How Much Rent Can I Afford?
Your Monthly Rent
$4,250.00
You can afford to spend $4,250.00 monthly on rent. You are spending 30% of your Gross Income on rent.
What You Should Know
- The amount you can afford to spend on rent largely depends on your income and expenses.
- As a rule of thumb, you should be spending no more than 30% of your gross income on rent to live comfortably.
- If you are looking to live in the same place for a long time, then it might be beneficial to buy a property instead of renting.
How Much Rent Can I Afford?
It might be difficult to tell how much a person should spend on rent, especially when comparing the total cost of living between different cities. One city may have higher rental prices but cheaper food. Another city may have lower rental prices but also lower wages. In this case, a city with higher rental prices may be a favorable option because of higher wages and cheaper food. It may be the case that living in a city with higher rental prices may even be financially smart. A proportion of how much you spend on rent to the amount you earn is important to look at.
As a rule of thumb, a person should spend no more than 30% of their gross income on rent to live comfortably. Additionally, according to the 50-20-30 Budget Rule, a person should spend no more than 50% of their income on needs, 20% on savings and 30% on wants. A person should never spend more than 50% of their gross income on rent. It is also important to consider your personal financial situation before locking in a lease. If a person spends more than 70% of their gross income towards paying off debt and buying needs other than shelter, then they may not be able to afford spending 30% of their gross income on rent. Note that your rent affordability does not depend on your net worth, but instead on how much money you make. It is important to make sure that you can pay off your rent without going into debt. If you are thinking of moving to another place, you should also consider moving costs before making a decision.
Suppose Julie lives and works in New York. She has an annual salary of $150,000. She has a yearly budget, and she expects her expenses including debt payments to be $85,000. Julie is planning to move in at the end of the month and is looking at 3 different apartments available.
| Category | Apartment 1 | Apartment 2 | Apartment 3 |
|---|---|---|---|
| Annual Rent | $40,000 | $60,000 | $70,000 |
| Savings After Expenses | $25,000 | $5,000 | -$5,000 |
| Rent to Gross Income | 27% | 40% | 47% |
| Is It Affordable? | Yes | Somewhat | No |
In this case, Julie cannot afford to rent Apartment 3 because she will likely go into debt after her expenses. On the other hand, Julie can afford Apartments 1 and 2. Apartment 1 is an affordable option with rent taking up 27% of gross income. Apartment 2 is also an affordable option because Julie is still expected to save $5,000 after all the expenses, but rent will take up 40% of gross income.
Different ranges of gross income will have different suggested rental expenses. The following table provides suggested and maximum amounts an individual should spend on rent based on their salary.
| Annual Income | Suggested Monthly Rental Expense | Maximum Monthly Rental Expense |
|---|---|---|
| $20,000 | $500.00 | $833.33 |
| $30,000 | $750.00 | $1,250.00 |
| $40,000 | $1,000.00 | $1,666.67 |
| $50,000 | $1,250.00 | $2,083.33 |
| $60,000 | $1,500.00 | $2,500.00 |
| $80,000 | $2,000.00 | $3,333.33 |
| $100,000 | $2,500.00 | $4,166.67 |
| $120,000 | $3,000.00 | $5,000.00 |
| $140,000 | $3,500.00 | $5,833.33 |
| $150,000 | $3,750.00 | $6,250.00 |
| $200,000 | $5,000.00 | $8,333.33 |
| $300,000 | $7,500.00 | $12,500.00 |
| $400,000 | $10,000.00 | $16,666.67 |
| $500,000 | $12,500.00 | $20,833.33 |
Gross Income vs. Net Income
What income should be used to find how much rent a person can afford? Rent affordability can be calculated using both gross and net income, but it is important what both imply. Gross income is much easier to calculate because it does not require estimating how much income tax a person has to pay. Because it is so easy to find gross income, the rule of thumb is that a person should spend 30% or less of their gross income on rent to live comfortably. On the other hand, net income is more difficult to calculate, but it is a more accurate reflection of how much money a person has. In this case, the person should aim to spend no more than 50% of their net income on rent. You can also estimate your total annual income before and after taxes based on your state of residence.
This calculator estimates net income using federal income tax rates for 2022. It calculates affordable rental prices based on the 30% of the gross income. After that, it calculates whether the rent is affordable based on the net income and expenses taken into account. It is also possible to look at different rental prices based on different rent to gross income ratio.
Renting vs Buying a Property
Renting is expensive, and sometimes monthly rent may be even higher than monthly mortgage payments on the property. In such cases, it might be a sound idea to purchase a property instead of simply renting it, but there are certain limitations and downsides associated with purchasing a property. If you are thinking between renting and buying a property, a Rent vs. Buy Calculator may be useful to make an educated decision.
Buying a property may be quite difficult because it usually requires a large amount of capital and a certain degree of commitment. A person who is looking to purchase a property should be willing to keep the property for multiple years to break even. It takes a few years to break even because there are closing costs and taxes associated with purchasing a property. In addition to that, a buyer should have enough money to cover the down payment on the property. Usually, the down payment is 20% of the purchase price for conventional loans, but it can be as low as 3.5% for some mortgage types such as FHA loans. It is also beneficial if a buyer has a good credit score because the credit score will have an effect on the interest rate offered to the buyer. If a buyer does not have a good credit score, then it might be beneficial to rent before the credit score is improved.
Renting a property is much easier and more flexible than buying a property. Usually properties are leased for a year, so a renter can expect to be able to move every year. It also does not require a large deposit, which means it is much easier to rent than to buy a property from the start. On the other hand, the downside to renting a property is that it is much more expensive than buying a property in the long term. A big part of monthly mortgage payments go towards the principal amount of a mortgage. This means that a large part of monthly payment is saved through building equity on the property. When a person rents a property, all of their monthly payment goes towards rent and nothing is saved.
- Any analysis or commentary reflects the opinions of Casaplorer.com (a part of Wowa Leads Inc.) analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. Casaplorer does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
- Interest rates are sourced from financial institutions' websites.