How Much Of Your Income Should You Actually Spend On Rent? And When Does It Make Sense To Buy?

how-much-should-i-spend-on-rent

If you live in Manhattan or the Bay Area, you already know that you’re likely paying through the nose for your apartment. But if you live anywhere else in the U.S. and you don’t have national publications bemoaning the state of your city’s rental market, it can be harder to know if you’re paying a decent amount for your accommodations or not.

But whether your rent is high or low, you might be wondering: how much should I spend on rent? What’s a reasonable sum—and what’s excessive?

And then, of course, there’s the whole “home buying” thing. You might be curious at what point it makes sense to stop paying a landlord and start paying a mortgage instead.

Here’s how to decide these questions for yourself.

What the Experts Say About Rent

First, let’s turn to the financial experts for answers.

Bestselling author Dave Ramsey recommends a monthly payment of 25% or less of your take-home pay. This doesn’t include any extras that might add to the monthly cost.

Popular TV host and author Jean Chatzky advises that your housing costs be no more than 35% of your take-home pay. Her calculation includes not just rent, but associated expenses as well, such as renter’s insurance, utilities, and any repairs you’re responsible for covering.

It seems fair to state that anywhere between 25%–35% of your take-home pay is a reasonable amount to spend on rent and other housing-related costs.

But perhaps more importantly: why this much? It’s because you’ll still need enough breathing room in the rest of your budget for other expenses.

According to Chatzky, for example, 15% of your take-home pay should go towards debt payoff (which sounds eerily similar to the amount you’re probably paying on your student loans). Another 15% will go towards transportation, 10% should go into savings, and you’ll need flexibility with the remaining 25% to cover everything else.

Keeping your housing costs to 35 percent (or less) of your budget will give you that flexibility and breathing room.

Where your personal comfort zone falls within that range depends on your overall financial goals and priorities. If you’re trying to pay down debt, for instance, you’ll want to stick closer to 25% (or less) so you can throw as much money as possible towards your repayment goals.

To do this, you’ll want to use a few tricks to minimize your rent.

How to Keep Rent Down

Whether you live in a city with notoriously high rent or you’re simply looking to slim down your budget, there are several ways to reduce the cost of your rent without having to move to a whole new city.

Of course living with roommates can go a long way towards alleviating rental costs. You’ll have your own private room but share common rooms like the living room and kitchen—and you’ll also share the cost of the monthly rent bill and utilities.

If you prefer to live alone, you can consider moving into a studio rather than a one- or two-bedroom house. Studios often come cheaper than options with bedrooms since they may have less space or a less-desirable layout for some.

Another solution is to find housing a little further away from the “hottest” neighborhoods. For instance, you could live in Queens instead of Manhattan, or in the outer suburbs of Atlanta instead of Midtown. You may have to spend extra time (and gas money) commuting each day, but those costs could be worthwhile when compared with the money you save in rent.

When Does It Make Sense to Buy Instead of Renting?

If you’re a renter, you’ve likely had plenty of people telling you that renting is like “pouring money down the drain” or “putting money in someone else’s pocket.” But buying a home isn’t necessarily the best solution for dealing with the high cost of renting.

There are plenty of other issues to consider when it comes to home ownership beyond the money aspect; you also have to factor in your current life situation and short- and long-term goals.

If you plan on staying in a particular area for at least 5 years, your income is stable, and you’re ready for all the responsibility that comes with home ownership, then buying a home may be right for you.

If you’re comfortable with the commitment of a mortgage—and/or you’re willing to rent out or sell your home if you move away—you might want to start looking at home-buying options.

You may be wondering: why the 5-year rule-of-thumb? When you buy a house, you’ll pay a variety of closing costs, including appraisal fees, loan origination fees, title insurance and more.

In addition, the mortgage payments that you’ll make for the first five years will predominantly be applied towards interest rather than principal. This means it will take roughly 5 years for you to “break even” with the closing costs and interest and start gaining any considerable equity in your house. For a more in-depth look at this issue, though, refer to the calculator below.

If, on the other hand, you think you might like to move in the next few years, your job is uncertain or you simply don’t want the responsibility of repairing the water heater and cleaning the gutters, you may find that the extra convenience and flexibility that renting allows you is worth the extra cost.

