Before you can start looking for an apartment for rent, you first need to figure out how much rent you can afford per month.
Property managers and landlords compare your income to the rent before approving you, and each sets their own limit. But just because you meet their minimum income criteria doesn’t mean you can truly afford the rent.
As you start looking for the next place to hang your hat, start by putting your current income and budget under the microscope.
How Housing Fits Into Your Larger Budget
The moment in between the decision to move and starting your apartment search is the perfect time to overhaul your budget from scratch.
Before going any further, start by setting a target savings rate. Decide on what percentage of your income you want to put toward building wealth each month. Because the greater the gap between what you earn and what you spend, the faster you can build an emergency fund, pay off unsecured debts such as student loans, build wealth, and start generating passive income.
Set a savings rate, and subtract that immediately from your take-home pay. The remaining income serves as your operating budget — use it as the foundation for your new budget. Try this free template to create your budget in Google Sheets, and leave some wiggle room for discretionary spending.
Housing as a Percentage of Your Income
When creating a budget, most people set a limit on the percentage of their operating income that they’re willing to spend on housing. (I actually recommend an alternative approach; more on that shortly.)
For example, you might decide you’re willing to pay 25% of your operating budget toward rent. That falls in line with the average American household spending on housing, which the U.S. Bureau of Labor Statistics reports as 24.96% of gross income.
As a rule of thumb, many landlords set a maximum percentage of 33% of take-home pay. They disqualify any applicants who bring home less than three times the rent.
If your income fluctuates each month, budget based on your lowest typical monthly income, not your highest. Your income may vary but your rent doesn’t, and you need to afford it even in your worst month.
Still, everyone’s budget needs are unique, and you may be able to afford more or less than the typical household depending on your other expenses.
Zero-Sum Game: A Holistic Look at Budgeting
Budgeting is a zero-sum game: if you spend more in one area, it leaves you with less to spend elsewhere. Think of it as a pie that you can carve any way you like, but it remains a finite circle.
Which means that you can spend more on housing if you forego expenses in other areas. For instance, you might despair when you first research New York City rents, but as a New Yorker you probably don’t need a car. So you sell your car, eliminating not only your car payment but all car-related expenses including gas, maintenance, and your car insurance policy. That’s money you can then put toward rent if you so choose.
In budgeting as in life, you can have anything you want, but you can’t have everything you want. Spend more on rent in a city with high cost of living, and it leaves you with less for other expenses.
Reframe the Question to Spend Less on Housing
Why do people overspend on housing? Because they ask the wrong question.
When looking for a new home, people ask themselves “What’s the most I can afford to spend?” Then they go out and look at homes that cost that amount — the maximum they could possibly afford.
To spend less on housing and put more money toward building wealth, ask a better question. Ask yourself “What are my minimum housing needs to still be happy?” That pushes you to look at more affordable housing options, and to get more creative in how you pay for housing.
Creativity often pays off. I haven’t paid a cent for housing in nearly six years, and before that I still paid far less than my neighbors. I do it through house hacking: finding ways to have other people pay for my housing. You can bring in roommates, rent out part of your home on Airbnb, rent out storage space through services like SpareFoot, or even bring in a foreign exchange student — a tactic that covers 90% of my friend’s mortgage.
My wife and I house hack through her employer, who provides us with free furnished housing. For fun, check out these jobs that provide free housing, and approach your housing search with more creativity.
Beyond Rent: Other Housing Related Expenses
Your housing expenses don’t end at the rent.
As you plan out your budget, don’t forget the following expenses and how they impact how much rent you can afford.
When you look at any prospective home, find out which utilities are included with the rent, if any.
Because utility costs add up quickly. You can easily spend hundreds of dollars each month when you total your bills for:
- Water and sewer
- Home phone
- Cable TV
Those last two make easy expenses to cut to save thousands each year. Just a thought.
Bear in mind that utility bills vary dramatically between homes. One home can easily cost you double or triple the gas, electricity, and water bills from another seemingly similar home due to energy efficiency differences or different energy pricing between municipalities.
Before moving into a home where you pay your own utility bills, ask for copies of past utility bills from each season to get a sense for the costs.
Some cities charge separate fees for trash pickup, recycling, and other basic public services on top of the taxes they already collect.
Double check if a municipality double charges fees on top of taxes before choosing a place to live.
Parking can be scarce in urban areas. Some landlords and buildings include parking; others don’t.
If you own a car and need parking, confirm the parking conditions at each rental unit you tour. You may find that it makes sense to pay slightly higher rent to secure an included parking spot, rather than paying separately for parking or spending 15 minutes looking for parking every evening.
Of course, street parking isn’t necessarily a dealbreaker. Some urban neighborhoods offer plentiful street parking, while others are a perpetual nightmare. Ask around among people who actually live there to get a sense for the local parking conditions.
Parking isn’t the only amenity that can add value despite higher rents. Some apartment complexes include valuable amenities like a community gym, pool, hot tub, and other conveniences.
