Okay, so you’ve crunched the numbers and decided that, for now, buying a house isn’t going to happen. That’s no biggie—it’s okay to rent! Sometimes renting really is the best option. You might just be starting out after leaving your parents’ house, or you might be 20 years into this whole adult thing and working hard to get out of debt. Whatever your reason for renting, you’re in good company—more than 100 million people in America are renters.1
Once you know you’re going the renting route, the big question is, How much rent can I afford? Let’s dig into how much you should spend on rent, plus why you shouldn’t feel bad about renting.
How Much Rent Can I Afford?
Your rent payment, including renters insurance (more on that later), should be no more than 25% of your take-home pay.
That means if you’re bringing home $4,000 a month, your monthly rent should cost you $1,000 or less. And remember, that’s 25% of your take-home pay—meaning what you bring in after taxes.
We know, 25% might seem like a low number to you. After all, most people are spending a lot more than that on their housing costs—nearly 36% on average.2
But if you spend more than 25% of your take-home pay on rent, your budget will wind up being really tight. Sure, you’ll still be able to pay for food and put gas in your car, but you won’t have a whole lot left to spend on life’s other necessities (and, no, goat yoga is not a necessity).
Worse, it’ll be really tough to find enough money to get yourself out of debt or, if you’re already debt-free, save up for a down payment on a house. We call that house poor—aka broke. Don’t volunteer to be broke by paying too much for rent.
How to Calculate How Much Rent You Can Afford
Get out that calculator you haven’t used since 10th-grade algebra class. Just kidding, this isn’t complicated at all!
To calculate how much rent you can afford, you need to know your monthly take-home pay—your gross pay minus any tax or health insurance withholdings. You can figure this out by looking at your paystub or (if you have direct deposit) by simply taking a look at your bank account to see your monthly deposits from your employer.
Multiply your take-home pay by 0.25. Ta-da! That’s how much rent you can afford.
Here’s an example:
- Let’s say you make $56,000 per year.
- Your monthly take-home pay would be around $3,734.
- If you multiplied that take-home pay by 0.25, you’d wind up with $933.50.
- So, with a $56,000 salary, the most you should spend on rent in a month is $933.50.
What About Rent Increases?
You may be wondering how rent increases play into all of this. Let’s talk about it.
First, you should know the state you live in probably has laws your landlord has to follow if they decide to raise your rent. Most states require landlords to give advanced notice of raises—usually 30 days—and some local governments even put limits on how much landlords can hike up your costs.3
If you’re already renting and facing a price increase, double-check the laws in your area to make sure your landlord isn’t stepping out of line. (One downside of renting is that rent usually goes up from year to year.)
But even if your landlord is playing by the rules, that doesn’t mean you just have to take your ball and go home. You can still negotiate.
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The key thing to remember about how to negotiate rent increases is landlords like having good tenants and don’t like having bad ones. So, if you’re a good tenant (as in, you make your payments on time and don’t break stuff), you should remind your landlord of that. Keeping you around—and not having to risk renting your place to a deadbeat—could be just the motivation your landlord needs to be more reasonable on a rent hike.
You may also be able to talk your landlord down if you offer to sign an extended lease, like 18 months instead of 12. Or if you do some research and find your new rent would be above market value, you’d have a good argument on your hands.
If you’re still stuck with a rent raise, and the new payment is too pricey for you, then it’s time to look for a new place to live.
What Can I Afford to Rent?
If you’ve decided to rent, you probably know there’s still one more decision to make: whether you should rent a house or an apartment. The answer depends on several factors, the most important being what you can afford. Remember: When you’re trying to figure out what you can afford to rent, keep that 25% number at the top of your mind.
Renting a House vs. an Apartment
Traditionally, renting an apartment has almost always been cheaper than renting a house. But as prices continue to rise, that may not be true for you.
The average price for a one-bedroom apartment in the U.S. is now at $1,163 a month.4 Even though the cost of renting a house has also gone up, it can still be the more affordable option if you’ve got roommates to split the payment with.
For example, a three-bedroom house with a monthly rent of $2,400 will only run you about $800 if it’s split three ways. That’s nearly $400 cheaper than the cost of the average one-bedroom apartment. Of course, if you’re living alone, renting an apartment may still be the cheaper option.
Plus, the cost difference in renting a house versus an apartment will vary based on where you live. For example, getting into a house in the heart of New York City isn’t exactly a realistic option for most folks.
