Looking for an apartment or wondering if you should move? With landlords regularly raising rents each year, your current lease might be too pricy or maybe it’s a steal. Here’s how to easily figure out what’s actually affordable for your budget without paying too much of your hard-earned money.
The Monthly Cap
Unless you’re making millions every year, here’s an easy rule of thumb to know for pricing an apartment so that it won’t bust your budget:
Don’t pay rent in excess of 30% of your take-home pay for the month. Period.
This is the national average in the US. Paying more than that puts you at increasing financial risk and strain. 30% is a comfortable amount but it will depend on your other financial obligations. This is critical to understand. Further, if you’re wanting to get ahead financially, keeping a hard cap on that 30% no matter your income will let you avoid unreasonable lifestyle creep while adding to your bottom line, not a landlord’s.
Consider Your Total Expenses
Your debt and expenses factor big time to landlords when it comes to offering a lease. Want to look good for them? For financial stability, spend only 70% of take-home income each month and invest the remaining 30% in money-making activities – stocks, bonds, passive income, a personal business, 401k, or IRA, etc. This sets you up for a comfortable living between being too frugal and too much of a spendthrift. It also keeps your debt/expense ratio in line, cleans up your credit, and will produce financial numbers landlords are looking for.
Unfortunately, we Americans are mostly spendthrifts hooked on hyperconsumption. 78% live paycheck to paycheck. The 70/30 Rule (70% to total expenses, 30% to investments) is where you take control of your money and win at the financial game. This more reasonable behavior safeguards your finances and makes you shine as a prospect to landlords, banks and realty agents.
Rent is a huge part of your financial portrait. If your debt payments each month are more than 20% of your take-home pay, banks start considering your more and more at risk for default. If your debt to income is more than 35%, they think you’re barely squeaking by. Similarly, landlords want to know your financial health in order to safeguard their property investment. While some landlords will rent to people even when monthly rates are 40% of your gross income, many won’t due to this perceived risk for inability to make rent. For a number of property managers and landlords, even 35% is too high and they will turn down those applications or anyone who’s credit score is below 650.
Where do you fall in terms of your debt to income? For the best snapshot, look at your take-home income, not your gross (basing numbers on your gross will make you feel like you have more money than is actually free to spend). Taxes and other federal withholding can take out large chunks from your paycheck so your net income is the most important number to base your debt to income on.
If your debt to income is at that 35% threshold or higher when your run your numbers, you might be better off avoiding a move to a pricier apartment. Instead, focus on paying down your debt to more reasonable levels. Here, moving to a cheaper apartment or getting a roommate would definitely help. I saved $700 a month a few years ago by leaving my one bedroom apartment to rent a room in my friend’s house. I did this for a number of years in order to build my wealth and pay down my debt. That came out to at least $8400 in savings a year for several years.
Bottom line: if your debt to income is over 20%, then no matter if your current apartment is 30% of your take-home pay, you probably shouldn’t move to a more expensive apartment – not if you want to live comfortably and get ahead in the financial sense.
Easy Formulas For Housing
If you’re thinking about moving, consider this formula to decide whether to stay put, move up in price or move down in price:
- You’re paying more than 30% of your take-home pay in rent: move to a cheaper apartment.
- Your debt to income is 20% or less of your take-home pay: renting any apartment that isn’t more than 30% of your income will likely be comfortable for you financially.
- Your debt to income is greater than 20%: make sure you’re not paying more than 30% of your take-home pay in rent and consider finding a cheaper place to live until your debt levels are at 20%.
- If your debt to income is greater than 35% of your take-home pay: start financial triage immediately. Good landlords might turn down your rental application due to your perceived financial risk. Stay under 30% for your rent obligations and perhaps seek cheaper accommodations, even if it means roommates, in order to use the money saved on rent to bring down your debt ratio to 20%.
Rent: A Big Chunk of Your Expenses
Paying for housing makes up by far the largest share of expenses a person typically spends each month. It’s also the one payment we can drastically alter. After all, getting a roommate or moving to a different location can literally save you hundreds of dollars a month. You can’t do that with many other expenses and it’s almost impossible to do that with debt obligations like credit card or student loan payments. Rent is where you can bring your finances to heel the quickest and easiest. Well, somewhat easily. You still may need to search, pack and move. But if you can save thousands of dollars in a year, that’s money that you can use elsewhere – like paying off those annoying loans or contributing toward your retirement – rather than simply forking it over to a landlord.
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