PLEASANT FICTION: Landlord and Tenant Financial Equilibrium
Published On: October 1, 2026 Posted by: Jeremy Peterson
There is a natural balance that exists at any given time between what a person earns for income and the proportion of that income that they spend on housing. The ratio may change one way or another based on availability of housing, technological change that increases productivity and income, interest rates, and the costs of creating housing. But in the last several decades, the relationship between income and housing costs has maintained a relationship of 3-to-1.
This 1/3rd Rule is something that we use as a benchmark to qualify tenants for our rental units. We know that if a tenant earns three times the monthly rent, they will have a much great likelihood of paying the rent in full and on time. This brings us to today’s interesting case study in how this model works.
In March of 2024 we began managing a property with an existing tenant. The rents were $1325 plus the water utility bill. This rent was established three years prior during the inflationary surge. But, as we began management the tenant would bring in a payment each month that was often just short of what was required to payoff the balance due. Late fees began accruing from this practice. Over the course of 30 months, the tenants owed almost $2200 in late fees, back rent, and utility bills. The tenants always promised to get caught up but never could.
This week we called them into the office to discuss their situation. They lived on a fixed income. We discovered that their household income was just $2875. They were paying 46% of their income toward rent. This explained a lot to us.
In evaluating their history, their income, and the unsustainable delinquencies on their ledger, we determined that a lease modification was in order. We determined that we needed to reduce rents to fit more in line with their income stream. In this case we reduced rents to $1050 per month. We also forgave $1,200 in late fees. The tenants agreed to pay $800 in past due utility fees and about $400 in back rent that was outstanding.
While the higher prior rents were nice on paper, but they were economically dishonest. The tenants couldn’t afford it and we weren’t collecting it. The whole arrangement was a pleasant fiction that made debtors out of the tenants and unwilling creditors out of us. Our lease modification corrected this problem for the long term and has brought honesty to situation.
For owners looking to fill vacancies in their units, it is important to know many tenants may not comprehend their own financial best interest or be financially literate. The 3-to-1 or 1/3rd Rule is an important tool for landlords to use in screening tenants to keep tenants financially healthy and landlord’s rent collections running smoothly.
