How much should I spend on rent?
Roughly a third of Americans rent their homes, and the number of renters has steadily grown in the last decade. On top of that, rents have skyrocketed in recent months, hitting new highs each month for 17 months in a row according to a report by Realtor.com.
If you’re one of the millions of households paying rent each month, or a first-time renter, you may be asking yourself how much you should spend on rent. For many, it comes down to budget and priorities.
How much should you spend on rent? Rules of thumb
There are a few rules of thumb that can help you decide how much of your income to allocate to rent.
30 percent rule
One common budgeting method is the 30 percent rule, which dictates you spend no more than 30 percent of your after-tax monthly income on rent. This percentage stems from affordable housing policies from the last century, which applied 30 percent as a benchmark to determine whether a renter is paying too much.
If your income is $3,000 a month, for example, your rent should not exceed $900 under the 30-percent threshold. If it does, you may be considered cost-burdened, and thus have a harder time saving or reaching other financial goals.
50/30/20 rule
Another common method is the 50/30/20 rule, which indicates that you should allot half of your after-tax monthly income to necessities such as housing, groceries and transportation. The other half is divided into 30 percent for discretionary spending (think clothing and dining out) and 20 percent for savings.
If you bring home $3,000 a month, that breaks down to $1,500 for basic living expenses, including rent; $900 for other purchases; and $600 for growing your investment, retirement or savings accounts.
While both the 30 percent and 50/30/20 rules can serve as guidelines to calculate how much rent you can afford, the ultimate determination is a bit more complex.
Aside from your income, you should take into consideration a variety of other factors, such as your debt and the cost of living in your city. For example, if you’re paying off student loans or have car payments, you may already have expenses that run up to several hundred dollars a month. Moreover, if you live in an expensive city, you’ll likely spend a higher percentage of your income on rent alone (unless you have a roommate to share the cost).
Rent-to-income ratio
Your rent-to-income ratio measures your monthly rent cost compared to your monthly income. You can calculate it by dividing your monthly rent bill by your monthly income.
For example, if you make $48,000 per year after tax, that’s equivalent to $4,000 per month. If your rent is $1,200, your rent-to-income ratio is 30 percent: 1,200 / 4,000 = 0.30.
If you follow the 50/30/20 rule, that leaves you with:
- $2,000 a month for rent and essentials
- $1,200 a month for discretionary spending
- $800 a month for savings
Other costs for renters
While rent is the largest housing expense you’ll shoulder, it’s not the only one. Depending on where you live, you may have to budget for parking and utilities every month, in addition to several one-time fees.
Move-in and move-out fees
Your landlord or property manager may charge you a one-time move-in fee, which generally runs up to a couple hundred dollars, but varies from one rental to another and by location. You may also be charged a similar fee when you move out, which is sometimes used to cover the cost of professionally cleaning the rental for the next tenant.
Security deposit
Unlike a move-in or move-out fee, a security deposit is usually equal to one month’s rent and is refundable when you move out. Depending on the condition of the rental when you hand it back over to your landlord, you may receive all of your deposit back or only a portion of it, with the rest going toward repairs for any damages beyond usual wear and tear. If you’ve missed a rent payment, in some locales the deposit can help your landlord cover it, as well.
First/last month’s rent
Depending on your location, you may have to pay both the first and last month’s rent upfront, together with a security deposit. In some places, you might have to prepay rent only for the first month, with the landlord recognizing your security deposit as rent for the last month of your lease. In this case, your rental expenses can run into several thousand dollars before you even set foot in your new place.
Application, parking and pet fees
Landlords and property managers often charge renters an application fee, which can range from $30 to $75 per person. This fee usually pays for a background check on the prospective tenant.
You may also have to pay for a dedicated parking spot. In large cities where parking comes at a premium, your parking fee can be substantial, sometimes $500 or more.
Some property managers also levy a pet fee that can vary depending on the kind of pet you have. You can expect to part with $200 to $500 upfront in order to have your furry family member in the unit.
Utilities
Depending on your location and the property, you might also have to pay for utilities such as electricity, water and sewer and trash pickup. In some cases, you’ll have to cover all the monthly expenses associated with the rental. In others, the property owner will split some of the utility costs with you. As a general rule, though, you should expect to pay for power and water, at minimum.
Renters insurance
Renters insurance protects your personal belongings from incidents like theft, fire or vandalism, and offers liability coverage for personal injury on the property, among other provisions. This type of insurance is usually low-cost — sometimes as low as $10 a month — but to save even more, you may be able to bundle it with your car insurance policy. Note that some landlords may have specific requirements about whether you need renters insurance, and the level of coverage that insurance should provide.
Bottom line
Paying for rent can be costly, and can get even pricier if you factor in other one-time and recurring expenses. That’s why it’s important to consider your budget and what you’re comfortable with when determining how much you should spend on rent.
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