The rent-to-income ratio calculator helps landlords know the maximum amount a tenant can afford on rent. Calculating a prospective tenant’s rent to income ratio is a vital part of the screening process. The rent and income ratio is an essential metric to get an overview of the tenant’s financial profile.
The standard rent-to-income ratio is 30% of a tenant’s monthly income. Or, the ratio could be an annual income that’s at least 40 times the monthly rent amount.
Why is using the calculator necessary? The calculator gives a good indication as to the maximum rent a tenant can afford. Generally, tenants who pay no more than 30% of income on rent are more likely to pay their rent—and pay it on time.
If you’re a tenant, you can also use the rent to income ratio calculator. By entering your gross annual income and the rent-to-income ratio, you can quickly find out how much rent you can afford every month.
The rent-to-income calculator is straightforward to use. All you need to do is enter the tenant’s gross income and the ideal rent to income ratio. The resulting number on the rent calculator shows you the tenant’s maximum affordable rent.
Here’s how the simple calculation works to figure out the income requirement you should look for.
Let’s say that a prospective tenant has a monthly income of $5,250. This amount would mean that their annual salary is $63,000. So, 30% of their income means that the maximum amount of rent they could afford is $1,575 every month.
The other way to calculate the ratio of rent to total income is to divide the gross annual income by 40. You arrive at precisely the same monthly rent amount.
The balance between affordability and comfort is the reason why 30% is the perfect rent-to-income ratio. Most financial advisors agree that tenants who spend just under one-third on rent can afford to live in the rental property. Rental expenses around the 30% mark mean that tenants can pay their rent, monthly debt, put aside savings, and avoid financial difficulties.
Successful landlords tend to stay away from tenants willing to spend a higher ratio of their income on rent. Although on paper, it looks like the tenants can afford the monthly rent, they put themselves at risk of missing rent payments. For example, all it needs is for a tenant to get a large unexpected bill for them not to be able to afford the next rent payment. If this happens, your cash flow is at risk.
Of course, calculating the rent-to-income ratio is just one factor when screening a prospective tenant’s finances.
As a landlord, you should get an idea of the tenant’s bigger financial picture. This means verifying their income, checking their credit score, debt level, and other relevant financial information. However, making sure that tenants can afford the rent by using the rent-to-income calculator is key to running a successful property management business.
Tenant's gross monthly income
Tenant's maximum affordable rent