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Landlords often require prospective tenants to show proof household income that is at least 40 times the monthly rent. While this may seem like an arbitrary requirement, it actually serves a very important purpose for both the landlord and the tenant.
In this article, we will explore the budgeting logic behind this requirement and explain why it is a standard practice in the rental market.
The Landlord's Side:
First, it is important to understand that landlords are running a business, and their rental properties are a source of income. The rent they collect helps to pay for the property's mortgage, property taxes, insurance, maintenance, repairs, and other expenses. Therefore, it is essential for landlords to make sure they are renting to tenants who can afford to pay the rent consistently and on time.
When a landlord requires a prospective tenant to make at least 40 times the monthly rent, they are essentially ensuring that the tenant's income is sufficient to cover the rent as well as other necessary expenses.
Here is an example to help illustrate the budgeting logic:
Let's say the monthly rent for an apartment is $2,000. If the landlord requires the tenant to make at least 40 times the monthly rent, that means the tenant's annual income should be $80,000 ($2,000 x 40).
In this example, the tenant's monthly expenses total $3,700, which includes the monthly rent of $2,000. The remaining expenses are a rough estimate of other necessary expenses that the tenant might incur on a monthly basis, such as groceries, utilities, transportation, health insurance, and other miscellaneous expenses.
If the tenant's annual income is $80,000, their monthly gross income would be approximately $6,667. After deducting taxes, the net income might be around $5,000 per month. Using this net income, the tenant's monthly expenses of $3,700 would leave them with $1,300 for savings or discretionary spending.
You can use the calculator I've provided to see what happens as the rent is raised, but the monthly budget and income stay the same. In doing so, you'll see how requiring prospective tenants to make at least 40 times the monthly rent, landlords are ensuring that the tenant's income is sufficient to cover their living expenses while leaving room for savings and discretionary spending.
By requiring a minimum income, landlords are minimizing the risk of default and ensuring that the tenant is financially stable. This can benefit both the landlord and the tenant, as a stable tenant-landlord relationship can result in a long-term lease agreement and a positive rental experience for both parties. The catch, however, is that it is a one-size-fits-all approach that doesn't take into account that many New Yorkers spend way more than a third of their income on rent because they have to and still manage to pay the rent on time (whether or not they're considered "rent burdened".)
Fortunately, options exist for people who don't meet the criteria. This is where the third party guarantors (discussed in other articles of mine) come in.