What Percent of Your Income to Spend on Rent

For Rent Crop- Infrogmation Yesterday the Wall Street Journal’s Developments blog (it covers real estate) carried a post Is Your Rent Too Damn High? inspired by a classic only-in-New-York character, Jimmy McMillan, the Rent is Too Damn High Party’s candidate for governor. The photo alone makes it worth the click.

The post muses, without resolution, on the eternal question of how high is too high.

Many personal finance experts say you should spend no more than 35% of your gross income on rent (not including renter’s insurance) whether you live in a high- or low-cost area. Of course, this amount can mean the difference between living in a studio on the outskirts of an expensive city or living large in a condo overlooking the beach in a low-cost area.

Many experts say this? It is the sort of faux wisdom that is often attributed to unnamed others and then passed on half-heartedly. I spent several minutes looking around the web for first hand advice on how much to budget on rent. I didn’t find much. There is lots of stuff out there on how big a mortgage you should take on, but relatively little discussion of renting. I guess renters just aren’t interested in personal finance.

Dave Ramsey is fairly typical in his recommendation of renting as a useful temporary stage before you save up enough to buy a place. Once you buy, he says to make your housing costs no more than 25% of your take-home pay. Presumably, he would recommend an even smaller percentage for rent.

Answers.com, always a good source for popular beliefs, gives 25% of gross income as the maximum rent. Move.com suggests a range of 25% to 30%.

I also found this voice-in-the-wilderness paper from the US Census Bureau from 2005, which cites 30% of income as the maximum of affordability, which is to say that above that level housing is considered unaffordable by government mandarins. But the paper makes it clear that this is a completely arbitrary figure and provides short bureaucratic history of it.

(The paper is also evidence that even in Washington some people saw the debacle coming in 2005. The first sentence reads “With creative financing in the present day housing market, housing values are increasing and homeowners are taking chances with alternative financing methods and consequently putting their homes on the line.”)

If you have been reading this blog for any length of time you know that I think that the idea that there exists a correct percentage of income to be allocated to rent (or savings, or just about anything else) that would make sense for most people is bunk. There are just too many variables involved in each individual’s situation. Folks need to understand how to come up with the right answer for themselves. Even a percentage given as a guideline is too inaccurate to be very helpful.

The dangerous thing about rent as a percentage of income is that it is a relationship that almost makes sense. In contrast, prescribing a percentage of income to most other expenditures would be so obviously loopy that nobody would take the suggestion seriously.

Maybe the biggest variable when it comes to rent (and real estate costs in general) is what part of the country you are living in. That is true about some other things too. But if I were to suggest that a person should spend a certain percent of income on winter clothes or air conditioning most would immediately see the objection that reasonable expenditures for those things are very different in, for example, Buffalo or Miami.

But rent has the property that, to a certain extent, its relationship to income self-corrects for location. Rent in New York is much higher than in Toledo, but so are incomes, for reasons that are not in the least coincidental. (I’ve never been to Toledo, BTW. I’m sure it is very nice.)

And rent is also one of those few things that is both a necessity and something that people tend to spend more on as they get richer. That is not the case with such things as food, clothing, and medical care, which make up larger portions of lower income budgets than higher income ones.

So, to a degree just sufficient to make the X% on rent idea remotely plausible, both location and income level more or less wash out of the equation. But that is not enough to make X% work.

Other big factors come into play. How much real estate you need, for example. Do you have kids? How many and what ages? Work at home? And location within a city can affect what you pay considerably. That decision could hinge on proximity to work, schools, airports, or a dozen other things.

Then there are the other expenses that are dependent on where and what you decide to rent. Paying more rent to live closer to your job versus saving on rent but paying more to commute is an obvious example of a tradeoff to consider. (New York and Los Angeles are often grouped together as expensive places to live with regard to real estate. That is true, but it bears pointing out that people in LA must also own cars.)

And let us not discount personal preference. Wanting to rent a nicer place, even though it means spending less on other things, is no less rational than deciding to rent a dump so you can eat out and travel more.

There exist those who appropriately spend 50% of income on rent and there are those who are spending too much at 20%. (A junior Wall Street analyst who walks to work and his embarrassingly well-paid boss, perhaps?)

