How to Use Rent-to-Income Ratio to Choose Incredible Tenants

Last Updated: October 19, 2023 by Cameron Smith

The number one reason for eviction is when tenants stop paying rent. Landlords need to do everything in their power to ensure this doesn’t happen as tenant evictions can cost up to $10,000. While there are several factors that determine if an applicant can afford the monthly rent, the most common metric is to calculate the rent-to-income ratio.

Benefits and Drawbacks of Rent-to-Income Ratio

As with any method, there are benefits and drawbacks. Check the list below to determine if this method is a good tool for your business.

Benefits	Drawbacks
Simple to calculate	Debt-to-income is more accurate
Easy to eliminate unqualified applicants	Additional funds (saved money) aren’t considered
Helps avoid potential evictions	Doesn’t factor net income

Benefits of Rent-to-Income Ratio

Here are the benefits of using a rent-to-income ratio:

• Simple to calculate – the formula is easy to use (or plug into our calculator!) to determine if the applicant can afford the monthly rent
• Easy to eliminate unqualified applicants – landlords can spend hours screening applicants searching for the right fit. With a high rent-to-income ratio expectation, landlords can quickly deny the rental application of anyone who doesn’t meet the standard.
• Helps avoid potential evictions – this method helps to ensure your future tenant can afford your space, helping you avoid evictions

Drawbacks of Rent-to-Income Ratio

While the rent-to-income ratio can be helpful, it should by no means be the only reason for accepting an applicant as it can be flawed. Look over these drawbacks below:

• DTI is more accurate – rent-to-income doesn’t look at debt. Applicants with high monthly financial requirements may find themselves having trouble making rent payments even if they have a high gross income.
• Additional funds aren’t considered – if someone recently won a settlement, has saved up a lot of money, sold a home, or is recently divorced and received a large sum of money, then their income may be zero. These people would be excellent renters as far as their ability to make payments each month.
• Doesn’t factor net income – a landlord should take a look at net income as well. For example, the applicant may be putting a huge percentage straight into a 401(k) or is having their wages garnished for a debt owed.

How to Calculate Rent-to-Income Ratio

Rent-to-income ratio is the percentage of a renter’s gross income that goes towards paying the rent. It’s a limited metric, but many landlords use it as a quick way to identify applicants who are worth additional screening.

Trying to predict a tenant’s ability to pay rent is not straightforward, and no single method will do the job. While credit scores, rental histories, and income verifications can help, the rent-to-income ratio is undoubtedly the quickest and easiest way to provide a first-glance view into an applicant’s financial health.

There are two common ways to calculate rent-to-income ratio:

1. Calculate the Percent of Income That Will Go Towards Rent
2. Multiply Monthly Rent by 3

Each of these calculations look at two main factors, rent and income.

• Rent – while this number varies across rental markets, so does income. However, you may still want to ensure your rental price is set to intrigue the best applicant pool of potential renters
• Income – applicants may have more than one source of income. Be sure to inquire about additional sources of income including:
  • Social security benefits
  • Self-employment income
  • Spouse or roommate income
  • Bonuses, commission, and incentive payments
  • Child support and alimony payments

1. Calculate the Percent of Income That Will Go Towards Rent

The formula looks like this:

Monthly rent payment / gross monthly income = RTI (rent-to-income) Ratio

A rent-to-income ratio of 24% would allow the applicant plenty of additional funds for additional bills, groceries, and more.

2. Multiply Monthly Rent By 3

This formula looks like:

Monthly rent payment X 3 = Monthly gross income

In the example above, the applicant earns $8,333 per month and would still be well above this threshold. 

What Is an Acceptable Rent-to-Income Ratio?

30% or less is considered the “gold standard” for rent-to-income ratio. A renter with a 30% or less ratio would hypothetically still have plenty of money for any additional expenses each month.

A rent-to-income ratio higher than 30% may cause:

• Late rent payments
• Missed rent payments
• Payments made in installments
• Asking the landlord to reduce the rent or accept later payments

This can create a difficult situation for landlords.

How Much Rent Can I Afford?

Considering most landlords aim for a 30% or less rent-to-income ratio, renters would need to ensure they are making enough to reach this ratio for their ideal rental rate. Under the right circumstances, some landlords may be willing to accept a bit higher than 30% but renters would need to show a history of making monthly on-time payments. Check out this chart below for an idea of the maximum monthly rent for your annual salary.

Gross annual income	Monthly income	Maximum monthly rent
$40,000	$3,333.33	$1,000
$50,000	$4,166.66	$1,250
$60,000	$5,000	$1,500
$70,000	$5,833.33	$1,750
$80,000	$6,666.66	$2,000
$90,000	$7,500	$2,250
$100,000	$8,333.33	$2,500
$110,000	$9,166.66	$2,750
$120,000	$10,000	$3,000

How to Handle Applicants Who Don’t Meet Your Rent-to-Income Requirements

Landlords can legally reject any applicant who doesn’t meet their rent-to-income requirements, regardless of how qualified they are in other areas. As long as they keep the same standards for every applicant, they can require 40% rent-to-income if they’d like.

Here’s a common process a landlord may take for looking at applicants who have rent-to-income ratios higher than the standard 30%:

1. Reject applicants who are far from the standard – if you are aiming for a 30% rent-to-income ratio, you may be willing to take between 30% – 32%. You can automatically deny any applicant at 33% or above
2. Pull their credit report (with permission) – a part of all rental applications should include a release for credit and rental history. You should pull a credit report for all remaining applicants as it will give you insight into debts and help you calculate their debt-to-income ratio. Now, you can reject more applicants with a baseline DTI that you find acceptable (perhaps 43% or 45%)
3. Verify Their Income – talk to their employer, ask for W-2s, check pay stubs, and/or look at bank statements to ensure the information the remaining applicants provided is accurate
4. Establish a Rental History – talk to previous landlords to ask about missed or late payments to find out if they have a good history of handling rent payments

Protect Against Unqualified Applicants

If a landlord has decided that there’s one applicant that they’d like to give the lease to, but the person doesn’t have a stellar rent-to-income ratio, the landlord can take a few different actions including:

• Lower rent – if lowering rent by $50 allows you to get a good applicant into the property and make it easier for them to pay each month, it is likely worth it. The cost of vacancy is high and offering this or another rent concession can be a good idea for a solid applicant
• Set-up automatic payments – landlords can work with rental management software to set up automatically recurring rental payments. The rent will come out of the tenant’s bank account on the same day every month, taking the initiative to pay out of the renter’s hands and potentially helping to ensure this amount gets paid first
• Require rental insurance – services such as LeaseGuarantee, can be purchased to help make sure that the landlord will continue to get paid the amount that was agreed upon, even if the tenant doesn’t pay or skips out on the rent
• Ask for a higher security deposit – a higher security deposit can help protect the landlord from missed payments, an unplanned vacancy, or an eviction. Be sure to check your local laws for information regarding the maximum security deposit you can ask for
• Require a co-signer – a co-signer is someone who signs the lease and will take over the financial responsibility of the rent if the tenant fails to pay. Requiring a co-signer can be one way to make sure that the rent is always paid