How do property managers verify income?

When it comes to selecting the right tenant for a rental property, verifying income is a crucial step in ensuring a smooth and successful tenancy. For property managers, this process is not just about confirming that a tenant can meet their rent obligations; it’s about establishing trust and reducing financial risk, creating a stable and reliable basis for accounting and investment.

In this blog, we’ll look the methods and best practices for income verification, offering insights that will help streamline your processes and make informed decisions effortlessly.

Why Income Verification is Important in Property Management

Income verification is essential in property and real estate portfolio management because it helps ensure that prospective tenants have the financial means to consistently meet their rent obligations. By verifying income, property managers can reduce the risk of late payments, defaults, or evictions, which protects the property’s revenue stream and solidifies budgeting and forecasting. Additionally, it helps in identifying trustworthy tenants, minimizing the likelihood of fraud, and ensuring a stable and secure rental environment. Ultimately, income verification supports informed decision-making, contributing to the long-term success of the property management process.

Standard Income Verification Methods

Employment Verification

Employment verification involves confirming that a prospective tenant has a reliable income from a legitimate job. This process is crucial for landlords to ensure that the tenant can consistently meet rent payments throughout the lease term.

Pay Stubs and Tax Returns

Pay stubs and tax returns are common income verification tools. Pay stubs, typically from the last two months, reveal payment frequency, gross and net income, and any fluctuations. Tax returns, particularly Form 1040, provide a comprehensive view of an applicant’s income history and unearned income over the past year.

Bank Statements

Bank statements offer insight into an applicant’s financial habits by detailing deposits, withdrawals, and current balances, helping to assess income stability and spending patterns.

Verifying Self-Employment and Other Income Sources

Self-Employment Income

For self-employed individuals, income verification requires collecting various forms of documentation to gain a full understanding of their financial situation. This approach ensures the accuracy and reliability of their reported income.

Verifying self-employed income typically involves:

  1. Requesting Tax Returns: Ask for the applicant’s tax returns, usually for the last two years, including form 1040, along with Schedule C (Profit or Loss from Business).
  2. Reviewing Bank Statements: Request bank statements from the past three to six months to track regular deposits and overall financial activity.
  3. Collecting Profit and Loss Statements: Obtain recent profit and loss (P&L) statements, which detail the business’s income and expenses.
  4. Gathering Business Documentation: Request business licenses, contracts, or invoices that can provide additional proof of ongoing work and income.
  5. Using Third-Party Verification Services: Some property managers might use specialized services that verify self-employment income by analyzing financial data and business activity.

Investment Income

To verify investment income, property managers typically request documentation that substantiates the income reported by the applicant. This may include investment account statements, tax returns, dividend and interest statements, and 1099 forms.

Government Benefits and Assistance

When verifying government benefits and assistance, property managers need to confirm the tenant’s eligibility and ensure that the income from these sources is sufficient to meet the rental requirements.

Best Practices for Income Verification

Complying with Fair Housing Laws

Property managers must ensure that income verification practices align with fair housing laws to prevent discrimination. This compliance is critical to maintaining equitable treatment for all applicants.

Maintaining Consistency and Objectivity

To ensure fairness, apply income verification criteria consistently across all applicants. Develop written policies for income verification that are uniformly enforced, and avoid processes that may disproportionately impact or exclude applicants from protected classes.

Protecting Applicant Privacy

Safeguard applicant privacy by securely storing their data, limiting disclosure, and collecting only the necessary information for income verification. This approach helps protect sensitive information and maintain trust.

The Role of Technology in Income Verification

Online Verification Services

Online employment verification services, such as Rental History Reports from MRI, offer property managers enhanced tools for tenant screening and rental applications. These solutions improve efficiency, accuracy, and compliance, leading to a more streamlined workflow and more informed tenant selection decisions, ultimately benefiting overall property management practices.

Automated Income Calculation Tools

Automated income calculation tools allow for quick and precise calculations of a potential tenant’s income, factoring in salary, bonuses, commissions, and other income sources. By reducing the risk of manual errors and presenting income data clearly, these tools ensure accurate and reliable income verification.

Handling Challenging Income Verification Cases

Dealing with Incomplete or Inconsistent Information

Property managers can address inconsistent or missing information by requesting previous tax returns, analyzing patterns in bank statements, or utilizing income verification services like Rental History Reports from MRI Software to ensure a more accurate assessment.

Verifying Foreign Income Sources

Verifying foreign income can often follow the same methods as domestic income verification. However, if there is any uncertainty about the authenticity of documents, it’s important to have them reviewed by a certified translator to ensure accuracy.

Addressing Applicant Disputes

When handling disputes over income verification, it’s essential to maintain a systematic and fair approach. Clear communication with the applicant, along with a consistent and transparent application process, helps ensure compliance with regulations and supports the property manager’s decision.

Ongoing Income Monitoring and Recertification

Annual Income Reviews

Property managers conduct annual income reviews to ensure that residents in income-restricted housing continue to meet eligibility criteria and to adjust rent as needed based on income changes. Residents are typically notified 60-90 days in advance of an upcoming review, during which they will provide updated income verification documents for assessment.

Handling Changes in Tenant Income

Addressing changes in tenant income requires a balanced approach of empathy and practicality. Property managers should work collaboratively with tenants to explore temporary solutions, plan for future rent adjustments, and, if necessary, review insurance coverage options to mitigate risks if tenants face financial difficulties and struggle to meet rent obligations.

Legal and Ethical Considerations

Fair Credit Reporting Act (FCRA) Compliance

Property managers must adhere to the Fair Credit Reporting Act (FCRA) to safeguard tenant rights and avoid legal issues. Compliance involves using background checks only for permissible purposes, such as assessing a tenant’s suitability for a rental property. It is crucial to ensure that the information used is relevant to the decision-making process and does not include prohibited factors like race or religion.

Preventing Discrimination and Bias

To prevent discrimination and bias in income verification, property managers should establish clear, consistent criteria for all applicants, focusing strictly on financial qualifications such as credit history and stable income sources. Adopting uniform procedures, providing staff training on fair housing laws, and eliminating subjective judgments will help maintain a fair and equitable verification process.

Get a software demo

Multifamily software used by the top ten NMHC managers

Take full control of the lead-to-lease process

Find good tenants
How far back should property managers look at income documentation?
Can a property manager deny an applicant based solely on income source?
What should property managers do if an applicant is unable to provide standard income documentation?

To request a demo of MRI’s property management software, please click here.

Infographic

Can fraud happen to your multifamily business?

Learn more about how to protect your property and your community with MRI Risk Management.

View the Infographic

Reinvest in some more great content:

Webinar

How AI Supercharges the Lease Value Chain

Find out more

Select your region

45000+

Clients

20.1m

Units

4.2m

Leases

300+

Partners

170+

Countries