The weird thing about the 25% or 30% on rent rule is that it may be less of a description of the advice of personal finance experts than a description of the way most people actually think about rent and housing expenditures. I remember reading somewhere that people who move from one city to another tend to spend the same amount on housing, no matter how inappropriate that may be in the new town. People are not comfortable with actually making a decision about how much of their income to spend on real estate so they just go with a percentage that sounds reasonable and that they see thrown around here and there.

[Photo – Infrogmation]

49 Comments

  • By Brian, October 20, 2010 @ 4:24 pm

    Excellent points.

    I know when I was looking for a place I had an idea of what I could afford, and the minimum I’d have to spend. But I was still looking for advice on how much % of my take home I should spend on it, just for piece of mind’s sake or, to make sure I wasn’t spending more than I should be, or whatever.

    But yes, there are a ton of variables. I spend about 21% of my net income on rent and at this time I couldn’t really afford to go much higher without significantly altering my lifestyle. I barely save any money (not including contributions to my Roth), and certainly not as much as I’d prefer to be saving (at least 10% of my net income). I’m not as frugal as possible when it comes to cutting costs, but I’m not being frivolous spending money foolishly either and flushing it down the toilet.

    For me, in my current situation, 25% would probably be around a maximum of what I could pay, and I’d probably have to make cuts to some other stuff in my life. 30% is out of the question without making major lifestyle changes.

    There are just so many other variables in play a hard and fast rule for everyone makes no sense.

  • By Neil, October 20, 2010 @ 4:53 pm

    Excellent points, except for owning a car in LA. It’s not like I know a lot of people in LA, but my small sample (approximately 5) tells me that no one there owns cars.

    Clearly it’s not a representative sample, but does put the lie to the myth that you MUST own a car.

  • By Adam, October 20, 2010 @ 5:13 pm

    Thank you, thank you. I spend about 50% of my income on rent in an expensive market. I am content. What would I be spending the extra 20% on even if I had a cheaper place? I’m unmarried and don’t have kids.

    ” I remember reading somewhere that people who move from one city to another tend to spend the same amount on housing, no matter how inappropriate that may be in the new town. ”

    Was that in Predictably Irrational?

  • By zach, October 20, 2010 @ 6:50 pm

    I agree that there are a considerable number of variables to consider then just rent/income.

    After leaving my parents house at 18, I have lived in 3 cities. San Jose, CA where I went to university. I am from San Francisco by the way. I spent 1½ years living in Stockholm, Sweden, and now currently reside in NYC.

    I have pretty much kept to the standard as the first place I moved into. Renting a single room in an apt with friends at around 30-40% of my take home in each of those cities.

    Here in NYC that it is currently 41%, the highest so far. However to rent lower, means worse neighborhoods and longer commutes.

    As a single 25yr old I am comfortable or rather accepting of my current expenses, because I see my time in this city as experience. Another variable we can consider on an individual basis

  • By South of Houston, October 20, 2010 @ 7:11 pm

    Neil- I think you may have an odd sample of people in LA… everyone I know in LA owns a car and judging by the traffic there, pretty much everyone there has a car.

    I also think it is odd that LA is often compared to NYC in terms of housing costs. LA rental costs are MUCH cheaper (at least vs. Manhattan), though it’s true that they are more expensive than many other major cities. Example: A friend in LA rents a 3 bedroom, 2.5 bath house in the Hollywood Hills with unbelievable views of the entire city an two parking spaces for $2700/mo. In Manhattan, $2700 will get you a very nice studio or small one bed in the most desirable neighborhoods. Simply not comparable (even including having to have a car in LA).

  • By South of Houston, October 20, 2010 @ 7:12 pm

    That said, I would still take NYC over LA any day :)

  • By Kosmo @ The Soap Boxers, October 21, 2010 @ 9:40 am

    35% of gross income? That would basically get me a mansion here (small midwestern city) :) We have a 3 bedroom/2 bath house built in the 90s, and mortgage (including insurance) is about 11% of gross income. Our day care costs (2 kids) exceed the mortgage by a healthy margin …

    When we lived in a town about 30 miles from here a few years back, our rent was probably less than 5% of gross income. (on the flip side, my commute is about half what it once way)

  • By Holly, October 21, 2010 @ 11:42 am

    I think that housing costs are way over-simplified when presented as a percentage of either gross or take-home pay. The resulting amount should at least be inclusive, meaning that the term ‘housing’ should include the other mandatory costs such as renter’s insurance, utilities, co-op fees, etc.

