses this alternative way to calculate the ratio.

For example, suppose your income is $100,000 per year, the amount of rent you can afford each month can easily be evaluated as 30% of your total income divided by 12.

The math will look like this:

(0.3 * 100,000) / 12 = $2,500

Alternatively, you can divide the net amount by simply 40.

( 100,000 / 40) = $2,500

How Landlords Can Protect Themselves?

Calculating rent to income ratio might seem quite effortless and manageable, but it might partly hold a deficit for the landlord. Why? Because the landlord is not able to acknowledge the total worth of the tenant because of unspecified sources of income. The potential tenant may seem to have other financial obligations like loan percentage, fixed rate for insurance, and indemnification.

Even after thorough screening, some people may delude and provide false income documentation. In any case mentioned above, the landlord is fully granted the right to access all additional financial information of an applicant. Tenants should likely provide all credit card details with a proper financial report.

Before letting in a tenant, make sure that all the certified funds, cashiers’ checks, money orders, and records of all previous taxes of a year are officially provided. Even if your tenant qualifies as per the 30% rule, they may be overburdened with extra expenditures. In such cases, landlords need to assure ways to protect themselves.

Here’s how landlords can protect themselves:

Set up recurring rent payments

Auto-pay services provide a convenient method of direct deposit with rent deduction on a specified date. It also provides more assurance of getting paid on-time each month if payments are set up to recur.

Request a large deposit as a backup provision from any uncertainty or loss

A larger security deposit offers greater security because it can cover the landlord’s losses in case of damages or missed rent. Also, introduce several methods of rent payment. Get rent default insurance coverage to keep your income stable and regular.

Specify a co-signer on the lease

The co-signer is responsible to pay the dues in case the primary leaseholder cannot. The landlord should vet the co-signer as thoroughly as the tenant.

Run a thorough background check

Check the tenant’s background and inquire about past rental history. Also, check what your tenant presents as evidence. Cross-check all the references provided. Verify and validate all means of income sources. Gather data regarding any individual or collective payments or transactions. Once the property is rented, conduct routine inspections to prevent huge problems.

Rent to income ratio can benefit the landlord and tenant in many ways. It can help with budget planning for tenants looking to comfortably afford their rent. Whereas, it can prevent landlords from having tenants who may have difficulties paying their rent.

However, when it comes to screening and shortlisting a tenant, the rent to income ratio may not reveal enough about the tenant, their level of responsibility, or honesty. Therefore, all landlords should be running tenant credit checks, in addition to, calculating rent to income ratios.

A Comprehensive Guide for Apartment Manager

Apartment Building Lending No Up Front Fees Winston Rowe and Associates

With growing sizes of building complexes, apartment management is becoming one of the most challenging jobs. As an apartment manager, you are not only responsible for maintaining the building but the owner and tenants as well.

The main task of an apartment manager is to improve the client-tenant living experience. They need to reduce costs and increase profit whenever possible.

Many property managers often face many challenges when trying to manage rental property. It’s essential that the management of a property run smoothly just like any other business.

If you are an apartment manager or owner struggling to do your job, these quick tips will guide you through managing an apartment efficiently. So let’s begin then.

Important Points to Consider for Apartment Manager

1. Following the Housing Laws and Policies

2. Securing Your Property

3. Making the Apartment Desirable

4. Selecting the Right Tenant

5. Maintaining and Upkeeping the Society

6. Resolving Resident Complaints Immediately

Important Points to Consider for Apartment Manager

1. Following the Housing Laws and Policies

Some specific laws and regulations govern the professionals responsible for managing properties. Every state has its own set of rules and regulations which needs to be strictly followed.

In recent years, there have been reported cases of property managers where their actions have resulted in the unauthorized practice of law. That’s why apartment managers should work closely with legal counsel. It will ensure that they don’t unintentionally violate the law.

Get in touch with the lawyers who are familiar with the housing field. They will guide you through relevant policies. Let them know about your intentions and what you plan to do with the property.

Furthermore, take advice on tax liabilities and potential credits related to renting properties.

We would suggest that meet two to three lawyers in the beginning. Talk to them about your renting plans and then,  decide with whom you can work for a long time.

Hiring a good lawyer will ensure that you always stay on the right side of the law.

2. Securing Your Property

Owning a residential rental property is a wise investment. But at the same time, it can be quite risky especially if you are new to this field. Without the right building insurance, you can face severe financial loss if something goes wrong.

The primary concern for any apartment manager or owner is the protection of the property from catastrophic events. Your apartment complex insurance should protect you against losses, damages, liability claims, and other issues.

Property insurance can seem complicated at first. But you can always take the help of your lawyer and insurance agent to guide you through.

Also, you should know that the insurance coverage and its cost vary. It depends on factors like the building’s location, type of construction, and more.

Some of the risks that apartment building managers/owners have to deal with:

    Liability for tenant, employee, and visitor injuries

    Theft or vandalism

    Advertising liability

    Fire, storms, and other catastrophic damage

    Invading the right to privacy

    Loss of rental income

    Discrimination lawsuit filed by disgruntled tenants

    Any allegations of fraud or misconduct by tenants

You can tailor the insurance policies to one’s need to address the risks as mentioned above.

