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You need to know how much rent you can afford each month before you can start looking for a flat to rent. How Much Rent Can I Afford to Pay Based on Income & Monthly Budget?

Before they approve you, property managers and landlords look at your income and the rent and set their own limits. But just because you meet their minimum income requirement doesn’t mean you can really pay the rent.

It’s important to carefully look over your current income and budget before you start looking for a new place to live.

How Housing Fits Into Your Larger Budget: How Much Rent Can I Afford to Pay Based on My Income & Monthly Budget?

The period between deciding to move and beginning your apartment search is an ideal opportunity to completely revamp your budget.

Before going any further, start by setting a target savings rate. Decide on what percentage of your income you want to put toward building wealth each month. The larger the difference between your income and expenses, the quicker you can accumulate an emergency fund, settle unsecured debts like student loans, increase your wealth, and begin generating passive income.

Please establish a savings rate and promptly deduct it from your take-home pay. The remaining income serves as your operating budget — use it as the foundation for your new budget. Try this free template to create your budget in Google Sheets, and leave some wiggle room for discretionary spending.

Housing as a Percentage of Your Income

When creating a budget, most people set a limit on the percentage of their operating income that they’re willing to spend on housing. (I actually recommend an alternative approach; more on that shortly.)

For example, you might decide you’re willing to pay 25% of your operating budget toward rent. That falls in line with the average American household spending on housing, which the U.S. Bureau of Labour Statistics reports as 24.96% of gross income.

Many landlords set a maximum percentage of 33% of take-home pay as a general guideline. They disqualify any applicants who bring home less than three times the rent.

If your income fluctuates each month, budget based on your lowest typical monthly income, not your highest. Your income may vary but your rent doesn’t, and you need to afford it even in your worst month.

Still, everyone’s budget needs are unique, and you may be able to afford more or less than the typical household depending on your other expenses, such as childcare, transportation, and healthcare costs, which can significantly impact your overall financial situation.

Zero-Sum Game: A Holistic Look at Budgeting – How Much Rent Can I Afford to Pay Based on Income & Monthly Budget?

Budgeting is a zero-sum game: if you spend more in one area, it leaves you with less to spend elsewhere. Think of it as a pie that you can carve any way you like, but it remains a finite circle.

This implies that you can allocate more funds towards housing if you reduce expenses in other areas. For instance, you might despair when you first research New York City rents, but as a New Yorker, you probably don’t need a car. So you sell your car, eliminating not only your car payment but also all car-related expenses, including gas, maintenance, and your car insurance policy. That’s money you can then put toward rent if you so choose.

In budgeting, as in life, you can have anything you want, but you can’t have everything you want. Spend more on rent in a city with high cost of living, and it leaves you with less for other expenses.

Reframe the Question to Spend Less on Housing

Why do people overspend on housing? People often overspend on housing because they pose the incorrect question.

When looking for a new home, people ask themselves, “What’s the most I can afford to spend?” Then they go out and look at homes that cost that amount — the maximum they could possibly afford.

To spend less on housing and put more money toward building wealth, ask a better question. Ask yourself, “What are my minimum housing needs to still be happy?” That pushes you to look at more affordable housing options and to get more creative in how you pay for housing.

Creativity often pays off. I haven’t paid a cent for housing in nearly six years, and before that I still paid far less than my neighbours. I do it through house hacking: finding ways to have other people pay for my housing. You can bring in roommates, rent out part of your home on Airbnb, rent out storage space through services like SpareFoot, or even bring in a foreign exchange student — a tactic that covers 90% of my friend’s mortgage.

My wife and I househack through her employer, who provides us with free furnished housing. For fun, check out these jobs that provide free housing, and approach your housing search with more creativity.

Beyond Rent: Other Housing-Related Expenses on How Much Rent Can I Afford to Pay Based on Income & Monthly Budget?

Your housing expenses don’t end at the rent.

As you plan out your budget, don’t forget the following expenses and how they impact how much rent you can afford.

Utilities

When you look at any prospective home, find out which utilities are included with the rent, if any.

This is important because utility costs can quickly accumulate. You can easily spend hundreds of dollars each month when you total your bills for:

• Electric
• Gas
• Water and sewer
• Internet
• Home phone
• Cable TV

Those last two make easy expenses to cut to save thousands each year. Just a thought.

Bear in mind that utility bills vary dramatically between homes. One home can easily cost you double or triple the gas, electricity, and water bills from another seemingly similar home due to energy efficiency differences or different energy pricing between municipalities.

Before moving into a home where you pay your utility bills, ask for copies of past utility bills from each season to get a sense for the costs.

Municipal Fees

Some cities charge separate fees for trash pickup, recycling, and other basic public services on top of the taxes they already collect.

Double-check if a municipality double charges fees on top of taxes before choosing a place to live.

Parking

Parking can be scarce in urban areas. Some landlords and buildings include parking; others don’t.

If you own a car and need parking, confirm the parking conditions at each rental unit you tour. You may find that it makes sense to pay slightly higher rent to secure an included parking spot, rather than paying separately for parking or spending 15 minutes looking for parking every evening.

Of course, street parking isn’t necessarily a dealbreaker. Some urban neighbourhoods offer plentiful street parking, while others are a perpetual nightmare, making it essential to consider the availability of parking options when choosing a place to live. Please consider reaching out to residents in the area to gain insight into the local parking conditions.

