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Renting a property to a self-employed individual is often perceived as risky in terms of tenant vetting, placement, and payment. However, when properly vetted and effectively managed, self-employed individuals can be reliable and valuable tenants.
“Risk management is important, but renting to self-employed tenants can be a viable option,” says Michelle Dickens from PayProp. “Many self-employed people separate their personal and business bank accounts and pay themselves a salary from the business, ensuring more consistent income and minimising the risk of non-payment.”
She lists a few ways through which careful tenant screening and the implementation of technology-enabled checks and balances can reduce landlords’ risks.
Proof of income
It is always advisable to request proof of income when screening tenants, regardless of whether they are self-employed or not. Renters with stable income are more likely to fulfill their rent payments punctually and in full.
However, when dealing with self-employed tenants, the issue can become more complicated, as some may have irregular and inconsistent income, lacking pay slips to demonstrate their ability to afford the rent.
In such cases, it is appropriate to ask for bank statements or tax returns, as these serve as valid means for self-employed individuals to provide evidence of income. Requesting proof of income over an extended period can help compensate for any exceptionally prosperous or lean months. Based on past experience, agents can then assess whether their income stream is steady enough to cover monthly rent without fail.
Credit check
Another crucial step in the screening process is conducting a credit check. Credit reports provide insight into an individual’s debt management skills, which can be more indicative of their suitability as a tenant than solely assessing their gross income. For self-employed individuals, it’s important to consider that they may incur debt, such as an overdraft, during lean months. However, this is not necessarily problematic if they are effectively managing their repayments. It is important to make note of any delinquencies, particularly during the period when the applicant began working for themselves.
A history of significant delinquencies prior to and during their self-employment raises concerns, but it’s reasonable to take into account that renters may have faced challenges during a career transition. If they have since achieved financial stability, they could still be a good tenant despite any initial setbacks. However, the decision ultimately rests with your discretion as the property manager.
Rental payment history
While rental reference letters are commonly used in tenant referencing, they are susceptible to fraud and misrepresentation, warns Dickens. Adopting a data-driven approach to tenant referencing provides a more robust solution.
Ultimately, the most reliable proof of a tenant’s ability to pay rent is their actual rental payment history. Even tenants with low incomes may prioritise their rent payments. However, rental agents may not always have access to this information and may have to rely on landlord references unless they utilise the appropriate technology. The PayProp Tenant Assessment Report, for instance, combines traditional credit scoring with the tenant’s rental payment history, including data from any previous tenancies with PayProp-powered rental agencies. This comprehensive information offers valuable insights into an applicant’s likelihood of paying rent on time and in full.
Distributing the risk
A self-employed tenant is significantly less risky when someone else is guaranteeing 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, the landlord can charge the paying tenants extra to make up the shortfall from their non-paying housemate – and knowing this, tenants may give each other extra encouragement to pay their full share.
However, not all properties are suitable for co-living, and not all prospective renters are open to sharing. If co-tenants aren’t an option, consider asking the self-employed applicant to find someone else to sign surety. Surety agreements can also be used for other higher-risk tenants, such as students or those with a low credit score.
Payment reminders
Rental agents can also use PayProp to further protect their clients’ investments. Tenants have complete access to all their payment information, including invoices and fully 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.
Dickens emphasises the importance of holding both self-employed and salaried tenants accountable for outstanding payments. “In our experience, 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.”
Self-employed, self-sufficient
“Renting to self-employed individuals could be a safer option than one might initially think. With standard due diligence, agents can benefit from the growing community of freelancers and independent contractors working from the comfort of their own homes,” concludes Dickens.