    Same for homebuyers’ costs…many people are misled to believe their dream home is affordable until they move in and realize the real costs of heating/cooling, homeowners’ assn. fees, taxes, trash removal, general maintenance (inside and out), etc. I also think that all figures should only be based on net pay to allow room to budget for unknowns such as emergencies, kids, and retirement.

  • By Neil, October 21, 2010 @ 11:55 am

    @South of Houston
    I’m well aware that my sample is skewed (it’s because all but one of the people I know in LA are people I know through cycling circles. The other one I know through my wife’s choir connections, which also seems to have an unusually high number of cyclists for some reason.)

    My point wasn’t that cars are not common in LA (clearly they are), my point was that they aren’t a necessity, as implied by the article. It is true that you have to be somewhat more intentional about your lifestyle choices in LA to live without a car, but it’s easy enough to accomplish. And no doubt lets you afford a nicer house or apartment than a driver of the same income.

  • By South of Houston, October 21, 2010 @ 6:43 pm

    @Neil- It’s certainly not impossible to live in LA without a car, but I think saying it’s ‘easy enough’ is a bit cavalier (though I guess if people are big cyclists it would be easier). I think almost anyone moving to LA or the surrounding area should budget in having to own a car.

  • By Michael, April 12, 2011 @ 12:14 pm

    As a native Angeleno it’s surprising to learn anyone could know a total of five people here without a car. Sure it can be done if you never go anyplace outside a 5-mile radius of your downtown loft and/or a few metro hubs. But get to the mountains or the beach or any of the other great attractions here by public transit alone? No way. Those 5 people must be either young hipsters starting their careers, new to the city, or bumming rides off family, friends and coworkers.

  • By Nat, June 28, 2011 @ 10:27 pm

    In Los Angeles, I paid about 26% of my net income on rent. In New York City, my job does pay more, but I am paying about 40% of my net income on rent – and I live in Jersey City. If I lived in NYC, I would be paying maybe over 50% of my net income (after deducting the extra NYC resident income tax) on rent for a similar apartment. You get paid more in NYC, but not in line with the increased cost of living, unfortunately.

  • By Ryan, September 27, 2011 @ 5:55 pm

    I live in the DC metropolitan area, and transportation costs should play a big factor. For example, I may be paying like 40 percent for rent, but if it means I can walk to work and eliminate metro/car costs it could balance out.

  • By Comm, November 3, 2011 @ 4:38 pm

    fck that. Free housing for all and work. Communism is the answer.

    people happines in comunist country > people’s hapinest in capitalist country.

  • By DC, April 6, 2012 @ 5:14 pm

    Ryan,

    Also live in DC and spend about 45% on rent. if youre getting away with less than 35%, your lucky here- at least if you are living in a part of DC without much crime…

