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Renting to self-employed tenants – what property managers need to know

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If you haven’t already, you could soon find yourself renting to more self-employed people.

Over 9.6 million Americans are self-employed as at December 2022, according to the US Bureau of Labor Statistics. That number could increase if the work-from-home (WFH) revolution maintains momentum despite some pressure to return to the office. Because a lot of freelance and contract work can be done remotely, many WFH entrepreneurs are upsizing to bigger single-family rentals for the extra space – and they’re willing to pay more for it.

The potential rewards of renting to self-employed people may outweigh commonly associated risks regarding tenant payment and placement – but how can you manage those risks? With careful tenant screening, backed up by technology.

Proof of income

It's easy to overlook, but it’s always advisable to ask for proof of income when screening tenants. Renters with reliable income are more likely to make their rent payments on time and in full.

But self-employed tenants may have irregular and inconsistent income, and won’t have pay stubs or W-2 forms to prove that they can afford the rent.

Bank statements, tax returns, and 1099 forms are all valid ways for self-employed persons to prove income. Property managers can then use their past experience to assess if their income flow is steady enough to afford rent each month.

Credit check

Another important step in the screening process is a credit check.

Credit reports show how well a person handles their debt, which could be a bigger deal-breaker than not having a high gross income. Make note of any derogatory marks, especially during the period that the applicant entered as working for themselves.

A history of serious delinquencies before and throughout their self-employment is cause for concern, but it's reasonable to consider that a renter could have encountered difficulties while switching careers. If they’ve since achieved financial stability, they could be a good tenant despite any blip in their history. However, that decision is entirely at the discretion of the property manager.

Rental reference letter

A rental reference letter can strengthen or save an application.

The first-hand account from a previous landlord or property manager could reveal whether the self-employed tenant is financially responsible, responsive and respectful, and whether they kept the apartment in good condition.

The quality of a tenant’s character may not be enough to compensate for any shortcomings, like a low credit score, but it can help you make a call on borderline tenants – or reject applicants with higher incomes but a history of causing damage.

Payment reminders

Property managers can use PayProp to further protect their investments.

Tenants have complete access to all their payment information including invoices and fully itemized statements through the PayProp Tenant portal – no more excuses for not knowing how much they owe. Similarly, owners can view all of a property’s information through the PayProp Owner app, guaranteeing complete transparency of payments and rental costs across the tenancy agreement.

PayProp automatically flags and presents property managers with a convenient list of late payers – backed by an indelible audit log of payment entries – to whom they can then send email and SMS reminders with one click. This keeps both self-employed and salaried tenants accountable. The longer arrears persist, the less chance you have of ever recovering the money, so instant and automated reminders are the best way to get results.

Insufficient income

If a self-employed tenant can’t provide proof of income, property managers can request a guarantor or a co-signer. Similarly, property managers can ask the tenant if they would consider first finding a roommate or co-tenant to split expenses. It is wise to screen any other potential lessees as thoroughly as you did the actual tenant, because you’ll be relying on their ability to pay.

Self-employed, self-sufficient

While risk management is important, self-employed tenants might not actually be as risky as many landlords believe. While they may have a slower month every now and then, they cannot be fired or laid off, and so they are less likely to experience a sudden and dramatic loss of income that would affect their ability to pay rent.

And since many self-employed individuals are running a one-person show, they are in charge of managing personal as well as business finances. As a result, they could have strong budgeting skills that enable them to pay the rent on time and in full every month no matter their workload.

Renting to self employed people could be a safer venture than one might initially think. With standard due diligence, property managers can benefit from the growing community of freelancers and independent contractors working from the comfort of their own homes.

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