These are amenities that you might pay separately for if not included in your rent. Before moving abroad, I paid around $100 a month to access a combined gym and pool. A friend of mine lived in a building that provided both, although he paid higher rent than I did.
Again, budgeting is a zero-sum game. Just be careful not to use amenities that you wouldn’t actually pay extra for as a justification for overspending on an apartment.
Although not expensive, renters insurance still stacks more housing-related expenses onto your budget.
Renters insurance covers all of your personal belongings, and many also cover other costs such as liability if your dog attacks a neighbor or moving expenses if you’re forced out of your home early due to fire or disaster. Look up renters insurance policy costs, and add it to your budget.
Pro tip: If you’re looking for renter’s insurance, check out Lemonade. It takes only 90 seconds to apply and policies start at just $5 per month. Learn more about Lemonade.
Furniture and Decor
If you move into a larger home, or move out of your parents’ house for the first time, prepare to spend some money on furniture, decorations, and other home goods.
Of course, you can buy furniture inexpensively and decorate your home without spending much either. Or you can spend an arm and a leg on brand new, upscale furniture and trendy decor.
I furnished my first townhouse entirely with used furniture I bought from people on Craigslist. If it didn’t look like a catalogue home, that’s because I knew nothing about interior design, not because you can’t find like-new furniture at a fraction of its original cost.
Whether you spend $300 or $3,000 furnishing an apartment depends entirely on you. But if you move into a larger home than you had before, expect to spend something.
Although it’s another nonrecurring expense, you still need to come up with a security deposit before you can move into a new rental home. Landlords typically charge between one and one-and-a-half month’s rent for the security deposit, although some charge more for applicants with a lower credit score.
You can’t pick up a full-size couch by yourself. And unless you drive a pickup truck, you probably can’t transport it yourself either. Even so, it would take dozens of trips in a pickup truck to move all the furniture that fits in an average house.
Whether you pay a moving company or simply rent a moving truck, you need to budget for moving costs. Even if you recruit friends and family to help you move, you should provide them with food and drinks as a gesture of gratitude. Which all costs money.
Ideas to Afford a “Reach” Home
Sometimes you just can’t help falling in love with a home that stretches your budget.
Although I don’t recommend spending an uncomfortably high portion of your income on housing, consider these ideas if you find yourself obsessed with a “reach” home.
1. Bring in a Housemate
Housemates pay their share of the rent of course, which could come to more than half if you offer them the most attractive bedroom or some other valuable commodity.
But beyond rent, housemates also slash some of your other housing costs. They split utility bills with you, potentially saving you hundreds each month. They might provide furniture, artwork, or home goods like cookware and silverware, relieving you of those costs. And they can split moving costs with you as well.
Housemates also teach you how to live harmoniously with others — a skill that comes in handy once you get married. It’s far easier to go from living with a housemate to living with a spouse than to suddenly have to start compromising and accommodating someone else’s habits.
2. Earn More Money
Yes, you can grow your savings rate by spending less. But you can also boost it by earning more.
You could do that any number of ways, such as negotiating a raise at work, or padding your resume with new certifications and getting a new job that pays better. Or you could build new income streams entirely by starting a side hustle.
Side hustles don’t have to be tedious either. You could start a business on the side of your job or turn your hobby into a paying gig. Some part-time jobs pay health benefits or other valuable perks, and many are downright fun.
Too many people just sit around and complain that they don’t earn enough. If you want to earn more, there’s nothing stopping you! You can also earn passive income that you don’t have to work for by investing money for passive income streams.
3. Negotiate Lower Rent
In every long-term rental I’ve ever lived in, I managed to negotiate a lower rent payment with the landlord.
No, you don’t need an advanced degree in negotiation. You just need to put yourself in the landlord’s shoes. Start by finding something the landlord wants more than money.
Remember that landlords aren’t the greedy Scrooges that the press makes them out to be. They’re people like you and me who saved up their pennies and invested them in rental properties rather than in the stock market or bonds.
Landlords want reliable tenants who will pay the rent on time, treat their property well and prevent damage, and get along well with the neighbors. Wiser and more experienced landlords also know the value of long-term tenants who stick around and don’t require them to go through another turnover any time soon.
Make a friendly, persuasive case why you’ll embody everything they want in a perfect tenant. I once worked out a deal with a landlord that I would pay the rent early, every single month, and that if I ever failed to pay the rent early, the rent would revert back up to its full price. But that’s merely one of many ways to negotiate lower rent with a landlord.
It’s all too easy to overspend on housing.
Know your housing cost limits — including all expenses, not just rent — before you go house hunting. Better yet, get creative in looking for ways to score either free or reduced housing, or at least reframe your housing budget to focus on your lower limit rather than your upper limit.
If you find yourself struggling, don’t resort to paying your rent by credit card. Instead, look for other ways to trim your monthly expenses, such as saving money on groceries or cutting your cable television. But you’d be wise to avoid putting yourself in such a pinch in the first place.