That’s why, when you’re deciding between renting a house versus an apartment, you need to figure out two things: 1) how many people you’ll be living with, and 2) where you’ll be living. Once you nail that down, do some research and see which option is the most affordable. It all depends on your individual situation.
When Is It a Good Idea to Rent?
You should rent if you haven’t completed the first three of the 7 Baby Steps, our proven plan millions of people have used to pay off their debt and build lasting wealth. Here’s a look at steps 1–3:
- Build your starter emergency fund of $1,000.
- Pay off all your debt (except your mortgage, if you already have one).
- Save up a fully funded emergency fund of 3–6 months’ worth of expenses.
If you’re still in debt or don’t have that full emergency fund, renting is for you. You should also rent if you haven’t saved up a good down payment on a house yet (more on that later).
We know that might not be what you want to hear, but remember this: We don’t want you to rent forever. We want you to attack your debt with gazelle intensity and build up an emergency fund fast so you can get a jump start on building wealth and buying a house.
We just want to make sure you own the house—and it doesn’t own you. Listen, something is going to go wrong when you move into your first home. If you’re up to your ears in payments, a broken refrigerator or AC unit will turn into a crisis that causes you to go further into debt.
You might think, But if I’m renting, I’m just throwing money out the window. I need to buy a house now as an investment and start building equity. Trust us: If you buy a house while you have debt or while you don’t have an emergency fund, the only thing you’ll be investing in is stress.
There are other reasons you might want to rent too. Maybe you’re in a transitional period of life and don’t know where you’ll want to live a few years down the road. Maybe you’ve just graduated from college and you’re not sure where to settle down.
Or maybe you’re a newlywed and need time to figure out how far you should live from your in-laws. All of those are good reasons to keep renting!
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What Can I Do to Afford My Monthly Rent?
You may have heard that 25% rule and thought, Rent here is so expensive! There’s no way I can keep my rent that low! If you did, don’t worry—there are ways to offset crazy high rent prices. Here are some tips to help you figure out how to afford rent and keep it from eating away at your budget.
Cut Back on Expenses
This might be difficult, but you’ll need to take a good, hard look at your monthly expenses. Let’s face it: You’ve probably got some things you can stand to lose in there. Do you really watch all those streaming services you subscribe to? Do you really need to go out to eat that much? Is that extra pair of shoes really necessary?
Think about everything nonessential that you spend your money on and make some sacrifices to give you some more margin in your budget (more on budgets later). You’ll thank yourself later!
Trim Your Grocery Budget
You can also find margin in your essential expenses like groceries. How many times have you gone to the checkout aisle only to be visually assaulted by all the impulse items that line the register? Those little packages of chips and candy may seem like a small cost in the moment, but they can add up. It’s time to get some will power and resist the urge to buy things you don’t need (which are not just at the checkout, but all over the store).
If you’re not making a lot of money (or you just don’t want to pay a boatload for rent each month), it’s time to get a roommate. The idea of living with a roommate may give you some painful flashbacks to college, but you won’t have to step over week-old pizza boxes on the living room floor this time around.
You’re a grown-up now, and you can room with another grown-up. Think of it as like-minded people in the same phase of life wanting to save money by sharing a living space. No lava lamps or Star Wars movie posters required.
Rent a Room
Believe it or not, a lot of homeowners are looking to rent out a spare bedroom or other rooms over their garage. Sure, you might not have free rein to kick off your shoes and put your feet up on the living room table, but you’d still have your own bedroom and (maybe) bathroom. And if the rent is super cheap—who can complain, really?
Increase Your Income
It turns out the answer to “How much rent can I afford?” will be different if you make more money. Up your income and you can afford more, right?
The good news is, there are plenty of ways to increase your income these days, and some of them are actually pretty easy. There are pizzas that need delivering, folks who need to be driven all around town, and stuff that needs to be sold. So what are you waiting for?
Find a Cheaper Location
The cost of rent mostly depends on where you live, so if you can’t afford rent in the heart of the city, start looking in the suburbs or farther out from the big metro hubs. You might have a longer commute, but the savings for living 30 miles south could be huge.
Get a Higher-Paying Job
Keep in mind that the cost of rent is only going to go in one direction: up. To stay on top of it, your income should be going in the same direction too. If you know you can count on a pay raise each year, great. But the truth is, you might need a higher-paying job altogether to make things work. Get out your budget and see how a higher income would change things.
