One of the most important, if not the most important, aspects of our lives is our home. Whether you live in a house, apartment, or anything else, it’s where we go to feel safe, relax and just be us. Loving where we live is an essential part of our happiness.
So it should go without saying, we wouldn’t want our home to be a point of stress for us, especially financially speaking. So when looking for a place to live, it’s crucial to find a place that fits our budget.
With that in mind, many people will ask, “How much rent can I afford”? There are several steadfast rules that you can apply when determining how much money you can spend on your rent, with some wiggle room if you spend less in other places, of course.
How Much Rent Can I Afford – The Basics
When entering into a lease for an apartment, the most important thing is to be sure it won’t break your budget. On the other side of the transaction is the landlord. They will also do their due diligence to ensure you are a good candidate and a low-risk renter who can afford the apartment.
Most landlords will want to see that your gross (pre-tax) annual income is at least 40x the monthly rent you’re committing to. The 40x Rule is the most basic way to determine if you can afford the rent. Simply take your pre-tax income and divide it by 40. If the result is more than the rent, you should be fine. If not, you might need to negotiate a lower rent or look elsewhere.
An example of this is if you make $60,000 per year, you can divide that by 40 to get $1500 a month you can afford in rent. This would be roughly 30% of your annual income, leaving the other 70% to cover utilities, additional living expenses, and bills.
The 30% Rule
As mentioned above, another simple rule for determining how much rent you can afford is keeping your rent to 30% or less of your gross monthly income. With that in mind, adding in utilities, groceries, and other living costs shouldn’t exceed 50% of your gross monthly income as a general rule as well.
Keeping with the example of a $60,000 annual income would mean you’d want to keep everything to do with your home at around $2,500 a month. Of course, if you spend less on groceries or utilities or anywhere else in your budget, the amount of rent you can afford increases by that much, as long as you stick to that budget.
Other examples would be:
- On $50,000 a year, you’re making $4,167 gross per month. Taking 30 percent of that, you should be able to afford up to $1,250 monthly for rent.
- On $100,000 a year, you’re making $8,333 gross per month. Taking 30 percent of that, you should be able to afford up to $2,500 monthly for rent.
The 50/30/20 Rule
The 50/30/20 Rule is more of a general finace\budgeting rule, but it’s good to know when determining if you can afford the rent you want. The rule breaks down what a typical budget should look like, including living costs such as rent.
- 50% of your income is for fixed costs. This includes rent, utilities, monthly bills, transportation costs, child support, and other obligations
- 30% is for day-to-day expenses. This might be spending on entertainment, shopping, restaurants, parking (if in a city), pets, etc.
- 20% is for savings. Examples would be an emergency fund, retirement, investments, sinking funds, and other savings account.
The 50/30/20 Rule will help guide you through calculating when determining your rent and other financial aspects. It is a general rule, and there is, of course, some wiggle room on any of these numbers when you spend less in certain areas. For example, if you don’t eat out or shop much, you may pay a bit more on rent, save a bit more, etc. Most experts will say expenses should not exceed the guidelines above no matter what.
How Much to Budget for Utilities?
Obviously, the most significant expense for living costs will be your rent, and it’s essential to as How much rent can I afford and to be able to answer that question. However, just factoring in rent isn’t the whole picture. Utilities will likely be your next most considerable expense, and their cost shouldn’t be ignored when determining if you can afford to live in a particular area.
There are simple ways to budget for your utilities as well. Take any additional costs such as electricity, gas, water, internet, etc., and add up the total cost for all of these for the last three months. Next, you’ll find the average cost for all the bills you’ve included for those three months. Next, take that average and divide it by how many paychecks you receive each month. The result will be how much money you should put aside for utilities per paycheck.
For example, let’s say your average cost for the utilities mentioned above comes out to be $400 a month. You typically get two paychecks a month (when paid bi-weekly, you have two months of three paychecks). Calculating the average of $400 per month, divided by the two paychecks, will result in putting aside $200 per paycheck for utilities.
If you are looking for a new place, you can ask the landlord or others how much the average cost for utilities such as gas, electric, etc., might be. Some rents already have some utility costs built-in with the average cost in mind.
Should I Really Use Gross Annual Income To Determine My Rent?
Up until now, we’ve been using gross income to answer the question “how much rent can I afford,” but some readers might question this, and for a good reason. Using gross income doesn’t take taxes, 401k, and other factors into account that could change your take-home pay (after tax) or net income.
Most rules and calculations use gross income because it’s much easier to get a rough estimate. For example, it’s far easier to take $50,000 and figure out 30% or divide it by 40 rather than taking $41,584.34 and doing the same calculations.
Using your gross income will give you a general idea while using your net income will provide you with a more precise amount you can afford to spend on rent, utilities, and other expenses.
Ways To Afford More in Rent
Ok, so you’ve done the math, and you simply can’t afford the rent on your own. But, don’t despair; there are still a few ways you can get the apartment you want, even if it’s a little above your range.
Find a Roommate
One of the easiest ways to reduce the cost of rent is to find someone to split it with. If the apartment you want to lease is two bedrooms, definitely find a roommate to help shoulder some of the rent and utility costs.
There are plenty of ways to find roommates these days as well. You can go old school and simply ask people you know or go new age and use different sites or apps available that connect people looking for roommates.
Don’t assume with a roommate, however, that the rent will be split right down the middle. 50-50 sounds like the easiest way to split the rent, but it’s not always fair. For example, one bedroom is much larger than another in some cases. Or maybe one bedroom has its own bathroom. In cases like these, splitting the rent evenly doesn’t make sense.
Before committing to anyone as a roommate, you should have this discussion so no one feels slighted. It will also give you the most definite idea of how much you’ll be paying in rent before moving in, which is crucial.
Find a Guarantor
If having a roommate isn’t your thing or the apartment is a one-bedroom apartment, you have other options if you cannot afford the rent. One such option is to find a guarantor, which is someone who would be legally and financially obligated to help pay your rent if you can’t for any reason.
Most would-be renters look to family members as guarantors, but it’s not as simple as asking mom and dad for help. Typically a guarantor is required to make 80x the monthly rent. Some landlords might also require that the guarantor lives in the same state as you to make them easier to find if needed.
Being short on rent isn’t always the only reason for a guarantor. Some landlords will ask you to acquire one for several reasons, such as:
- Just graduated from college
- Lacking employment history
- Lacking rental history
- A non-resident of the United States
- Have a poor credit score (650 or below)
- Lacking credit history
Suppose you don’t have any family members to ask that fit all the necessary criteria. In that case, you can pay for a guarantor through private equity or an insurance firm. If you are looking in a hot market, having a guarantor lined up could be a good idea before you start looking for an apartment. This way, when the right apartment comes along, you’ll be ready to go and have a leg up on the competition.
Finding the right home is an integral part of our lives, and the last thing we want is for them to be a source of stress financially, so asking yourself How much rent can I afford is essential. Knowing how much rent you can afford is not an exact science as everyone’s spending habits vary. However, the rules above can serve as general guidelines and starting points when determining your rent budget.
If you can’t afford the rent of an apartment, you can always attempt to find someone to help in a roommate or a guarantor as well. Happy hunting!