On March 1, 2020, the City of Portland implemented some new laws that affect landlords and their rental properties. These laws fall under the F.A.I.R. Act, which stands for Fair Access In Renting. We’ve been running an informative and educational video and blog series on what these laws mean to you as a rental property investor.
Today, we’re focused on one particular part of the law, which is rent ratio rules.
Rent Ratio in F.A.I.R. Requirements
The rent ratio rules are controversial.
We’re talking about the income to rent ratio that most landlords use when they’re screening applicants and deciding who is most qualified to live in their properties. There are two separate screening criteria that you can use when you’re renting out a home. The first is called low barrier, and it allows landlords to accept applicants with less financial stability and criminal records in their past. Standards are very low, and that’s why it’s called low barrier criteria.
The other criteria you can use is criteria that you establish yourself. We imagine most landlords will chose this criteria instead of the low barrier criteria.
So if you want to have a stricter screening process, choose the criteria that allows you to set standards of your own.
Even when you’re setting your own rental criteria, you have to follow the established rent ratio that the City of Portland is using. There’s a rent table that’s based on the number of bedrooms your property has. Let’s say you’re renting out a two-bedroom home. In that case, the rent table is $1,584 per month. That’s the average or median rent that the City of Portland uses.
It means that when you’re screening applicants and looking at their income, you can’t require that your tenants earn any more than twice the monthly rent. If your rent is higher than the rent table, you still have to follow that standard. So, if you’re renting out a home for $1,800 per month and it has two bedrooms, your rent to income ration can still only be two times the $1,584 amount – not the two times $1,800 amount.
That’s roughly $3,200 per month. If an applicant can demonstrate he or she earns $3,200 per month, you cannot reject the application based on income, even if your rental property is more than $1,584 per month.
If your rent is lower than $1,584, you are permitted to use a standard that’s two-and-a-half times the monthly rent.
This may seem backwards to you. If the rent is higher, you typically want your residents to have a higher income.
Increasing the Chance of Default
Many landlords are concerned that this will increase the risk of residents defaulting on their rent.
With the current rent ratio in place, your residents can rent a higher priced home even if they earn lower incomes. Many investors worry that you’re putting a resident in a bad situation in which the chances that they’ll fail are high. You don’t want your residents to stop paying rent and your residents don’t want to live in a place they can’t afford. This requirement doesn’t seem to make a lot of sense. It’s not fair to the property owner.
It’s not fair to the resident, either.
Most landlords and property managers have found it financially responsible to stick to the industry standard of rent to ratio requirements. This has been three times the monthly rent for quite some time. There’s a reason that this is the standard practice. Most personal finance experts would tell people that they shouldn’t spend more than that on housing; whether it’s a mortgage payment or a rental payment. Residents want to be financially healthy, and if your rental payment is too high, it’s hard to meet your other financial obligations. This will put more residents in financial peril. It may increase the risk of default and the chances of rent not coming in.
Most of us don’t see this requirement as a winner for anyone.
Portland’s Rationale with the Rent Ratio
It’s difficult to wrap your head around the rationale behind this requirement. To our best guess, the City of Portland is trying to solve what they perceive to be discrimination problems. They feel lower income people are discriminated against when it comes to good housing. They don’t have the ability to live in certain neighborhoods that might be more expensive and have better schools. So, by dropping barriers such as these financial requirements, low-income people might have more opportunities when it comes to housing fairness. We get the intent, but it seems to fly in the face of financially responsibility.
This may remind you of the housing crash, when people were given loans even if they couldn’t afford them. Now, we’re requiring landlords to rent to people even if they’re not sure they can afford the property they’re renting. There’s a housing problem in Portland, but whether or not this will contribute to the solution remains to be seen.
As you can see, it’s getting very difficult to self-manage a rental property in Portland. There’s a lot of risk, and you don’t want to put your property or your financial security in danger.
If you want to talk about these new laws or talk to us about managing your Portland rental property, contact us at Mynd Property Management.
You can also visit our Facebook group of investors, which is called Master Mynd. It’s a real estate investors’ club, where you can exchange ideas with other owners. Check out our weekly podcast as well, called The Myndful Investor. We invite leaders in real estate and property management to talk about their success and, more importantly, their failures. There’s a lot to learn from this relatable content.