Compare Insurance Rates
We know—finding places to free up money for rent is not very glamorous or fun sometimes. And one of the most boring is finding better insurance rates. Most people just let their insurance stay the same every year. But you could save some serious money by shopping around. And make sure to bundle your different types of coverage together with one company to save even more. So, don’t just keep paying the same company . . . look into other options!
What Are the Advantages of Renting?
For some people, renting isn’t an easy choice. House fever can come on strong when you see your friends buying their first homes, and renting can feel like you’re throwing money out the window.
But there are plenty of pros to renting. So be sure to remind yourself of these big advantages to renting while you’re asking yourself, How much rent can I afford?
- There’s less commitment. Not sure if you like the area where you’re renting? Hey, you’re out of there as soon as your lease is up. Plus, if you’ve got a job that has you moving around a lot (like serving in the military or in ministry), it’s easier to get out of a lease than to sell a house.
- It can help you get a mortgage down the road. Did you know you don’t need a credit score to get a mortgage? No, like, seriously. Plenty of lenders offer the option of manual underwriting, which is banker talk for deciding whether you qualify for a loan by looking at stuff besides your credit score—if you don’t have one. One of those things, and usually the biggest, is your history of consistently paying rent on time. So instead of worshipping at the altar of the almighty FICO to raise your “I love debt” credit score, rent for a season. If you already have a credit score, get out of debt and get rid of it!
- You don’t have to worry about maintenance. If something breaks, you can call your landlord to fix it. This is probably the coolest thing about renting: You don’t have to pay out of pocket for a surprise repair cost. That’s on someone else’s dime.
Don’t Forget About Renters Insurance
As a renter, you don’t have to worry about paying for things that go wrong with your rental. That’s the beauty of not owning the place! But there’s one extra cost you should opt for when renting: renters insurance. Having a rental insurance policy will protect you financially if your belongings are lost or damaged in a catastrophe like a fire, storm or robbery. Don’t count on your landlord’s insurance—that usually only protects their property.
Renters insurance is pretty cheap, so there’s really no excuse not to have it. If you need coverage, reach out to a trusted agent for advice.
Saving for a House While Renting
If you want to kiss renting goodbye and buy a house, you need a good down payment. But how much should you put down?
Ideally, you should put down 20% of your home’s total value. That may seem like a lot, but putting that much down means you won’t have to pay private mortgage insurance (PMI). Those monthly fees can add up quickly, and you’re only paying to protect the lender in case you stop making payments—it’s not insurance for you!
If you’re a first-time home buyer and you’re ready to buy (remember: that means you’re debt-free and have a full emergency fund with 3–6 months’ worth of expenses), a 5–10% down payment is okay too, but be ready to pay PMI. And stay far away from FHA and VA loans—and all their fees!
But how in the world am I supposed to save up all that money for a down payment? you might be asking yourself. Here’s the thing: It might be easier than you think thanks to our favorite B-word: a budget.
If you’ve never sat down and made a budget at the beginning of the month by planning what to do with every single dollar you take home, we have some bad news: You’ve probably been letting a whole lot of money go to waste without even knowing it. That’s what happens when you don’t tell your money where to go—you end up wondering where it went.
Some people recommend the 50/30/20 rule (50% for needs, 30% for wants and 20% for savings) for budgeting. But that way of thinking won’t give you the intense focus you need to accomplish big money goals like saving for a house. You have to know where all your money is going, and that’s why a zero-based budget works best.
Serious budgeting is hard at first. But here’s the good news: When you put in the effort to make your first budget, you’ll feel like you got a raise because of all the extra money you’ll find. We hear folks who make a budget for the first time say things like, “I’ve really been giving this much money to Chick-fil-A and lululemon?”
Yeah, you have. But you don’t have to anymore! And it’s not like you need to cut fun out of your life when you get on a budget, either. You may just cut back to buying one pair of leggings each month instead of six.
All that extra money, plus anything else you squeeze out of your budget, can go toward building a strong down payment and, as we’ve said earlier, will even make it easier to afford the rent you’re currently paying.
Taking the Next Steps
When you’re ready to start saving up for your home, check out our Home Buyers Guide. This guide will walk you through the home-buying process from start to finish and give you peace of mind about the whole journey to becoming a homeowner.