How Much Rent Can I Afford?
Author : Kevin Ryan
Originally Published : May 11, 2023
Reposted from : Buy Side from WSJ
Knowing how much rent you can afford is critical to creating an achievable budget, but balancing affordability with livability can get complicated—especially if you live in an expensive marker or are renting for the first time.
It can be tempting to sign a lease for the nicest place in the best location you can find, but that isn’t always financially responsible. Paying too much in rent could leave you struggling to pay your other bills or unable to save for the future.
“Younger people are facing big challenges regarding housing,” says Christopher Lyman, a certified financial planner at Newtown, Penn.-based Allied Financial Advisors. “Prices just seem to keep going up, and the same dollars need to go much further.”
Still, the situation isn’t hopeless. With the right spending plan, you can get yourself into the best possible home you can afford. Here’s how financial planners say you can make sure your rent is in line with your income and goals.
What percentage of my income should go toward rent?
Experts we spoke to recommend keeping rent costs below 25% to 30% of your monthly income. More than that and you might not have enough left for your other daily needs or you might end up cutting into your savings. Most suggest basing your budget on your net (after-tax) income, given that you’ll be taxed differently depending on your location.
James Guarino, a certified financial planner at Baker Newman Noyes in Woburn, Mass., generally steers clients to the 50/30/20 budget, which has 50% of your income going toward needs—including that up to 30% on rent.
In this model, the other half of your income is divided between wants (30% of your income) and savings (20%) which can include extra debt payments.
When it can make sense to spend more
However, if you live in an expensive market, Guarino says, you might have no choice but to spend more on rent. This would push your needs category past 50%, thereby cutting into the other parts of your budget.
“If you’re in Boston, New York, San Francisco or L.A., 30% of your income probably isn’t going to cut it,” says Guarino.
He says some people in these cities, especially early in their careers, pay much more on rent and sacrifice elsewhere. It isn’t a sustainable situation, but it could pay off if it earns you a higher salary down the road. Just make sure you’re being realistic about the potential long-term benefits—and consider relocating to a less expensive city after a few years if it doesn’t look as though that salary bump is coming.
Another factor to consider is whether spending a little more on rent could help you save on other costs. For example, living near a city’s downtown or in a building with a gym might be more expensive, but if you can walk to work or forgo a gym membership that increased cost could be offset.
“These are all things you should take into consideration when you’re thinking about how rent factors into your overall budget,” says Garrett Sorensen, an Old Hickory, Tenn.-based certified financial planner at Marcum Wealth. Consider using a budgeting app to help you see how paying more or less in rent would affect you.
When it can make sense to spend less
It can make sense to spend less than 30% of your net income on rent if you have other large expenses. Perhaps you have a sizable amount of student debt that you want to pay off quickly, or maybe you’re providing for family members.
One effective way to reduce your rent is to live with roommates. Akeiva M. Ellis, co-founder of Natick, Mass.-based financial education company The Bemused, decided to take on a roommate when she was renting her first apartment after college.
“I knew that was what I needed to do if I wanted to save, which was nonnegotiable for me,” she says. “You just have to know what your priorities are, have an open mind, and be flexible. There are usually multiple ways to make the equation work.”
When does renting make more sense than buying?
Buying a home can be advantageous in the long-term, since you’re gaining equity instead of forking money over to a landlord. But there are often other factors in play.
For example, if you plan to relocate within a few years, then renting is likely a better solution, says Sorensen. Buying involves more upfront costs and there is a risk of home prices falling in the short term.
Maybe you can’t afford the home of your dreams now, but the trajectory of your career might allow it in a few years. “If that’s the case, there is no need to rush,” says Sorensen. “It’s worthwhile to rent for a few years and save up so you can buy that ideal home.”
Plus, owning can lead to unexpected—and, sometimes, incredibly expensive—costs. “As a homeowner, you’re responsible for everything,” says Guarino. “If an appliance breaks or a boiler blows, you’re on the hook and everything comes out of your pocket.”
Experts advise having three to six months’ worth of living expenses—including your rent or mortgage payment—saved as an emergency fund. You may also want 1% to 4% of your home’s value set aside as a maintenance fund if you own.
Your monthly rent will make up the bulk of your housing-related expenses, but it certainly won’t be the only cost. Here are a few other expenses you’ll need to factor into your budget if you rent.
Make sure you find out which utilities you’re responsible for and which the landlord covers. Internet, cable and electricity will generally be up to the renter, while responsibility for gas and water varies by location. Ellis points out that many utility companies will provide historic billing information to prospective renters if requested. Factor those numbers into your budget, but keep in mind that your usage may differ from that of previous tenants.
You might need to rent a moving truck to haul your stuff, or hire a moving crew, which costs $1,712 on average, according to HomeAdvisor. And the expenses won’t end there, since sleeping on the floor of a bare-walled apartment is less than desirable. “Very rarely are you going to move into a fully furnished apartment,” says Guarino. “Even cups, plates, utensils—it adds up. Those are the kinds of surprises that really blow people away if you haven’t lived by yourself before.”
Security deposit and agent fees
In addition to the first month’s rent, some rentals require a security deposit, an agent’s commission and the last month’s rent. “So here you are thinking, ‘Well, I’ve gotta come up with $2,500 for my first month,’ and what you don’t realize is that it’s actually going to cost you $7,500 to get your foot in the door,” says Guarino.
Some landlords require renters insurance, and financial advisors highly recommend getting it either way. For $15 a month on average, renters insurance covers your belongings in the event of a fire, theft or water damage.