Are you a desirable tenant? I know, you believe you are but let’s play a game. The name of our game is “Are You A Good Prospect?” Or as I like to call it, “The reason you would reject yourself as a tenant”.
Now let’s set some parameters.
HASA in New York presently pays 1050.00 for a one-bedroom apartment. This will be the rental amount we will use in this game. Remember, these numbers are for illustration only and will change as time goes on.
The Scenario: You as the tenant
I have a one-bedroom for rent. Gas and electricity are not included. Coldwater, hot water, and heat are included.
You are my prospective tenant.
- Your monthly take-home is 2000.00
- Rent = 1050.00
You have the following expenses:
- Mass transit (1 fare zone) 5.00 per day x 5 days =25.00 x 4 weeks =100.00 (New York MTA as of 11/25/13)
- Electricity = 75.00 per month approx. These numbers do not reflect increase cost due to air conditioning or electric heater.
- Cooking Gas = 23.00 per month approx.
- Cell phone 30.00 per month (you were smart and got an unlimited plan)
- Food approx for one person 200.00 per month based on SNAP predictions
Now let’s add up all your recurring expenses
1050.00 + 100.00 + 75.00 +23.00 +30.00 +200.00 =1478.00
Doing The Math
The Disposable Income equation. Substitute net income in place of gross income. Net income = 2000.00.
Note: This is a modified version of the Disposable Income Equation. I don’t know where it came from. But I have found that real estate companies use it. There is more than one version of this formula.
Net Income x 75% Minus all Recurring Bills = Disposable Income
- 2000.00 x 75% = 1500.00
- 1500.00 – 1478.00 = 22.00
22.00 is what you have to live on. Provided you don’t add anything else.
Anything else can be:
- Clothing, cable, or satellite bills.
- Going out.
- Gifts for anyone.
- Kids.
- Pets, movies, video games, etc.
Optional: Added cushion, this is money needed in case of emergency. That’s usually 50% of what is leftover. In this scenario, there is no cushion.
What you are left with
You have 22.00 to “live” on for the whole month provided nothing goes wrong and you don’t deviate from your budget.
Flipping the Script: You as the owner
Now for the fun part of the game, you are now the landlord. Keep in mind that the first thing tenants stop paying when they have a financial problem is the rent.
Question: Are you comfortable renting to this tenant? If not why not?
This is why agents and owners ask how much do you take home.
The disposable income formula is only one formula used to determine if a person can afford rent. Another formula is used to compute how much a person should make in order to afford an apartment.
That formula would show that you would need to make 3,150.00 per month to afford this apartment and still have money to live on.
The Desired Income Formula
Rental Amt x 12 mos x 3 (factor) /12 = Desired Net Income
Note: Like the modified Disposable Income Formula I have no idea where this formula came from. It is widely used in rentals. There are not any variations that I have run into. There is one significant change. The “factor” is constantly changing. There have been factors as high as “x 5” for rentals in Manhattan. Check with the listing agent to see how they determine your “Desired Net Income”
Example
- 1050 x 12 x 3 divided by 12
- 1050 x 12 = 12,600 yearly income desired before deductions
- 12,600 x 3 = 37,800 Cushion
- 37,800 / 12 = 3150.00 Desired Net Income per month
An owner looks at the yearly income, cushion and desired net income per month. I have had owners reject a tenant because they missed one of these.
Note: I modified the formula (factor usually is 4 or higher) so as to give you a break. The one used by most brokers and management companies is higher.
Risk Assessments thru the eyes of the owner
Why take you through all of this? Because you need to be better prepared for the real world of rentals. It about the owner making their bills.
Owners do risk assessment such as the banks do. Most will request your credit report, sometimes your credit score. More than anything else they need to know their rent is secure. No one can predict what will happen but you can hedge your bets. Look at your expenses and income, adjust them as needed. Do you really need cable or the new game system?
If you are just starting out you need to assess your desirability as a tenant from the owner’s point of view. Claiming that you are “clean and good tenant” is not enough. Owners expect you to say this, no one says the opposite.
This is one of the obstacles you need to be aware of before you seek your first rental apartment. See: Five Things You Need To Consider Before You Rent for more information
The Guarantor
There is a possible solution to your rental problem. See if someone will be a guarantor for you. This is a person that makes an agreement with the owner to guarantee the rent should you fall short. The guarantor must submit financial information. As well as bank statements, credit and background reports.
Note: This agreement is enforceable in court. This is an involved process that should be considered carefully. Choose wisely and don’t mess up.
Disclaimer
Disclaimer: I am not a lawyer and nothing stated here is legal advice. This article applies to the five boroughs of New York. All information deemed accurate but not guaranteed. Always check the real estate laws in your part of the country.
Comments, Questions, Suggestions?
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