The Ins and Outs of Rent-to-Income Ratio: What Landlords Need to Know

The rent-to-income ratio is one of the criteria used to calculate your annual gross income when determining whether you qualify for a mortgage. This ratio accounts for the ratio of your gross income to your monthly housing expenses, including rent. If a landlord has specific income restrictions, they may require a higher ratio than 36-40%. To determine your ratio, you need to look at part of your credit report, which will have details on the total gross income you earn and the amount of monthly debt you have.

Recently, there has been much focus on rent-to-income ratios (see: Rental discrimination). Many tenants are under the impression that landlords discriminate against them because they can’t afford their rent. Most landlords tend to prefer tenants who can afford their rent. A rent-to-income ratio is used to help them decide if they can afford a potential tenant and determine how much rent to charge them. Landlords, after all, also have to look out for their own monetary interests. It’s why many landlords outsource to a property inventory management company to potentially increase the rent. By effectively tracking inventory metrics such as the number of rentals, fleet age, and inventory turnover rate, landlords can make informed decisions to optimize their rental business and create a fairer rent-to-income ratio.

How to calculate the rent-to-income ratio

One of the primary ways a landlord determines whether or not to approve your housing application is by determining your “rent-to-income ratio.” This ratio is the amount of money you make before taxes or deductions (excluding any gifts or inheritances) divided by the rent you expect to pay. The formula used to calculate this number is as follows:

  1. Total Income minus
  2. Total Expenses divided by
  3. Total Income minus
  4. Total Expenses minus
  5. Total Housing Costs.

The housing costs are the most important factor in this equation since every landlord wants to ensure that you have enough money for basic living expenses.

Automate rent reminders and late fees

Not enough landlords understand that their tenant’s rent can be paid late each month. The more a landlord knows about the effects of late payments, the better they will be able to help their tenants avoid late fees in the future. Late payments can be a problem many landlords face. Oftentimes, tenants will fall behind on their rent due to medical crises, job loss, or even simple forgetfulness.

Getting a lease guarantor / co-signer

Landlords often require a lease guarantor or cosigner to mitigate risks associated with renting out their property. Wondering what is a guarantor? A guarantor is someone who agrees to take responsibility for a financial obligation if the primary tenant or lessee fails to fulfill their obligations under the lease agreement. This could include paying rent, covering damages, or other liabilities outlined in the lease.

Keep in mind that seeking the assistance of a guarantor can provide financial security by introducing an additional party who becomes legally responsible for rent payments and any potential damages. It’s particularly valuable when dealing with tenants who may have limited rental history, insufficient income, or poor credit scores. By having a guarantor with a stable income and strong credit standing, landlords can ensure that rent obligations are met, reducing the likelihood of financial losses.

Additionally, requiring a guarantor serves as a screening tool, helping landlords assess the reliability of prospective tenants. Overall, having a lease guarantor or cosigner offers landlords peace of mind, legal protection, and increased confidence in their rental agreements, making it a common practice in the realm of property management.

Pros and cons of using the rent-to-income ratio

The rent-to-income ratio that landlords should know helps determine if a tenant will be able to pay rent. The rent-to-income ratio that landlords should know is very closely related to the gross income of tenants. The rent-to-income ratio that landlords should know, also called the gross rent multiplier, is the relationship between annual gross rent and gross annual income.

The rent-to-income ratio, also known as (RTI), is a fairly complex ratio that measures the relationship between a household’s gross monthly income and the amount it spends on housing. Determining the RTI helps determine how much of a risk a landlord should assume when renting to an individual or family.

The rent-to-income ratio (R/I ratio) is a commonly used guideline used by landlords to determine the affordability of a potential tenant’s income level for a given property. Two basic factors determine the amount of income of a potential renter a lender will consider: gross income and debt-to-income (DTI) ratio. Gross income is the total income a person receives before taxes. It is also referred to as total income or adjusted gross income. DTI is the ratio of total monthly debt payments (including mortgage, auto, and any other debts) to total monthly income.