Some landlords and rental practitioners may think renting a property to self-employed tenants is risky. This is chiefly because their vetting, placement and payment systems are geared to tenants in regular employment with monthly payslips.
However, Michelle Dickens of PayProp says that when carefully vetted and correctly managed, self-employed people can be reliable and valuable tenants.
“Risk management is important, but renting to self-employed tenants can be a completely viable option,” says Dickens. “Many self-employed people keep their personal and business bank accounts separate and then pay themselves a salary from the business. This gives them a more consistent income and reduces the danger of non-payment.”
She explains how to carry out careful tenant screening and use the correct technology-enabled checks and balances to reduce the risk to landlords and rental practitioners.
Proof of income
As with regularly employed tenants, the first step in screening self-employed rental applicants is asking for income proof. After all, tenants earning a reliable income are more likely to make their rent payments on time and in full.
Complicating the issue with self-employed tenants is that some may have irregular and inconsistent income and are not likely to have pay slips to prove that they can afford the rent.
Valid ways for self-employed applicants to prove their income is to produce recent bank statements or tax returns. Ask for proof of income over a longer period – say, three to six months – which will help compensate for any unusually fast or slow months.
“Knowledgeable agents [sic] can then use their past experience to judge if the applicants’ income flow is steady enough to afford the rent each month without fail,” says Dickens.
Credit checks
Another important step in the screening process is doing credit checks through the credit bureaus. Credit reports show how well a person handles debt, and poorly managed debt could be a bigger deal-breaker than not having a high gross income.
Self-employed people may take on debt such as an overdraft during lean months, but this isn’t necessarily a problem if they are managing repayments well. Take note of any delinquencies, especially those that occurred while the applicants were self-employed.
A history of serious delinquencies before and throughout their self-employment is cause for concern, but it's reasonable to consider that applicants could have encountered difficulties while switching careers. If they have since achieved financial stability, they could be good tenants despite any early failures. Again, rental practitioners need to use their discretion in each case.
Rental payments
Rental reference letters are a common piece of the screening process, but Dickens cautions that they’re open to fraud and misrepresentation.
A data-driven approach to tenant referencing is much more reliable, she says.
“The best proof of whether tenants can be expected to pay the rent is their actual history of rent payments. Tenants on a low income may still prioritise their rent. Unless they have the right technology, rental agents don't always have access to this information and may have to rely on landlords’ references,” says Dickens.
The PayProp Tenant Assessment Report combines traditional credit scoring with tenants’ rental payment history with any PayProp-powered rental agencies they have previously worked through. This provides comprehensive information about applicants’ likelihood of paying on time and in full.
Mitigating risk
Self-employed tenants are significantly less risky when someone else guarantees their rent payments.
“Tenants in shared accommodation can be made jointly and severally liable for rent, meaning that each tenant is legally responsible for the full rent on the property. If necessary, landlords can charge the paying tenants extra to make up the shortfall from their non-paying housemates. Knowing this, tenants may give each other extra encouragement to pay their full share,” says Dickens.
However, not all properties are suitable for co-living, and not all prospective tenants want to share accommodation. If co-tenants aren’t an option, consider asking self-employed applicants to find someone who is creditworthy to sign surety.
Surety agreements can also be used for other higher-risk tenants, for example, students or those with low credit scores.
Reminders
Rental agents can also protect their clients’ investments by setting up automated payment reminders. Tenants have complete access to all their payment information, including invoices and itemised statements. If they don't pay, rental agents can follow up with automated payment reminders via text message and e-mail and even use the platform to order letters of demand from PayProp's partner attorneys.
“Keeping both self-employed and salaried tenants accountable for monies owed is essential. The longer arrears persist, the less chance you have of ever recovering the money. Instant and automated reminders are the best way to get results,” says Dickens.
Safe option
“Renting to self-employed people could be a safer option than you might initially expect. The world of work has changed considerably over the past few decades – even before the Covid 19 pandemic. With standard due diligence, agents can benefit from the growing community of freelancers and independent contractors working from home,” says Dickens.
Writer: Sarah-Jane Meyer