7 simple steps to determine how much rent you can afford to pay
Are you looking for a new place? Not sure how much you should be spending on rent? We’ve come up with some general guidelines to help you determine what the ideal rent is for your income.
Establish a Budget
First, you need to assess your income. How much do you bring in every year, with any salary, bonuses, dividends, interest, support, or other means of income included? You need to know what you’re working with before you can find out how much you can afford to spend. If you’re not sure where to get started, you can easily calculate your monthly budget using simple home budget calculators.
You should expect to spend about 60% of your budget on the top three budget items for most families, which includes housing, transportation, and food. You won’t want to go too far over this number because then you will have nothing left in your budget for emergency funding, your retirement plan, entertainment, credit card payments, insurance, and all of your other monthly expenses.
30% or 3x the Income Rule
In the past, most landlords recommended spending 30% of your income on rent. However, many people spend closer to 40% of their after-tax salary on rent, so you will need to determine what is right for your budget and salary. On the other hand, this may just be an arbitrary number because every person’s situation is different, and what he or she can afford to spend on rent every month is also different. For instance, approximately 20% of households spend more than half their income on housing and are still living comfortably.
40 Times the Rent
Many landlords require that your income is 40 times the monthly rent or more. Simply take your pretax annual salary and divide it by 40 to find the monthly rent that you will be approved for, if your landlord requires 40 times the rent.
For example, if your annual household salary is $100,000, then you could afford to spend $2,500 per month on rent ($100,000/40 = $2,500 per month). If you find that your total income is not 40 times the rent, but you know that you can afford the monthly rent, you may want to consider applying with a guarantor.
50/30/20 Guideline
A simple rule that many people follow is the 50/20/30 guideline. This breaks down to spending your income on the following:
- 50% on fixed costs (such as rent, utilities, and transportation)
- 30% on day-to-day expenses (such as entertainment, dining out, shopping, and other fun expenses)
- 20% on financial goals (like paying down debt, building an emergency fund, and saving for retirement).
For example, if your monthly household income is $8,000, you’ll want to budget $4,000 on fixed costs, $2,400 on flexible spending, and $1,600 on future financial goals. Once you account for all of your monthly income, you can budget half of your income towards fixed costs. Once you subtract utilities, transportation, and other fixed costs from this number, you will know what is left to spend on rent.
Are There Additional Fees?
If you will be working with an agent, remember to account for the broker’s fee. They typically will charge between 8 - 15% of the full year’s lease, which can be a large upfront payment that will be due at the time of signing. There will also be a down payment to consider, as well as closing costs. While some residences will require as little as 3% down, it can still add up to a hefty amount that you will need to pay on the spot.
What Do You Need to Provide?
Your landlord will want to know what all of your sources of income are. You will need to provide the following items to prove your income and apply for the apartment, condo, or home of your dreams:
- 3 months of paycheck stubs
- 3 months of bank statements
- Copy of previous year’s taxes
- Any other proof of income
- Letter from your former landlord (not required, but can be very helpful)
- Letter of employment from your employers
- Guarantee letter (if necessary)
What Are You Comfortable With?
At the end of the day, you’ll need to ask yourself what you feel comfortable paying. What seems like a reasonable amount? What is the most you are willing to spend every month? What is the most you’re willing to spend every month? Make sure to take into account how much you spent for transportation, entertainment, food, and anything else you spend money on every month. Once you find what is left, you need to start thinking about how much you feel comfortable devoting to rent. Are there expenses you can cut out of your budget so that you can afford to spend 30-40% of your gross income on rent?
Things like where you choose to live and how much space you want will affect your monthly rent. For instance, living in the big city can be very expensive, even though you may be saving by taking more public transportation. Moving somewhere slightly outside of the big city can save you money and provide you with better amenities and space. You will need to figure out what your priorities are, including what your necessities are and what you can sacrifice in order to save money on rent.
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10 things you should never buy used: https://www.businessinsider.com/10-things-you-should-never-buy-used-2015-12/