How much rent can I afford? The answer to this question may be more complex than how it seems on the surface.
Housing costs, including rent, are almost always the biggest budget item for the average American. In fact, the average American spends nearly 40% of their monthly budget on housing costs.
While almost 63% of Americans had a mortgage in 2017, there is also a significant portion of the population that rents, and depending on where you live, that could cost you a pretty penny.
At the end of 2019, the median rent for a one-bedroom apartment in the U.S. was $1,078 a month, and a two-bedroom was $1,343 a month. The lowest average was Puerto Rico at $474 a month, and the highest was Hawaii at $1,566 a month.
While the numbers vary from state to state, it was also found that the cost of a one-bedroom had increased by about 4.1% and a two-bedroom by about 5.5%.
Whether you are in a high cost of living area or a low cost of living area, it’s clear that rent is increasing faster than wages, and the U.S. is facing an affordable housing problem.
With housing costs continuing to rise, it’s important to regularly evaluate your budget and how much rent you can afford. If possible, you don’t want to get into a situation where all your money is going toward rent and other necessary bills.
This article discusses how much of your budget should go toward rent and the steps you need to take to answer the question: how much rent can I afford?
How Much of Your Budget Should go to Rent?
Statistically, the average American spends 37% of their monthly budget on rent.
But how much should you be spending?
The general rule is that you shouldn’t spend more than 30% of your monthly gross income on housing costs, including utilities and home-owner costs (if you own a home). Those who pay more have historically been said to be cost-burdened.
However, the Federal Housing Association also has a rule that says an individual or household can spend up to about 40% on housing expenses if they have no debt.
Another rule of thumb is the 28/36 rule, which states that you shouldn’t spend more than 28% of your gross monthly income on housing costs and no more than 36% on your total debt, including housing. This debt-to-income ratio rule is what most mortgage lenders use to assess your borrowing capabilities.
Whichever rule you prefer, the overarching idea is that you should try not to spend more than 40% of your income on your total debt and housing costs. Otherwise, you may find yourself in a tight position.
Of course, many do spend more, but then you’ll be seriously running the risk of not meeting all your monthly obligations, and you certainly won’t be able to save or invest.
So, how much rent can I afford? The answer will depend on your specific situation and income.
Below, you’ll find 5 steps you can take to determine how much rent you can afford.
How Much Rent Can I Afford?
The following 5 steps will help you calculate how much rent you can afford and what you can do to fit your rent/housing costs into your budget.
Step 1 – Calculate Your Total Gross Income
All of the rules of thumb described above are based on your gross income or your income before taxes and deductions.
Thus, the first step in calculating how much rent you can afford is calculating your total gross income every month.
This could be simple or challenging depending on your relationship status and type of job. If you are salaried, then your monthly gross income should be relatively stable. However, if you’re a freelancer or have other variable income, this could change from month to month. Your income may also change if you have side hustles or multiple jobs.
If you have a variable income, we suggest looking at the past 6 months to a year to determine your average gross monthly income. We’d also suggest erring on the side of caution by finding housing slightly below that average to give yourself some breathing room.
If you have side hustles, we suggest basing your gross income and subsequent housing budget on the income from your main job.
If you’re cohabitating with someone and sharing costs, then both your incomes can be combined to determine your gross monthly income and rent affordability.
Step 2 – Calculate Your Budget
Knowing your gross monthly income is a necessary first step and will help you determine a ballpark range for what you should be spending, but you’ll also need to calculate a budget to determine what you can actually afford to spend.
Remember, your total debt plus housing costs should ideally be no more than 40% of your total gross monthly income. This means you will need to understand what debt and other monthly obligations you have before determining what is available for housing costs.
At the most basic level, a budget is your total net income minus your total monthly liabilities. However, there are many ways to budget, and not all methods may work for you.
Check out these 10 budgeting methods and choose one that will work for you.
Step 3 – Determine How Much Rent You Can Afford
Once you know your total monthly gross income and have a budget built, you can then determine how much rent you can afford.
If you have little or no debt, we suggest primarily using the first rule discussed above, in which you spend between 30-40% of your gross income on housing.
However, just because you can spend more money on housing doesn’t necessarily mean you should. We suggest spending no more than you must to find a safe, comfortable, and desirable living arrangement and saving or investing the savings.
Similarly, if you have a lot of debt, we suggest saving as much as you can on housing and focusing on paying down debt and saving/investing.
Step 4 – Begin Your Rent Search
Once you have a rent number determined, you can begin your search for housing in your desired area.
Start by using the desired rent payment and maximum monthly payment, then search using other desired metrics such as the number of bedrooms, location, amenities, etc.
Hopefully, you’ll be able to find something that fits most of your wish list, and that is within your budget. However, with rent prices on the rise, it isn’t uncommon for people to find that their wish list and budget do not match. No matter the case, be very wary of deals that seem too good to be true. That’s going to cost you even more money. So, make sure to educate yourself on recognizing and avoiding rental scams.
If your wish list and budget don’t match, go on to step 5 below.
Step 5 – Modify Your Search to Fit Your Rent Budget
Like it or not, you can only rent what you can afford.
So, when your wish list and budget don’t match, the first thing you need to look at adjusting is your wish list.
The items that will generally make the biggest impact in terms of overall rent costs are size (square footage and the number of bedrooms/baths), location, and condition. Other factors include amenities and type of housing.
Go through your wish list and see what you may be willing to compromise on. Often, downsizing and changing location will be enough to open up rentals that fit within your budget.
Another potential option is to look to increase your income. If you don’t want to compromise or want to eventually move to a better place, you might consider looking for ways to hack your 9-5 or make extra money through a side hustle or second job.
Lastly, if you’ve adjusted your wish list and are unable to increase your income, you might look at finding a roommate(s) so that you can fit your housing costs within your budget. In fact, nearly 32% of American adults lived with roommates in 2017, a number that has been increasing over the past few decades.
Bonus Tip: Use a Rent Calculator
The above steps are a great roadmap to determining how much rent you can afford, but they do take some effort and adjustment.
We understand that most people are busy and may not have the time or confidence to make all the calculations we discussed.
Luckily, there is a way to get the ballpark rent affordability information you need in only a few quick steps with a rent affordability calculator.
Simply enter your location, monthly or yearly gross income, and expenses and let the calculator do the work for you.
You’ll receive a breakdown of your monthly budget, including approximately how much will go to taxes, how much you should be saving, spending, and allocating toward rent.
Some rent calculators, like this one from Zumper, also include a percentage of places that match your budget by the number of bedrooms and rental listings within your budget.
A rent calculator can take almost all of the work out of finding a place to rent and is something we highly recommend checking out.
Moral of the Story
Housing costs are often the biggest expense of any American household, and those costs are only going up.
With many struggling to live within their means, it’s more important than ever to understand how much rent you can afford and try and stay within that range.
The rule of thumb is to spend between 30-40% of your monthly gross income on housing if you have no other debt and not spend over 40% of your monthly gross income on debt and housing combined.
When answering the question “how much rent can I afford,” first start with calculating your monthly gross income, then your budget (income minus necessary expenses). Once you have those numbers, you can determine how much you can afford to spend on rent, begin your rental search, and make any modifications to your wish list to match your rent budget.
For those who like to keep things simple, you can use a rent calculator to help you quickly make the necessary calculations. Many calculators will even show you listings in your desired area that fit within your rental budget.
Now that you know how much rent you can afford, it’s time to get started finding your next home.
Talk about Money Learned.