3. Making the Apartment Desirable

You can’t ignore the fact that for each day your property stays vacant, you lose potential rental income. If you want to attract quality tenants, make your apartment as desirable as possible.

How do you do that? A few simple fixes to help you make your property desirable to prospective tenants.

    The first thing any tenant would look at is the exterior paint. If it is not at par, the tenant may not even want to come inside. A few ways how you can fix it:

        Add some quality landscaping to increase the property’s curb appeal

        Remove chipped paint and get a new coat of exterior paint

        Repair broken banisters and replace torn window screens

        Keep the compound clean. Remove trash, weeds, and debris

        Make sure the lawn and shrubbery are well-manicured

    If you want to charge a hefty amount in monthly rent, then, of course, you would have to go the extra mile. Provide luxuries that many tenants would be gladly willing to pay for. For instance, you can consider adding an in-house dryer, energy-efficient appliances and more.

These small tricks will help bring in the quality of applicants.

4. Selecting the Right Tenant

The next step in the apartment management process is selecting the right tenant.

Renting out apartments can be stress-free only if you have the right tenants. For that, you would need to advertise the vacancy to let people know about your rental space.

I. Advertise the Empty Space

Even in places with high housing demands, advertise your space stating all the facts and your requirements. This will help draw the right kind of applicants to your rental house.

The ad should contain information such as your contact number, details about your apartment, and what up are looking for. Some of the places where you can advertise it are:

    Post it on newspaper

    Display it on Internet classified sites

    Connect with a real estate broker

II. Screen Tenants

Of course, you are not allowed to discriminate your tenants based on caste, creed, race, sex, etc.

However, you should screen tenants before renting your apartment to anyone. Make sure that they are financially sound to pay your rent and do not have any criminal background.

Otherwise, unsystematic screening and tenant selection often result in some significant headaches. You might end up with a tenant who pays the rent late or not at all and poorly maintained the place.

Your screening criteria should be the same for all. It should include:

    Run a background check on each applicant to ensure that they won’t conduct any illegal activities in your apartment

    Obtain a credit report to see if they can afford your rent and will be able to pay your rent on time

    Ask for references from previous landlords or other personal references if any

III. Get it in Writing

Once you have chosen your tenant, make sure that you have a lease agreement in place. It should contain all the terms and conditions agreed by both the parties.

Having it in writing will protect both you and your tenants in case of any conflict in the future. The rental agreement helps create good relation by specifying things. It includes clauses like how and when you handle tenant complaints and repair problems, notice period if the tenant decides to leave, and more.

The lease agreement should contain the following information:

    The names and signatures of the tenant(s) and landlord

    The starting and ending dates that the property will be rented

    Rent costs and due dates

    Policies on security deposits and lease termination

    The tenant’s responsibility to maintain the unit and pay for damage caused by any neglect

    Strategy and procedure for dealing with tenant’s complaints and repair request

    Mention the restrictions if any on tenant alterations on their apartment without your permission

    Information on any environmental hazards present at the property

    Other optional policies as required

You can always find lease templates online or even talk to your lawyer about what information to put in one.

Furthermore, a written agreement helps in running the property smoothly and enhance resale value. Make sure that the tenants are aware of all the clauses included before signing the lease.

IV. Ask For Security Deposits

Security deposits are used to cover the expenses in the event of any damages or other faults with the apartments when a tenant moves out. To avoid any dispute over the security deposit when the tenant moves out, it’s better to inspect and document the condition of the unit before they move in.

Specific regulations are governing the policies regarding security deposits. With the help of a lawyer, establish a system of setting, collecting, holding, and returning security deposits.

Also, check with your state’s Landlord Tenant Act to know how long before you can return the deposit and/or a settlement statement.

5. Maintaining and Upkeeping the Society

At times it may become difficult for the apartment manager to choose between areas which need more focus than others. But thanks to the technological advancement, the apartment management software that comes to our rescue.

Using society software, you can streamline all operations and handle it from a single place. Following these five quick tips will help in a better apartment management system:

I. Automate Society Billing & Accounting

Financial issues are always a serious matter. When the apartment size keeps getting bigger, maintaining accounts can get too time-consuming and challenging at times.

The process of accounting and bookkeeping, penalty calculation, and income and expense tracking should be streamlined for smooth functioning. The best way to do that is to employ a society management software that automates your billing and collection efforts.

Some of the essential modules of tenant management include document depository, penalty calculation, maintenance charge payment, payment gateway, request for quotation, and more. It integrates with the current system in place without disrupting the whole operation.

II. Communicate With Your Tenants Effectively

As an apartment manager, it’s essential that you maintain a healthy relationship with all your tenants. For that, you need to find an effective way of communication.

The smart move would be to incorporate an apartment management software that offers communication tools. These tools can post notices and reach out to everyone. Furthermore, it assists in other activities like securely sharing pictures from community events, broadcasting essential messages, and maintaining functions calendar.

You can also create and publish articles on waste management guidelines, festival celebration forums, and more. It will help you create one active community with the ease of the housing software.

