A property management company’s top two tasks are protecting owners’ assets and keeping their rentals occupied in that order of importance. Over the last 30 years, DenCO Property Management (DenCO) has perfected a tenant screening process that verifies responsible individuals who will make good rental prospects.
DenCO uses Rent-To-Income Ratios to compare tenants’ rent to their monthly income. The Ratio helps landlords assess whether a prospective tenant can realistically afford the rent. The national standard is that tenants should spend no more than 30 percent of their income on rent. Ratios above 30 can be a red flag because tenants with high rent-to-income ratios are statistically more likely to fall behind on rent. As of August 7, 2023, Colorado law limits the minimum income requirement landlords can impose to no more than twice the monthly rent. DenCO sees the Ratio as a good first step in tenant screening but understands that we cannot use it solely to approve or deny a rental application.
What is the Rent-to-Income Ratio?
A Rent-to-Income Ratio sets a benchmark to determine whether a potential tenant can afford a rental. The equation is below.
Rent-to-Income Ratio = (Monthly Rent ÷ Gross Monthly Income) × 100
Per national standards, a tenant should earn at least three times the monthly rent to comfortably cover living costs like groceries, transportation, and utilities without financial strain. For example, a potential leaseholder needs a monthly income of $8,000 to meet the 30% rent-to-income ratio for a $2,400 rental.
Minimum Monthly Income = Monthly Rent / Desired Rent-to-Income Ratio
Minimum Monthly Income = 2400/.3 = $8,000
Other Benefits of Using Rent-to-Income Ratios
Beyond assessing whether a tenant can afford a rental property, the rent-to-income ratio provides additional benefits listed below.
Efficient Tenant Screening
Rent-to-Income Ratio gives landlords a quick, objective benchmark during screening. DenCO uses it alongside credit scores, rental history, and rental references to make an informed decision.
Increases Renewals
Tenants who can afford their rental are more likely to renew their leases. Happy tenants set the stage for a more harmonious landlord-tenant relationship, reducing stress for all parties involved.
Maintain Rental Cash Flow
Placing tenants who meet the monthly income benchmark helps maintain rental cash flow because they pay their rent on time.
Reduces Tenant Turnover
It does not take long for tenants who lease units they cannot afford to move. High turnover means more vacancies, lost rental income, and additional marketing costs to find new tenants. High turnover also increases maintenance and repair costs to prepare for the next tenant.
Reduces Eviction Risks
Tenants who spend too much of their income on rent usually struggle financially, leading to missed payments and, eventually, eviction. Evictions are complex in Colorado, so benchmarking monthly income and analyzing rental and credit history helps DenCO avoid tenant removals.
Use of Rent-to-Income Ratios in Colorado
According to Colorado Law SB23-184, landlords cannot deny the application based on a higher rent-to-income ratio. They must use additional screening to determine if the tenant can meet their rent payment obligation. DenCO recommends the following to reduce asset and financial risks.
Consistent Screening: Apply uniform screening to all applicants to avoid discrimination claims. DenCO has an application form on its website that applicants must fill out to start the screening process. A prospective tenant can provide the landlord with a portable tenant screening report, as defined in Section 38-12-902 (2.5), Colorado revised statutes.
Comprehensive Evaluation: While income is a factor, we analyze the tenant’s financial situation, including credit and rental history.
Keep Compliant: DenCO retains legal counsel to ensure our lease agreements and property management practices comply with current regulations.
Owners who want to off-load the tenant vetting process should consider hiring DenCO to rent their properties to responsible tenants. Please call 303-722-9688 or fill out this form on the contact page.
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