Amenity Access

Parking isn’t the only amenity that can add value despite higher rents. Some apartment complexes include valuable amenities like a community gym, pool, hot tub, and other conveniences.

These are amenities that you might pay separately for if not included in your rent. Before moving abroad, I paid around $100 a month to access a combined gym and pool. A friend of mine lived in a building that provided both, although he paid higher rent than I did.

Again, budgeting is a zero-sum game. Just be careful not to use amenities that you wouldn’t actually pay extra for as a justification for overspending on an apartment.

Renters Insurance: How Much Rent Can I Afford to Pay Based on My Income & Monthly Budget?

Although not expensive, renters insurance still stacks more housing-related expenses onto your budget.

Renters insurance covers all of your personal belongings, and many also cover other costs such as liability if your dog attacks a neighbour or moving expenses if you’re forced out of your home early due to fire or disaster. Look up renters insurance policy costs, and add it to your budget.

Pro tip: If you’re looking for renter’s insurance, check out Lemonade. It takes only 90 seconds to apply, and policies start at just $5 per month. Learn more about Lemonade.

Furniture and Decor

If you move into a larger home, or move out of your parents’ house for the first time, prepare to spend some money on furniture, decorations, and other home goods.

Of course, you can buy furniture inexpensively and decorate your home without spending much either. Or you can spend an arm and a leg on brand new, upscale furniture and trendy decor.

I furnished my first townhouse entirely with used furniture I bought from people on Craigslist. If it didn’t look like a catalogue home, that’s because I knew nothing about interior design, not because you can’t find like-new furniture at a fraction of its original cost.

Whether you spend $300 or $3,000 furnishing an apartment depends entirely on you. But if you move into a larger home than you had before, expect to spend something.

Security Deposit: How Much Rent Can I Afford to Pay Based on Income & Monthly Budget?

Although it’s another nonrecurring expense, you still need to come up with a security deposit before you can move into a new rental home. Landlords typically charge between one and one-and-a-half months’ rent for the security deposit, although some charge more for applicants with a lower credit score.

Moving Costs

You can’t pick up a full-size couch by yourself. And unless you drive a pickup truck, you probably can’t transport it yourself either. Even so, it would take dozens of trips in a pickup truck to move all the furniture that fits in an average house.

Whether you pay a moving company or simply rent a moving truck, you need to budget for moving costs. Even if you recruit friends and family to help you move, you should provide them with food and drinks as a gesture of gratitude. Which all costs money.

Ideas to Afford a “Reach” Home: How Much Rent Can I Afford to Pay Based on Income & Monthly Budget?

Sometimes you just can’t help falling in love with a home that stretches your budget.

Although I don’t recommend spending an uncomfortably high portion of your income on housing, consider these ideas if you find yourself obsessed with a “reach” home.

1. Bring in a Housemate

If you offer housemates the best room or something else valuable, they may pay more than half the rent.

But beyond rent, housemates also slash some of your other housing costs. They split utility bills with you, potentially saving you hundreds each month. They might provide furniture, artwork, or home goods like cookware and silverware, relieving you of those costs. And they can split moving costs with you as well.

Housemates also teach you how to live harmoniously with others — a skill that comes in handy once you get married. It’s far easier to go from living with a housemate to living with a spouse than to suddenly have to start compromising and accommodating someone else’s habits.

2. Earn More Money

Yes, you can grow your savings rate by spending less. But you can also boost it by earning more.

You could do that any number of ways, such as negotiating a raise at work or padding your resume with new certifications and getting a new job that pays better. Or you could build new income streams entirely by starting a side hustle.

Side hustles don’t have to be tedious either. You could start a business on the side of your job or turn your hobby into a paying gig. Some part-time jobs pay health benefits or other valuable perks, and many are downright fun.

Too many people just sit around and complain that they don’t earn enough. If you want to earn more, there’s nothing stopping you! You can also earn passive income that you don’t have to work for by investing money for passive income streams.

3. Negotiate Lower Rent

In every long-term rental I’ve ever lived in, I managed to negotiate a lower rent payment with the landlord.

No, you don’t need an advanced degree in negotiation. You just need to put yourself in the landlord’s shoes. Start by finding something the landlord wants more than money.

Remember that landlords aren’t the greedy Scrooges that the press makes them out to be. They’re people like you and me who saved up their pennies and invested them in rental properties rather than in the stock market or bonds.

Landlords want reliable tenants who will pay the rent on time, treat their property well and prevent damage, and get along well with the neighbours. Wiser and more experienced landlords also know the value of long-term tenants who stick around and don’t require them to go through another turnover any time soon.

Make a friendly, persuasive case for why you’ll embody everything they want in a perfect tenant. I once worked out a deal with a landlord that I would pay the rent early every single month, and that if I ever failed to pay the rent early, the rent would revert back up to its full price. But that’s merely one of many ways to negotiate lower rent with a landlord.

Final Word on How Much Rent Can I Afford to Pay Based on Income & Monthly Budget?

It’s all too easy to overspend on housing.

Know your housing cost limits — including all expenses, not just rent — before you go house hunting. Better yet, get creative in looking for ways to score either free or reduced housing, or at least reframe your housing budget to focus on your lower limit rather than your upper limit.

If you find yourself struggling, don’t resort to paying your rent by credit card. Instead, look for other ways to trim your monthly expenses, such as saving money on groceries or cutting your cable television. But you’d be wise to avoid putting yourself in such a pinch in the first place.