That being said, of course, to rent vs. to buy is a massively complex question. From a financial perspective, here are a few of the factors you’ll need to consider:

Total cost of homeownership

As a homeowner, you’ll have more expenses than just a mortgage (plus closing costs). You’ll also pay for the cost of repairs, maintenance, lawn care, and other home-related expenses.

For example, if replacing your roof costs $20,000 and needs to happen every 20 years, think of it as paying $83 per month for your roof. If replacing your windows costs $15,000 and must happen every 18 years, it’s like you’re $70 per month for the windows.

You’ll need to calculate the costs of long-term home maintenance based on the age and condition of the property and the amount of time you plan to own it. (Alternately, if you buy a house in an HOA-governed area, you’ll need to factor in the associated HOA costs).

In addition, the property tax rate in your locality can add several hundred dollars each month to your costs, as does the culture of your area with regard to whether or not landlords typically cover utility costs. (All homeowners must pay for their own utilities; renters may or may not have to cover these bills.)

Total cost of renting

That being said, renting bears its own costs, including the expenses associated with moving more frequently, the cost of security deposit losses, and the higher utilities costs that might stem from energy-inefficient dwellings.

Bear in mind, also, that rent typically rises with inflation, while fixed-rate mortgages stay the same. In other words, you’ll pay a $1,000 per month mortgage payment with increasingly cheaper dollars over time, while your $1,000 rent payment will continually rise. In addition, you don’t receive the tax benefits that homeowners enjoy (mortgage interest is deductible).

Opportunity cost

Finally, consider the opportunity costs associated with tying your down payment into your home equity. If you put $20,000 down on a house, for example, what opportunity costs do you suffer from alternate uses of those funds, such as using that same amount of money to pay off your student loans or investing the money in the stock market? (Bear in mind that there are tradeoffs associated with using home equity to repay loans.)

As you can see, there are substantial variables to consider in deciding whether to buy or rent. To get a better idea of which option is best suited for you, here’s a rent vs. buy calculator that factors in variables many variables you should consider, such as:

  • length of time you’ll live in the property
  • your mortgage rate
  • down payment
  • mortgage length
  • home price appreciation
  • projected rent increases
  • inflation rate
  • growth of alternate investments
  • your personal tax rate
  • property taxes in your area
  • maintenance and fees
  • additional renting costs like rental broker fees (if applicable)

At the end of the day, though, much of this equation is conjecture. You don’t know how much your home will appreciate in value, how much rental costs will rise, or what your alternate investment gains might be. At a certain point, you’ll need to make the decision based on quality-of-life considerations.

As with many things in life, your decision of how much you should spend on rent and whether to buy or not comes down to your priorities.

Did you switch from renting to buying? How did you decide?

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Published in Financial Tips, Smart Tips for Saving Money

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  • Harry Moreno

    What does take home pay mean in this context? Pre or post taxes?

  • Hi Harry,

    Take-home pay means after taxes.

    Hope this helps!

    Cheers,

    Jeffrey
    Student Loan Hero

  • Chaserville2009

    My daughter is trying to find a better apartment because she is getting a new job with higher pay. She won’t see a new paycheck until the end of March, but she’s champing at the bit to get on a waiting list or two (including putting down a deposit) right now. Her current lease isn’t up until after June 15, and a lot of places don’t have any idea what they’ll have available yet. How can she/we determine what’s a reasonable amount for her to sign on for when she doesn’t have a pay stub in hand yet? Thank you.

    • Hi,

      That’s pretty hard to say if she’s uncertain what her paycheck would be. To be safe, it probably makes more sense for her to wait and see what her paycheck will be until she applies for a new place. I realize that might not be what she prefers to do, but it could help prevent a worse scenario where she can’t afford her rent. Outside of that, I don’t think there are easy resolutions.

      Sorry I couldn’t be of more help. If there’s anything else I can do, let me know.

      Best,

      Jeffrey
      Student Loan Hero

      • Chaserville2009

        Thank you. My apologies – I didn’t know you had posted a reply. She has put down a minimal non-refundable fee to be on a wait list for what she wants. She and I both did some research and determined that she was within the range of the recommended percentage of her pre-tax income. We’ll be able to match that up better after the new paychecks start coming in, and the place she has her eye on doesn’t have any openings through May at this point. Should be enough breathing space to get it sorted out with better figures at hand.

        • Glad to hear it! Best of luck, and let us know if there’s anything else we can do to help!

          Cheers,

          Jeffrey