How Much Rent Can I Afford? Affordability Factors And How To Calculate

Renting is something most people will do at some point in their lives, whether you’re fresh out of college or downsizing. Before you start looking for a place, it’s helpful to map out what you are able to spend. Of course, that forces you to ask the question of how much rent can I afford. Let’s explore how to run those numbers for your situation.

Rules Of Thumb: How Much Rent Can You Afford?

While everyone has a different financial situation to consider, keeping a roof over your head is a necessary expense. Luckily, there are multiple rules of thumb to help you map out exactly how much you should spend on rent. Remember, your situation is unique – you can adjust these guidelines to fit your finances better.

Here’s a closer look at those guidelines.

Using The 30% Rule

The “30% Rule” calls for capping your budget for rent at 30% of your gross income. The idea for this cap sprung up when the U.S. Department of Housing and Urban Development (HUD) started to consider households spending more than 30% of their gross income on housing as cost burdened.

If you spend more than 30% of your take-home pay on housing, it can be difficult to make progress toward other financial goals. The 30% cap should include all of your housing-related expenses, which include things like utility bills and renters’ insurance.

You can calculate how much you have to spend using this rule by multiplying your take-home pay by 0.3. For example, if you take home $3,000 per month, you’d have $900 to spend on rent under the 30% rule. 

$3,000 x 0.3 = $900

For some, the idea of spending less than 30% of their income on rent is unrealistic. If you live in an expensive area or are just starting out, you might struggle to stick within the 30% parameters.

Using The 40x Rent Rule

The “40x Rent Rule” is common knowledge to New York residents looking for a place in NYC. Many landlords in the big city require tenants to pass the 40x rent rule, which means you have to earn an annual salary equal to at least 40 times the monthly rent.

For example, let’s say you find an apartment with a $1,000 monthly cost. According to the 40x rent rule, you would need to earn at least $40,000 a year to pass the test.

You can work backward to determine how much you can afford to spend based on this rule. Start by finding your annual salary, then divide by 40. So, if you earn $80,000 per year, this rule suggests you can afford to spend $2,000 per month on rent.

$80,000 / 40 = $2,000

Using The 50/30/20 Rule

The 50/30/20 rule offers a more comprehensive look at your budget. Instead of focusing solely on rent, this rule states that all of your necessary living expenses, including rent, should add up to 50% of your net income.

The remaining half of your income is divided into 30% for wants and 20% for savings. With this rule, you have more flexibility to work out what number makes sense for your life. For example, if you have unavoidable childcare costs, that might cut into your available living expenses. With that, you might not be able to spend a full 30% of your income on rent.

How To Calculate How Much You Can Afford In Rent In 4 Steps

Now that you know some general guidelines, it’s time to break out your calculator.

1. Determine Your Net Income

The first step is to calculate your net income, which is the amount of income you hang on to after paying taxes. That’s a contrast to your gross income, which is the amount of income you earn before taxes.

If you only have one source of income, determining your net income might be as simple as looking at your last pay stub to see what taxes are coming out of your income. But if you have side hustles, you’ll need to factor in this extra income, the necessary taxes and any deductions.

2. Total Your Monthly Expenses

Next up, it’s time to add up your monthly living expenses and debts. For some of the rules of thumb, a high amount of debt or living expenses could lower the amount you have available for rent.

3. Factor In Savings

Saving money is a critical part of building a bright financial future. Consider your long-term financial goals when deciding how much to save each month. If you want to make saving a priority, it might require spending less on rent.

4. Calculate How Much You Can Afford In Rent

With a clear look at the numbers, it’s time to determine how much you can afford to pay in rent. Be honest with yourself about your financial goals and lifestyle requirements. If the amount you can reasonably afford to pay in rent is unrealistic for your area, it might be time to get creative.

Example: How Much Rent Can I Afford On $60,000?

The amount you can truly afford to spend on rent varies from person to person. But running through the rules of thumb can help you avoid overspending. Here’s how much you can afford with a $60,000 ($5,000 a month) take home income based on the common guidelines:

• The 30% Rule: If you bring home $60,000 per year, this rule suggests you can spend $1,500 per month on rent. ($5,000 x .3 = $1,500)
• The 40x Rent Rule: If you earn $60,000 per year, this rule suggests you can spend $1,500 per month on rent. ($60,000 / 40 = $1,500)
• The 50/30/20 Rule: If you earn $60,000 per year, this rule suggests you can spend $2,500 per month on living expenses ($5,000 x .5 = $2,500). Since your living expenses will involve more than rent, the amount you can spend on rent varies based on your situation.

Factors Affecting How Much You Can Afford For Rent

As you run the numbers, it’s helpful to understand which factors impact how much you can afford.

Location And Cost Of Living

The cost of living in your area has a big impact on how far your rent money will go. If you live in an expensive area, sticking to one of the general rules might make it impossible to find an apartment in your price range.

Consider looking for apartments further away from the center of town to find a more affordable option.

Income

The income you bring in has a direct impact on the amount of rent you can afford. Someone earning $100,000 per year can afford to pay more per month than someone earning $30,000 per year.

Single-Family Home Vs. Apartment

In general, it’s more expensive to rent a single-family home than an apartment. The idea is that a single-family home comes with more privacy, which comes with a higher price tag. Consider switching up your search to include apartment options if single-family home rental prices are out of reach.

Rent Increases

Landlords also have bills to pay, which sometimes leads to rent increases across the board. As a renter, you can be subject to potential rent increases along the way. Unlike owning a home, you cannot typically lock in a rent price for longer than the lease term, which is often a year at a time.

Tips For Increasing How Much Apartment You Can Afford

The right apartment can make all the difference in your quality of life. Here are some tips to increase the amount of apartment you can afford.

• Get roommates: Splitting the rent price with roommates will lower your costs. If you pool your resources, you might end up in a nicer apartment.
• Opt for fewer amenities: Some apartments come with a suite of amenities, which come at a price. Consider looking for an apartment with minimal amenities to lock in a better rent price.
• Get a side hustle: A side hustle can increase your net income, which will lead to more funds available to cover rent.
• Cut back on spending: If you can lower your living expenses, you might be able to spend more on your apartment. Consider cutting back on spending to increase the amount of rent you can afford

The Bottom Line

Determining how much you can afford to pay for rent is a critical exercise. It will help you avoid overspending on this unavoidable expense. If you are ready to budget for an apartment, start monitoring your spending with Rocket Money^SM.