As you set out to find a new place to rent, I’m sure the thought has crossed your mind: How much rent can I afford? It’s an important question that can have ramifications on your financial well-being.
Housing is such an important component of people’s monthly budget: It takes up about 33% of consumers’ annual expenditures according to the latest Bureau of Labor Statistics’s Consumer Expenditure Survey, That’s why getting it right is so important.
In this article, we’ll cover several ways to estimate how much rent you can afford, how to account for any debt you might be carrying and what to do if rent costs exceed your budget.
How to calculate how much rent is affordable
Some folks may assume that if they submit an application to their landlord and they qualify, that it implies affordability. But qualifying for a place to rent doesn’t necessarily mean you should go for it.
To illustrate, let’s look at the following ways to calculate how much rent you can afford.
The 40 times rent rule of thumb
In some cities, landlords require tenants to have gross incomes of at least 40 times their monthly rent. Making forty times your rent in annual earnings may seem like a high standard, but it’s quite common in cities with a high cost of living.
To use this rule, landlords divide your annual earnings by 40. For example, someone making $50,000 a year would be able to qualify for a place renting at $1,250 a month.
Here’s the maximum amount of rent implied by various income levels using the 40 times rent rule.
|Gross Annual Income||Rent Amount: 40x rule|
The simplicity of this rule is alluring. It can save you time and give you a ballpark figure on what rent you can afford. But it’s a bit flawed.
For one, not everybody lives in a high cost urban area. And, more importantly, this rule of thumb uses your gross income in its calculation. That’s your earnings before taking out taxes and other deductions. So it doesn’t consider the actual amount of cash you have available to meet rent.
The 30% rule
Another way to figure out how much rent you can afford is through the 30% rule. To use it, take your monthly net earnings and multiply them by 30%.
Here’s an example. Someone making $50,000 a year would be earning $4,167 a month gross. Next, assume that after taxes and deductions the amount is $3,400 a month net. The 30% rule would imply a rent of $3,400 x 0.3 or $1,020 – a more conservative amount when compared to the 40 times rent rule.
Still, the 30% rule doesn’t take into account any other aspects of your financial situation. It makes no assumptions about your debt situation, or its impact on your financial flexibility.
Consider your monthly debt payments
The two rent calculation methods discussed thus far are only guidelines which don’t consider your entire financial picture. If you want to get a more accurate sense of how much rent you can afford, you need to dig a little deeper.
Do you have credit card or student debt, for example? If so, factor your monthly payments into the 30% rule. It can give you a better sense of rent affordability. Here’s two approaches.
Rent affordability: Debt-first approach
To use this method, first subtract the monthly amount you pay to service your debt from your take-home pay.
Let’s say this amount is $400 and that you earn $3,400 per month after taxes and deductions. In that case, the amount available each month after covering debt is $3,000.
If you apply the 30% rule on this amount, you’ll end up with a rent amount of $900. You’ll then have $2,100 ($3,000 – $900) left for your other living expenses.
Rent affordability: Rent-first approach
Using this approach, you apply the 30% rule on your net monthly earnings without first subtracting what you pay towards debt.
So if you have monthly net earnings of $3,400, you’ll end up with a higher rent of $1,020. But now, you’ll have $1,980 ($3,400 – $1,020 – $400) left for your other living expenses.
Clearly, the debt-first approach is more conservative and mindful of your budget when calculating the rent you can afford. It’s a useful approach if, for example, you want to save more or start paying off your credit card debt.
Factor in how much flexibility you need
Another alternative to calculate how much rent you can afford is to come up with your own rule of thumb: one that pays attention to your own special set of circumstances.
Perhaps you’re moving to a new city or are starting a new job. If so, consider spending no more than 20% of your monthly income on rent. Spending a smaller percentage on rent is a safe approach when your situation is uncertain. Exercising caution allows you to save more and build a safety cushion should you need it
What if your rent cost exceeds your budget?
If your income falls below your landlord’s requirement there’s several options you can consider.
- Use a guarantor. A guarantor is a person who takes on your financial responsibility should you be unable to cover your rent. Landlords typically require documentation proving your guarantor’s income, but they don’t necessarily need to be physically present when you sign your lease.
- Take on a roommate. Having a roommate is an effective way of making rent more affordable. Your new roommate will become a cotenant, so that in the eyes of your landlord they’re equally responsible for paying the rent as you are. So choose your roommate carefully.
- Borrow from family. You shouldn’t stretch yourself to the point that you need a loan to afford rent. But in some cases, a loan might help you cover an unaffordable security deposit. Tread carefully with family loans as they can end up affecting personal relationships.
If you’re ready to start your search, check out this rent affordability calculator. It takes into consideration your take-home pay, monthly debts and rent location.
In addition, the calculator will display available rentals in your area which fit the parameters you enter. But it won’t display rentals which are more than 40% of your after-tax income. Spending more than that will overburden your budget.
How much rent can you afford then?
Before you start your next apartment search, spend some time figuring out how much rent you can afford. Housing costs take up the lion’s share of a person’s paycheck and choosing the right rent amount can save you headaches down the road.
Take into account your current financial picture: include your debt payments and any money goals you may be trying to achieve such as saving more, paying off debt or building an emergency fund. The right monthly rent can help you get closer to money goals faster.
If your monthly take-home after taxes is about $3,400, the 30% rent rule dictates that you can afford $1,020 a month. That leaves you with $2,380 to meet your other living expenses, including any debts you may be carrying.
Servicing debt uses up part of your take-home pay. Therefore, it makes sense to calculate how much rent you can afford after deducting what you spend every month on your debt.
According to the HUD, families spending more than 30% of their income on housing are considered “cost burdened.” Staying well inside of that percentage on your next rental is considered prudent.