You are ready to find a new place to live and you’re wondering how much of your income should you designate towards making a monthly rental payment, i.e., how much rent can you afford? There are many different ways to help you determine how much of your monthly budget should be set aside for your rent payment but when applying for a new place, take into account that the rental company or managers may be working with a specific debt to income ratio via a formula in order to qualify you. These formulas aren’t always the same and can vary widely from one entity to the next.
A good rule of thumb is that generally, landlords require your annual income to be 40 times that of your monthly rental amount or 30 percent of your income. To find this figure, divide your annual income by 40 and that will give you the amount of monthly rent you will most likely qualify for – example: $50,000 annual income divided by 40 = $1250). There are many online calculators that will figure this for you.
With this said, the 30% formula was developed over 80 years ago and many factors have changed since this standard was established. See this Money Matters article on reducing your debt for some great information on setting a budget. Student loans are now a common debt for many people and those weren’t taken into account at that time. However, car loans were considered and you may not have one – lucky you! You may be able to afford more than you really want to pay. Your goals may include saving a larger percentage of your income and spending a lesser percentage on your rental payment. The 30 percent rule is a good general formula to get you to a starting place. It will help you in preparation for applying for different properties but the bottom line is only you can make a well informed decision about what you can afford to pay towards your living expenses and still pay your other commitments.
Make A Budget
If you don’t have a budget, now is the time to sit down and write down all of your expenses. Putting them down in black and white will help you see what your income-to-expense ratio looks like and only then will you be able to make a smart decision about the amount of rent you can easily afford without eating ramen noodles for every meal!