How much rent can I pay?

Financial Planners

Knowing how much you can afford to rent is important to creating an achievable budget, but balancing affordability and livability, especially if you live in an upscale neighborhood or are renting for the first time, is It can get complicated.

It may be tempting to rent the nicest place in the best location you can find, but that doesn’t always make financial sense. If you pay too much rent, you may struggle to pay other bills or be unable to pay them. save for the future.

“Young people are facing huge housing challenges,” said Christopher Lyman, a certified financial planner at Allied Financial Advisors in Newtown, Pennsylvania. “Prices appear to be continuing to rise and need to rise even further on the same dollar.”

Still, the situation is not hopeless. With the right spending plan, you can get the best possible home within your budget. Here’s how financial planners tell you how to make sure your rent is commensurate with your income and goals.

What percentage of your income should you spend on rent?

Experts we spoke to recommend keeping your rent below 25-30% of your monthly income. Any more than that and you may run out of money for other daily needs or drain your savings. Considering that taxes vary depending on where you live, most people recommend basing your budget on your net (after tax) income.

James Guarino, a certified financial planner at Baker Newman Noise in Woburn, Massachusetts, typically leads clients in this direction: 50/30/20 budget50% of income goes to basic needs, of which up to 30% goes to rent.

In this model, the other half of the income is distributed according to desire (30% of income) and savings (20%), which may include additional debt payments.

When it makes sense to spend more

But if you live in an expensive market, you may have to pay higher rents, Guarino said. This pushes the need category over 50% of his and puts pressure on other parts of the budget.

“If you’re in Boston, New York, San Francisco, or Los Angeles, 30% of your income probably won’t cut your income,” Guarino says.

Some people in these cities, especially early in their careers, pay much more in rent and make sacrifices elsewhere, he says. This is not a sustainable situation, but it could pay off if you can get a higher salary in the future. Make sure you’re realistic about your long-term profit potential, and if your salary isn’t likely to rise in a few years, consider moving to a cheaper city.

Another factor to consider is whether a slightly higher rent increases your chances. help me save About other expenses. For example, living near downtown or in a building with a gym can be expensive, but if you can walk to work or waive your gym membership, you might be able to offset the increased costs.

Garrett Sorensen, a certified financial planner at Markham Wealth, based in Old Hickory, Tennessee, said, “These are all considerations when considering how rent will fit into your overall budget. ‘ said. Consider using budgeting app It helps you see how paying rent affects you more or less.

Where it makes sense to spend less

If you have other major expenses, it makes sense to spend less than 30% of your net income on rent. Perhaps you have a large student loan and want to pay it off quickly. Or maybe you’re supporting a family.

One effective way to lower your rent is to live with a roommate. Akeba M. Ellis, co-founder of The Confusion, a Natick, Massachusetts-based financial education company, chose to have her roommate when she rented her first apartment after college.

“I knew that was what I had to do if I wanted to save money. It was a no-brainer for me,” she says. “All you need is to understand what your priorities are, be open-minded, and be flexible. There’s usually more than one way to make the equation work.”

When would it make more sense to rent than to buy?

Buying a home can be lucrative in the long run as you get capital instead of handing over money to the landlord. However, other factors are often involved as well.

For example, if you plan to move in the next few years, renting is likely a better solution, says Sorensen. There is a higher initial cost to purchase and the risk of short-term declines in home prices.

probably can’t can afford to buy a dream house It may be so now, but depending on your career trajectory, it may be possible in a few years. “If so, there’s no rush,” says Sorensen. “It’s worth renting for a few years and saving money so you can buy your ideal home.”

Additionally, there can be unexpected and sometimes unbelievably high costs of ownership. “As a homeowner, you are responsible for everything,” Guarino says. “When an appliance breaks down or a boiler explodes, everything is out of your pocket and you are in trouble.”

Experts advise setting aside three to six months’ worth of living expenses, including rent and mortgage payments, as an emergency fund. If you own a home, it’s a good idea to set aside 1% to 4% of his house value as maintenance funds.

Other considerations

Monthly rent is a big part of your housing-related expenses, but it’s not the only expense. Here are some other costs you should factor into your budget when renting.

public works

Make sure you know which utilities you will pay and which your landlord will pay. Internet, cable, and electricity are generally paid for by the renter, but gas and water responsibilities vary by location. Ellis points out that many utilities will provide prospective renters with past billing information upon request. Factor these numbers into your budget. However, keep in mind that your usage may differ from your previous tenant’s usage.

moving expenses

You may need to rent a moving truck or hire moving staff to move your stuff. Average cost is $1,712According to Home Advisor. That’s not the only expense because sleeping on the floor in an apartment with no walls is highly undesirable. “We rarely move into a furnished apartment,” says Guarino. “If you include cups, plates and utensils, it’s a lot of money. For someone who’s never lived alone before, these surprises really startle people.”

Security deposit and brokerage fee

Some rental properties require a security deposit, brokerage fee, and final month’s rent in addition to the first month’s rent. “Here you are thinking, ‘He has to have $2,500 for his first month,’ but you don’t realize it costs him $7,500 to actually step in. says Mr. Guarino.

Lessor insurance

Some landlords may need Lessor insurance, and financial advisors strongly recommend getting one way or the other.For $15/month averageRenter’s insurance covers your belongings in the event of fire, theft or water damage.

Any advice, recommendations or rankings contained in this article are the buy-side of the WSJ editorial team and have not been reviewed or endorsed by any commercial partner.

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