How Much Rent Can You Afford?
One of the biggest questions that comes up when looking to rent a home is the cost of rent. Just how much can you afford? This can determine what places to look for, what you’re able to afford and have to leave aside, and where you’re able to live. It affects everything about your decision, so knowing what you can do is going to be a big issue.
The general rule
The general rule of thumb is that you should spend no more than 30% of your after-tax income on rent. If you live alone, this is just for you, while if you live with someone else, you can use your combined income, so affording a more expensive place is a lot more manageable.
Landlords will generally follow a pretty similar rule. There are many that will reject you if the rent will cost more than 30% of your combined income (including any roommates) per year or 1/40th of your combined income per month.
So, this should give you a good first estimate. But like any rule of thumb, it’s skipping over a lot of factors that could be relevant to you.
So, how do you know just how much rent you really can afford?
Caveats to the general rule
The first flaw to the 30% rule is that it comes from old laws and legislation. Public housing laws that were written in the late 1960s, then amended in the 1980s, put rent requirements at costing no more than 30% of income. That was a few decades ago, so things have changed, and those might not be the best rules to follow blindly anymore.
The second big flaw is that it treats everyone as having the same needs and ability to pay. If your income is above average, you can get a really good place for a small percentage of your income, while being able to afford a lot more if you wanted to. If your income is below average, you may need to dedicate a large percentage of your income to just basic home and be unable to afford anything more. Trying to put a single number on how much you should pay doesn’t make sense across a large spectrum of incomes.
With all of these caveats, while you can use 30% as a starting point, how do you decide how much you can spend on rent? How do you come up with a number for your particular situation?
How to find the number for you
- Start with your combined incomes: Consider everyone who lives with you. Take everyone's incomes and what they spend on things other than rent. Make a budget that accounts for everything else. The difference between what you spend and what you make is the upper bound of what you can spend on rent. Adjust downwards from there.
- Determine how much you’re using the home: Do you work from or spend a lot of time at home? Or do you spend a lot of time elsewhere, coming home mostly just to sleep? This gives you a good indication of how much home is going to mean to you. The more time you spend there, the more it’s worth the money for a nicer place. If you don’t spend a lot of time at home, then significantly lower than your upper bound - there’s no point in spending everything you possibly could for a place you’ll barely spend time in.
- Plan for rent/income changes: Rent tends to increase over time. If you can barely afford it now, how well are you going to do later? Also, plan for what you’d do if a sudden fall in income were to happen. You want to make sure you have some buffer of savings and money that's not going directly to pay for rent so that you can prepare for something like this, so estimate how much you'd need to save and decrease what you spend on rent by that amount.
- Location is the main driver of price: If you want to live in, say, a metro area, you’re going to have to spend more on rent. If your location isn't as important to you, you can lower how much you're willing to spend.
- Account for utility costs and the like: Rent isn’t the only cost a home has. Take your current utility spending off of the total money available for rent. You may need more or less, but your current costs are a good first estimate.
These are just a starting point: add more adjustments if you think of anything else.
So, how much rent can you afford?
At this point, you shouldn’t have a percentage of your income. You should have a specific range of what you can afford. You budgeted for the most you could afford and adjusted it downwards as it went.
If something changes in your life, you can reassess. Get a new job that pays more and lets you work at home? Then you can afford more money and have more reason to spend more on rent. Rent goes up beyond what you’re comfortable spending? It’s time to start looking for another place.
You have something better than a guideline: you have a real number, and knowing how you got there. Any time your life or situation changes, you can follow the same process again.
So, go forth and make more informed decisions about how much rent you can really afford.