According to recent studies, evicting a tenant could end up costing a property owner upwards of $10,000. Knowing more about the rent-to-income ratio could save you and your residents money and hassle going forward.
In this post, we'll take a look at the rent-to-income ratio, why it's rising, and what you, as a property owner, can do to manage your risk.
What is the recommended rent-to-income ratio?
The standard rule is that an applicant's rental payments should not exceed 30% of their gross monthly or yearly income. This industry standard was first put in place by the National Housing Act of 1937, which aimed to make suitable housing more affordable for low-income families.
After a couple of increases, it was eventually set at 30% in 1981, but the reality is that this number is often arbitrary. In some of the most populous metros like San Francisco, San Diego, Miami, San Jose in California, and Los Angeles, 30% does not reflect the regular cost of living, so property owners in those regions might see residents dedicate as much as 50% of their income to rent.
Some property managers also track the debt-to-income ratio. Calculating DTI essentially provides an overview of an applicant's borrowing history. Those with too much or not enough debt on their record may see their rent-to-income rise or fall between 30% and 50%.
Although these guidelines exist to tackle the growing number of tenants defaulting on their payments, there are other things property managers and operators can do to increase protection.
Why are rent-to-income ratios rising?
Over the past 20 years, RTI has been steadily rising across the U.S. There are a collection of socio-economic triggers that have resulted in this increase:
- Post-pandemic rent relief: Government-backed rent relief programs aimed at helping lower-income families with the financial burden of Covid are now ending.
- Competitive housing market: People are choosing to rent for longer due to rising house prices. As a result, the demand for rental housing is huge while availability remains low.
- Migration/commuting: Increasingly, professionals are choosing to move out of expensive areas in favor of more affordable suburbs with a commute into the city.
How can TheGuarantors help?
Our Lease Guarantee product works on an applicant-by-applicant basis to manage the risk involved with leasing your property. We use machine learning-based underwriting to approve more residents for your properties while simultaneously offering property owners high-level risk protection against potential renter default.
You can also consider providing Security Deposit Replacement to your tenants. This deposit coverage reduces the amount your applicants pay upfront, thereby reducing their move-in costs, while maintaining the same level of protection for your teams against damages.
Both types of coverage make it easier for your residents to get the homes they want while mitigating your risk exposure.
Conclusion
The incremental outlook for RTI in the U.S. looks ominous for renters and property owners. But there are things you can do to help manage your risk while continuing to provide access and affordability to your residents.
Contact our team today for more information on how our Lease Guarantee and Security Deposit Replacement products can help improve access and affordability for your residents while providing you with improved risk management and financials.