  • By Oscar, April 24, 2012 @ 7:39 am

    I recommend using the formula 0.28 x ([Take Home Pay] – [Monthly loan or credit card dept]) makes perfect sense as maximum mortgage payment with taxes. With renting that percentage could be higher say 32% because a renter doesn’t have to worry about maintaining the apartment or house (i.e., roof, HVAC, etc.). It leaves plenty of funds for the NECESSITIES and SAVINGS the later from which car repairs (Insurance is included in the necessities) and long range goals can be achieved or emergencies covered. Following these guidelines if you spend wisely and not attempt to live above what you can afford (i.e., spending too much on WANTS not what is NEEDED) there shouldn’t be a problem ever. This is for a couple with no children. Add children to the mix and that percentage is going to start dropping quickly. Unfortunately many don’t look at their budget and goals to determine whether they can afford children, they just decide lets start a family and do without researching the minimum cost of caring for them (excluding college, just determining cost for food, clothing, medical, daycare, etc.) I often hear people complain about their finances, yet I observe them eating out regularly, buying new cars, Cable to the max, etc. There isn’t anything wrong with any of this but before one whines about not being able to afford their bills, they should look at their spending habits and objectively identify what is a frill and not necessary to live (food, clothing, shelter). Society is getting worse about not being accountable or responsible. With the recent housing bust I heard on the radio people saying the banks pushed the loans on them. Really! They held a gun to their heads? No, they wanted a house no matter what (or a too large house to impress someone). They didn’t think it through. They didn’t seek out the advice of a Certified Financial Planner that wasn’t affiliated with any financial institution. Even those that know better (heard a couple of lawyers (husband & wife) in California who went upside down in their mortgage. Still had their same income, still could afford making the payments, but from an investment it made more sense to let the bank foreclose. Since when did they put fine print on loan documents that says, “I agree to make the monthly payments until the property is worth less than the loan?” If that were the case everyone would let the banks take their new cars within a year of buying them. I bet if Loan Sharks had made the loan to those lawyers they would continue to pay, else they would have found themselves in physical pain. If the cost of living is too high where you are, look to moving elsewhere. Else, take on a second or third job to boost the income. Also, never ever base your income to include overtime, base salary only.

  • By Keith, July 4, 2012 @ 11:37 am

    I go as cheap as I can find with non-negotiable items like dishwasher and washer/dryer.

    I’ve lived in very expensive luxury apartments before, but after 3 to 6 months it’s not exciting any more and I’m stuck with a high rent long after the excitement is gone. I find the same problem with cars.. it’s cool for a while but the loan outlasts the excitement. Think different.

  • By azul, July 23, 2012 @ 11:42 pm

    I have spent 30-45% on rent and think it’s worth it to have a safe, clean, quiet place to live where I don’t have to worry about an old dumpy building burning down, loud, drunken, white-trash neighbors with domestic disputes, having my car stolen or broken into, or drug dealer neighbors. Last time I looked for a rent that would be cheaper was when gas was pushing 4$/gal. I would save $100-$150 a month on rent, but spend an extra 1-2 hours per workday driving and spend an at least an extra $60-$100 dollars on gas. Time is worth a lot. Spending 40 hours in traffic every month would be worth almost $300 at minimum wage. Cheaper rents nearby came with unseen costs like: a) major bug problems that resulted in damaged property and the repeated inconvenience of exterminators b) neighbors whose activities invite the cops on a regular basis. One acquaintance’s rent looked cheaper at $200 less per month, then I heard how they had a drive-by shooting at the complex.

  • By Jason, September 24, 2012 @ 2:33 pm

    I’m 31, single, I have one child but still get my step-daughter every other week with my son (divorced). I live in Pensacola Florida and I pay about 11% of my gross income for rent. The house I live in has 4 bedrooms 2 baths, an air conditioned room seperated (used as a home gym) in the garage (2 car). It has a large fenced in yard with a huge work shed, yard maintenence is included. I have more than enough space for me and the two kids even if i had them 100% of the time; I only pay $950 per month, so it’s all relative to where you live. I would never spend 30% gross on rent just for the sake of it; it’s a waste of money as well as space. I agree with the article though, use the percentage as a maximum but consider what you need and where you live.

  • By Joe, September 26, 2012 @ 3:23 pm

    Everyone, please keep in mind that the more % you allow/spend on housing or another expense, the less left for other things. What about saving and investing? If you can afford spending 50% of your take home income on housing, what percent are you putting into long term wealth growth? Would it not be better to use 25% for housing and put the other 25% into at least, savings or paying cash for expenses, instead of buying on credit and adding the debt burden of interest to your expenses, further cutting into your ability to increase your net worth?

  • By Emily, December 15, 2012 @ 8:52 pm

    I think the real answer is that if you are wondering how much rent to spend, it is worth the time and money to see a certified financial planner. I have been awarded disability (SSDI) and am a single mother of a 6 yo. Together we will receive about $31k gross a year. I will also receive a lump sum payment of about 70k. Plus I am in bankruptcy, having not yet gone before the judge. Crap, that’s a lot of variables!

  • By lesy, December 27, 2012 @ 4:51 am

    nice article its recommendation of renting as a useful temporary stage before you save up enough to buy a place.