III. Manage Apartment Facilities and Staff Smartly

Again, you will often find complaints about how the apartment facilities are not well maintained.

You can save yourself some time by automating all your task such as asset tracking, inventory management, maintenance staff, and more. With the help of society management software, you can save yourself the pain of manually overlooking every activity.

Moreover, the software will also empower your tenants to book an apartment facility online. You can keep records of visitors for security purpose. These are a few of the many benefits a useful apartment management software has to offer.

Provide a superior experience to residents by managing all apartment facilities smartly.

IV. Skillfully Manage Society Data

One of the many benefits of using society maintenance software is that you can easily centralize all your data in one place.

You need to maintain a directory of residents, the number of flats in the apartments and more, to systematically reach out to them. Using maintenance software will save you a lot of time and help effectively manage the condo.

6. Resolving Resident Complaints Immediately

Resident complaints will always be an issue for apartment managers. It is therefore essential to have a system in place that will help resolve their problems immediately.

Having a central tracking of resident complaints or suggestions can be a good idea for efficient management. That’s why the whole process of filing complaints and the manager resolving the issue needs to be automated.

To immediately attend to the tenant’s problem, you can do the following:

    Use software that will help you track the complaints at various stages. It should also send alerts in case of unresolved complaints

    Give tenants a number where they can reach the management department 24/7, to handle any emergencies

    Always have a few handymen on standby who can repair your apartments when need be

It will help you manage the apartment much better and increase resident satisfaction. Thus, it will enhance their faith in the management committee.

Wrapping it up

Apartment management may seem like a daunting task at first. Especially when there are tenants who try to create menace in society.

Sometime you would also need to take legal actions when necessary. Some tenants do not pay rent on time or conduct illegal activities on the premises. Sometimes, they even cause damage to the property or violate the lease agreement. In such cases, talk with your lawyer and proceed in the right way.

Or you can take the help of a mediator to work with you and your tenant to reach out a settlement on the issue. Either way, make sure that other residents in society do not face any inconvenience.

The Ins and Outs of Apartment Building Construction

Apartment Construction Lending No Upfront Fees Winston Rowe and Associates

In nearly every metro area of the country, building developers and contractors are scrambling to keep up with the growing demand for rental apartments. In 2014, nearly 350,000 apartments began construction. A number that increased by nearly 14% from 2013, according to the National Association of Home Builders.

However, even with a large number of projects underway, there are certainly no shortages of challenges that come with apartment construction and there are a number of variables to take factor in when considering the overall cost of commercial apartment construction.

From what type of amenities you will include with the building to the building’s walkability in the surrounding area and construction variables such as labor, weather, trade tariffs, it can be a challenge to construct the building of your dreams while staying within budget.

As apartment sizes are shrinking, tenants are turning to the amenities to help meet all of their needs while living there and driven property owners to great lengths to include must-have amenities for everyone. But when it comes to designing an amenities package and choosing what amenities to include there can often be a lot of “push and pull.” It is a careful space-planning exercise.

According to a 2015 survey from the National Multifamily Housing Council, amenities such as fitness areas, pools, and in-unit laundry machines were of greater interest to Millennials than to baby boomers and nearly 60% of the 120,000 person survey said they are interested in having a lounge area or party room in their apartment building.

For owners and developers, it is important to know which amenities will give the most return on investment. When designing a new apartment construction project, it pays to stay up on the trends of potential tenants.

Some amenities require not only an allocation of space, but significant ongoing maintenance and expenses while others can be installed at little initial or ongoing cost. Some can even save you money over time. The type of amenities you should include will come down to which amenities are valued most by renters, as well as age group and lifestyle.

Location and Walkability

Determining what amenities are right for any one community can be a challenge, but some amenities can be scaled back if the apartment exists within a surrounding community.

For some renters, location is the number one amenity. In a 2015 nationwide survey by the National Association of Realtors, roughly eight out of 10 people said that being in walking distance to community features like shops and parks was very important to them when considering a new place to live. Tenants care about the walkability of their living situation. If tenants live within walking distance of restaurants, bars, and gyms then forgoing some of those features can save on apartment construction cost.

However, apartment construction in a walkable city can be a challenge because there is limited space. Not only that, but land costs are also much higher for walkable, urban locations as opposed to rural areas. As a building developer, you will want to find ways to work with a municipality to provide useable sidewalks, trails, and open spaces to attract new renters and encourage a pedestrian-friendly experience for everyone.

Amenities and walkable communities aren’t the only things developers and contractors struggle with when it comes to apartment construction as there are a variety of other factors that can affect the final price.

Many apartment developers are fighting off price increases for things like labor shortage, weather conditions, and building materials due to international trade tariffs. In fact, according to data from the Bureau of Labor Statistics (BLS), even the threat of trade tariffs can affect the price of steel and lumber. In August of 2018, the producer price index for steel mill products jumped by 19 percent compared to the year before and while lumber and plywood also saw a sharp rise in the spring and early summer.

If you are planning to build an apartment building or are a current property owner looking to make upgrades, click below to contact us today!

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