The rent-to-income ratio measures the percentage of income a tenant will need to cover their monthly rent. It’s a quick and convenient way to assess their ability to pay rent on time.The higher the ratio, the more likely a tenant will miss their rent payments. Conversely, the lower the ratio, the more capable they are of meeting their payment deadline.
Luckily, you don’t need to crunch the numbers manually – we’ve created a pair of handy calculators below that you can use instead. Keep reading to learn how they work and how to choose your ideal rent-to-income ratio.
Below are two calculators you can use to determine the rent-to-income ratio for a tenant.
For the first calculator, enter the renter’s monthly gross income and monthly rent. The calculator will then provide you with their ratio as a percentage.
For the second calculator, enter the monthly rent and use the slider to set your desired rent-to-income percentage. The calculator will deliver the renter’s target gross monthly and annual income.
Use the renter’s gross income, which is what they earn before various payroll deductions are subtracted from their pay. These include primarily taxes and CPP and EI contributions. Other deductions may include benefits premiums, union dues, and wage garnishments.
Net income is the amount a renter receives after their employer has withheld all deductions.
The biggest risk you face as a landlord is your tenant defaulting on their rent. Your profit margin will decline sharply without regular rent payments, so it’s vital to ensure you choose a tenant who can comfortably afford your monthly rental fee. By calculating the rent-to-income ratio for each individual who applies to be your tenant, you can better identify those who meet this standard.
Renting to someone with an excessively high rent-to-income ratio, say 60%, is risky. This type of tenant is more likely to struggle financially, as they’ll be juggling multiple bills in addition to their rent. With a tight budget, it’ll be more challenging for them to cover unexpected expenses. And should they lose their job, their day-to-day spending will rapidly drain their bank account. Eventually, they’ll have little or nothing left for rent payments.
Should your tenant consistently miss their rent, you may have no choice but to evict them. Unfortunately, evictions come with a steep price tag and can take a long time to resolve.
On the other hand, a tenant with a low rent-to-income ratio poses much less risk for you. They’ll be far more capable of paying their rent on time, even when they experience financial setbacks.
There’s no one answer to what constitutes a good rent-to-income ratio. However, a widely used guideline is 30%. At this level, a tenant will likely have few issues making timely rent payments while still being able to cover their other everyday expenses.
Still, it’s entirely up to you to choose the percentage you’re most comfortable with based on the level of risk you’re willing to assume.
In addition, it’s wise to consider the state of the economy and the location of your rental property when setting your limit.
For example, incomes during a recession tend to decrease, which means more renters than usual will have a higher rent-to-income ratio. Therefore, you may have to lower your standards to accommodate them. Otherwise, you risk losing them to your competition.
Regarding location, renters who live in urban areas tend to have higher rent-to-income ratios. The reason is that real estate in cities is typically more competitive, and living costs are higher.
A notable limitation of the rent-to-income ratio is that it doesn’t account for debts.
For some tenants, debt payments comprise a sizable chunk of their budget. Not surprisingly, it’ll be much more challenging for them to pay rent on time compared to someone with a light debt load.
For this reason, consider adding the tenant’s total monthly debt commitments to the ratio. You’ll get a far more accurate assessment of their ability to handle rent payments.
A rent-to-income ratio is a valuable tool for gauging a renter’s ability to pay their rent on time. However, it doesn’t accurately depict their suitability as a tenant when used in isolation. As a result, you’ll need to review various other financial and non-financial criteria during the screening process. These include their credit score, late payment history, past rental history, savings, and debt obligations.
A high rent-to-income ratio doesn’t necessarily mean a tenant will struggle to pay their rent on time. So never rely on it exclusively to decide whether to approve or decline a rental application. In fact, you could get into legal trouble if you do, as the courts may view it as a form of discrimination.
Luckily, SingleKey’s Tenant Report offers a treasure trove of information to screen a tenant properly. This comprehensive and easy-to-read document includes a detailed credit report from Equifax and a background check. It contains everything you need to know to decide whether an applicant has what it takes to be your tenant.
Interested in seeing how it looks and what it has to offer? You can download a free sample report here. Or, if you’d like to order a copy, simply provide us with a few basic details about your tenant. We’ll have your report ready to download in as little as five minutes!