According to the Office of Policy Development and Research (PD&R), the average rent in the US has climbed year over year, and that trend shows no sign of slowing down. Overall, rent prices have increased roughly 12 percent faster than wages, so having a workable budget as a renter is crucial.
The general rule of thumb is to spend no more than 30 percent of your income on rent, but according to a Harvard research study conducted in 2020, one in four renters spend more than half of their income on rent. So, what’s a renter to do?
Determine How Much You Can Spend on Rent
The 30 percent rule is the easiest way to calculate how much you can spend on rent. Simply take your yearly net income (the amount you get after taxes and benefits are deducted from your pay) and multiply that by .3 (30 percent) to get how much you can spend on rent per year. Divide that number by 12 to get your monthly rent payment. So, for example, if your yearly net income is $50,000:
- $50,000 x .3 = $15,000 (yearly rent amount)
- $15,000/12 = $1,250 (monthly rent amount)
While this is the easiest method to determine a rent amount, it isn’t the most practical or realistic, considering that 25 percent of people are spending at least half of their income on rent. Another approach is to take your net monthly income and deduct all your necessary bills and other expenses to find how much rent you can afford. Necessary bills are the ones that are hard-set, meaning you must pay them every month. These may include:
- Car payments
- Insurance (car, rental)
- Credit card payments
- Utilities (this can be an estimate, but renters can expect to pay around $200 a month in utilities)
- Student loan payments
- Cell phone/Wi-Fi service
- Average groceries (renters usually spend $150-$200 a month on groceries, but this depends heavily on you and your preferences)
Next, deduct all your other monthly payments. These are the not quite necessary but nice to have bills, such as:
- Gym membership
- Subscriptions (Netflix, Twitch, Hulu, etc.)
- Delivery services
- Anything else you pay monthly
From the amount you have now, deduct 10 to 15 percent for necessary expenses, such car maintenance (gas, oil changes, new tires, etc.) or medical needs (such as trips to the doctor or routine prescriptions).
Estimate the average amount you spend on unnecessary expenses every month, such as new clothing, salon visits, dinners out, etc., and deduct that, as well.
The amount you have left after deducting all the above is what you can afford to spend on rent. If it is lower than you thought, review some of the not-quite-necessary bills and extras to see what you are comfortable with eliminating.
Finding More Ways to Save
Once you determine how much rent you can afford, you might want to reconsider the areas in which you’re searching. Some neighborhoods are more expensive than others depending on demand. For example, if you want to live in New York, an apartment in Manhattan may cost around $4,200 or more. However, if you rent in Brooklyn, the average rent is about $3,000. If you want to live in the Atlanta area, a one-bedroom apartment in Brookhaven will cost roughly $1,700. However, just a short distance away in Doraville, rent for a one-bedroom drops to about $1,200.
Another way to save on rent is to get a roommate. While getting a roommate presents a whole new set of challenges, having someone to share the costs could ease some of the financial burden of renting alone. Be aware that in most cases, the roommate will also need to be on the lease, so choose a roommate with good credit. The landlord could also raise the rent to cover the additional wear and tear on the apartment, so keep that in mind as you search.
Know Your Rent Due Date
It’s important to know what day of the month the rent will be due. In addition to helping you avoid late fees, knowing this will help you calculate how much money is going in and out, and during what time of the month. Consider using a budget tracking app or creating a spreadsheet to keep track of your expenses.
Some rentals may include utilities. Ask the property manager or landlord if any utilities are included in the rent. While renters may pay water, electric, and gas, trash removal is often included in the rent price, especially if you’re renting in an apartment complex. Be sure to ask what, if any, utilities are included with the rent. The landlord or property manager may also suggest utility companies that you can use. Before renting, call the companies, provide them with the rental address, and ask for an estimate. This will help you determine how much extra you’ll need for utilities.
Check Your Credit
Once you know how much you can afford, it’s a good idea to check your credit rating. It will probably be one of the first things the landlord or property owner checks when you apply for a rental. The government mandates that the primary credit companies provide a free credit report to consumers once a year. The easiest way to get this report is using the federally recommended Annual Credit Report site. This site won’t provide you with a score, just your report. If you find mistakes on your credit report, take action to dispute them now before you start applying for rentals.
If you want a score, there are several apps that provide this service for free, or you can check with your bank or credit card company to see if they provide this service. You can also purchase your score from myfico.com. Your FICO score is the one used by about 90 percent of lenders.
You have more than one credit score. There are three consumer reporting companies (Experian, TransUnion, and Equifax), and they all calculate the score differently based on your credit report.
If you have good to excellent credit, you generally don’t have anything to worry about when applying for a rental. If your credit score is below 620, you may need to find a co-signer to help you get approved. However, having a steady income and good references can often make up for a less than stellar credit report, especially with a private landlord. In any case, be ready to explain the reasons for a low credit score and the steps you are taking to improve it.
Once you’ve ironed out your budget and your credit, you’ll want to decide on a location. We’ll review the factors to consider in step four.