What is Rent to Income Ratio and How to Calculate It for Future Tenants
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.
By: Winston Rowe and Associates
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:
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.
Winston Rowe and Associates prepared this article they are a national consulting firm. You can contact them at https://www.winstonrowe.com
Winston Rowe and Associates