  • By some body, January 3, 2013 @ 5:01 pm

    when i got my first job, i lived alone in a one-bedroom apartment and my rent was about 15-20% of my income. now, i am from india, and i knew other indians in the same stage of lifecycle as myself shacked up two or three to an apartment, though they were making comfortably 50% more than i was (same city). they lived in a slightly better neighborhood and paid half (apiece) of what i paid for rent, which would make their rents about 10-14% of their salaries. but i preferred paying more and living in a slightly lower scale housing because of the independence it afforded me.

    now, farther along in my lifecycle (and married with kids), our piti is about 15% of our combined annual income. but i assure you, we did not compare the percentage when we bought our current house. but it did work out the way you have suggested!!

    - s.b.

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  • By Famiii, January 28, 2013 @ 8:48 am

    In theory it doesn’t make sense in practice it does.

    Few people budget and those that do seldom keep to it. Rent as a percentage of income is a loose rule of thumb that can be varied by where you live, or your income bracket, or your family size, but my experience (Africa, Europe and US) is that if you are spending 50% of income on rent or mortgage it is obviously not working.

    Generally depending on circumstances 20% to 40% would fit 99.9% of all people in all circumstances. And 25% should be a rough average – this has been stable over many decades and applies on all continents.

  • By Tasha, February 10, 2013 @ 5:55 pm

    As someone about to start graduate school, 25% of my income (a $30K stipend) is a reasonable benchmark. Because I’ll be in Boston, an urban area with higher apartment prices, I’d need a roommate, but that’s pretty typical. If I chose to live alone, I’d be spending ~45% of my income on rent–definitely excessive. In college, I might note, about 65% of my scholarship money has gone to food and housing combined (I chose the cheapest options for both), and the rest to in-state tuition and books. I wasn’t really sure how much was reasonable to spend on housing alone until I did some research.

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    Other big factors come into play. How much real estate you need, for example. Do you have kids? How many and what ages? Work at home? And location within a city can affect what you pay considerably. That decision could hinge on proximity to work, schools, airports, or a dozen other things.These is great looking forward to read more..

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  • By Sara, May 5, 2013 @ 1:01 am

    Thank you. You effectively brought me back down to earth after seriously considering a move. I am married and have a 2 year old. We live in LA in a small 1 bedroom apartment in a great location near my husband’s work. Yes it is small, but we’ve lived here so long that our rent is only $1k, which is UNHEARD OF in this area. That being said, we have absolutely no outdoor space, no parking and things are a little cramped. A cute 2 bedroom apartment with a front and backyard and parking opened up down the street and I fell in love with it. The landlord likes us and offered a $200 discount, making the rent $2k/mo, which would double our rent. At first I was brainstorming all the ways to budget and make it happen, but after reading your blog, I’m realizing it would cost us almost 50% of our income. So no, we’ll get rid of some stuff and stay in our cozy yardless apartment until we can save enough money for a down payment on something…or not. Knowing LA’s housing market, I have a feeling we’ll be in this apartment for a very very long time.

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  • By Curt, June 23, 2013 @ 12:36 pm

    Why 30% does not always work. The smaller or higher your income that number needs to change.

    a) Family 1 monthly income = 2000 Rent 600 (rent 30%). This leaves 1400 for other expenses.

    b) Family 2 monthly income = 6000, Rent 3000 (rent 50%). This leaves 3000 for other expenses.

    Granted family 2 will likely spend more on other expenses but not always as

  • By Gary, June 30, 2013 @ 4:59 pm

    Here is Seattle, the 25-30% rule of thumb simply doesn’t fly at all, since, even at my income level, which is $2,020/month gross, there simply isn’t anything available anywhere in the area. The more realistic figure for me is 35%, and even then, that excludes most of Seattle’s rental properties.

  • By Chris, July 27, 2013 @ 8:19 am

    Read once… A good home buying strategy is to delay the nice house you can afford by first buying something at half that price, paying the difference into a savings account and using that as well as sale of the first place for a down payment later. Perhaps a similar strategy could be used with rent but with less return. The geographic considerations mentioned in this blog would also make it extremely variable.

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