The key to positive cash flow is 1) making sure your monthly income from your rental is greater than the expense to own it and 2) making sure you get paid every month, on time and every time.

This seems a bit obvious at first glance but if every tenant real estate investingalways paid rent on time then there would be no such thing as eviction notices due to non-payment. What can you do to help with that effort?

The first is a proper vetting of your applicants. You can do this yourself or if you use a property management service, they will perform the evaluation for you. The two main ingredients to approve a potential tenant is a combination of sufficient income to cover the rent as well as a review of a recent credit report.

To determine affordability, have the prospect provide you with a copy of the most recent paycheck stub. The general guideline for housing payments is approximately one-third of gross monthly income. If your rent is $2,000, then you want to see a gross pay check of about $6,000. Yet that’s not the whole story. Your prospective tenants might have other, undisclosed debt that could affect the ability to pay. That’s why you need to review a credit report as well.

The credit report will reveal not only payment patterns but also other monthly obligations. Look for other monthly debt such as car payments, student loans and credit card debt. Add up the minimum monthly payments then add those to your rent requirement. Banks that evaluate mortgage applications like to see total debt payments not exceed 40 percent of gross income. Anything beyond that and it has been shown that consumers are more likely to default on their debt.

 

Your credit report should show responsible payment patterns but it also shows additional debt. It’s critical for your cash flow to properly review both.