Is Your Residential Tenant Qualified? (The 30% Rule)

Hey, thanks for being here today, you guys. I want to spend just a couple of minutes for all the investors out there who have residential units that they lease out to tenants. And what I want to talk about is kind of qualifying the tenant. My name is Mark Halsey. I'm the managing broker of a real estate brokerage firm called Results Commercial in Minneapolis, St. Paul, Minnesota. And we focus a lot on commercial investment properties, but you guys, having been in this industry, I've worn lots of hats in lots of different places. And so it's not easy sometimes to qualify tenants, right? You go out there and you spend a lot of time and energy not only finding the right property, getting the unit ready, putting a lot of money into the unit, and now you need to make a big decision. What's the big decision? Who's going to live in your unit? And of course, that person living in the unit is, oh my goodness, they're like the critical factor. They're the source of the income. That source of income, they're your customer. You're going to have a relationship with them. If they fail, they're certainly not helping your success rate at all because now suddenly you're going to be void of some incoming income, and that can make things rather challenging. So listen, what I want to talk about today is about affordability, okay? Affordability, because many people that get into investing, they go, but Mark, how can I know whether or not that tenant can afford the unit? The 30% rule, 30% rule. That's what we're working off of. These are standards that have been around for a very, very long time. We've had wages that have been rather stagnant. Now some wages are just finally starting to move up a little bit. Thank goodness for that. Thank goodness for all the people in all those jobs that have been stuck at far too low wages. So it's nice to see some wage increases out there. But I'll tell you what, on the landlord's side, not only are property costs so expensive, but everything else that goes with them. I mean, insurance costs right now can be crazy. So what ends up happening is a landlord has huge liability, and of course they're looking at their bottom line going, all right, that's how much I have to pay every month, and now I have those two units, 10 units, 100 units. What can be a fair and reasonable market rent? And of course, you need to match up the market because that's the competition. But the market does fluctuate. It does go up and down. So when you're getting that application in, you got to do the math. It starts with the math, just like everything else in real estate. And what is the math, 30%? This is what we do. Okay, so as we're looking at an application to fill one of our units, this is the first thing I'm doing. Why? I've learned the lesson the hard way. It really stinks. It's just an awful scenario when someone is in a unit that they can't afford. Now, I'm not even talking about for me, the landlord, all right? I'm talking about for the tenant. There's nothing pleasant about this situation. There's nothing good about seeing a tenant in a situation in a unit that they can't afford. What do we want to do? We want to problem solve. We want to figure out how we can make this work. But when someone has a limited, when their income is a finite amount and rent is a finite amount and the landlord must pay their mortgages and insurance and operating costs and everything else that goes with this, the numbers have to work. If you can lower your rent to make those numbers work for that tenant, well, by all means, go ahead and do that. But what you want to be careful about is sometimes a tenant will say, no, I feel good about this. I can make rent, okay? I make this much on my day job and I work weekends and I make this much in the moment. Of course, we start hearing some of that. It's like, uh-oh. Again, I'm really glad that we have good hardworking tenants putting all their monies together. But what I don't want to do is create a stressful situation for a tenant by putting a tenant in a unit they can't afford. That's what this is about. So do the math. You can play with your own numbers. But the general rule of thumb is the 30% rule. 30% of their gross income can be applied to their rent. Listen, pretty simple stuff, but pretty important stuff because if you make a mistake on this one too, it has an effect on more than just the landlord. Thanks for joining me today. I hope this was helpful. Subscribe to our channel if you're so inclined. I sure would love for you to do that. I'd like you to check out our website if that would be helpful to you, resultscommercial.com. You might find some stuff on there that would be helpful for you within the real estate industry. But I really do appreciate you being with me today. So thank you.