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).
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?
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
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|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|