Rent calculator can help you determine how much of your income should go to rent. Whether you're moving to a new city or a new neighborhood, you rarely purchase a home without renting first. Until you become a homeowner, one of the most pressing questions when budgeting your income remains: "How much rent can I afford?" There's a good chance you want to relocate to a particular locale or type of apartment with specific features such as a fitness center, a patio, or balcony. This Rent calculator will help you determine what percentage of income should go to rent. It can also serve as a preliminary check to decide between renting an apartment or buying a home. If you are moving into the rental apartment mid-month or towards the month’s end, use the prorated rent calculator to discover how much of the monthly rent you should pay based on the number of days you occupy the property for that month.
If you're a landlord, you can use this calculator to measure a renter's ability to pay rent; as a rent-to-income ratio calculator or a "rent affordability calculator", this is a great tool to match prospective tenants' income range with your apartments' listing price.
What is Rent?
Food and shelter are two of the primary factors for survival, and we dedicate the bulk of our income to them. Of course, as we earn more income and settle these needs, our focus shifts to other things. But before we become homeowners, renting a resident is an option that requires considerable thought in terms of location, size, and quality of the property.
Rent is the payment you make to a landlord or property owner to use a property temporarily. You can pay rent to stay on the property for a week, month, six months, or lease it for a year. A lease is a contract that determines how long you will stay on the property, while rent is the periodic payment you make to the property owner during the tenure of the lease.
A significant concern for all involving parties in a rental agreement is the non-payment of rent. Landlords try to ensure that their renters can cover the cost of their rent each month using a simple math formula – the rent-to-income ratio to decide prospective renters' ability to pay before a comprehensive screening of qualified applicants.
Conversely, renters begin by probing into their finances to decide what percentage of income goes to rent.
What is the rent-to-income ratio or income to rent ratio?
The rent-to-income ratio is a simple math formula to measure a renter's ability to pay rent. You calculate by dividing rent by the renter's income:
rent-to-income ratio = rent / renter’s income
For example, if the rent is $800 per month, and the renter earns $2,500 per month, their rent to income ratio is
800 / 2500 = 0.32 which is stated in percentage as
0.32 * 100 = 32%
It means that the renter commits 32% of their monthly income to rent.
The rent-to-income ratio is important because it is the most straightforward tool to predict a tenant's ability to pay rent quickly. Other methods, such as verifying a potential tenant's income, credit score, and eviction checks, are more complex processes.
The rent-to-income ratio helps landlords avoid eviction costs due to failure to pay rent, while renters can use the information to guide their house search. Since landlords decide on an acceptable rent to income ratio, some landlords will only rent to tenants whose rent-to-income ratio is at most 30% before carrying out a detailed evaluation of the renter's application.
But using the rent-to-income ratio does not reveal if:
The renter has other sources of income that do not reflect on their stated monthly income, such as a lucrative side hustle, consequently undermining their chances of being considered; or
If the renter is left with enough funds to pay their rent after meeting other financial obligations from their annual gross income or monthly income such as taxes, student loan, alimony, child support, or an IRA contribution.
However, the real estate industry standard remains the 30% rule used by most landlords. Its premise is that renters should commit no more than 30% of their annual income to rent to avoid unnecessary financial burdens.
Adopting the rule means that if a landlord is renting an apartment for $1,000/month, they will only consider renters’ whose annual gross income equals or surpasses
($1,000 *12) / 0.3 = $40,000 which is 40 times the rent.
required annual gross income = rent * 40
Hence, the 30% rule qualifies tenants based on a "40 times rent" rule.
The rent-to-income ratio determines the monthly or annual gross income a tenant must earn to afford the rent each month.
How much of your income should go to rent?
The short answer: it depends.
How much you can afford for rent and how to calculate rent relies on several factors.
Though the 30% rule helps both renters and landlords, it is not uncommon for most people to rent houses that cost about 50% of their income. Especially in urban areas where real estate is highly competitive and the cost of living is high, people tend to compromise in favor of their rent.
Renters viewing apartments for rent may consider the availability and extra costs associated with amenities such as a gym, swimming pool, or security measures when making their decisions. Also, each renters’ expenses' uniqueness means that the rules are only judgemental calls, and you must employ a dynamic calculation based on your unique budget.
That is why it is recommended that your housing budget fits within your financial situation, savings, and expenses. The rent calculator takes into account your projected monthly outgoings to suggest an answer to your question: "How much rent can I afford?"
Steps to arrive at your affordable rental cost:
Compile your utility cost, including gas, electricity, water, trash, cable, and especially, INTERNET. If utilities are included in a rental you are considering, you can probably afford the slightly higher rent.
If you are relocating within your neighborhood, you probably have an idea to estimate the costs using past bills as reference.
If you are moving to a new area, it will help to make inquiries with the locals, current tenants, or even the landlord.
Prepare a food and incidentals budget – if you eat out a lot, expect your food budget to go up. More importantly, scout the cost of groceries, the food at restaurants close by, and incidental expenses at superstores in the local area to see how the cost change stack with what you are accustomed to spending.
Transportation – Considering houses for rent with an excellent public transportation network or within walking distance of your job or school can be highly beneficial. It saves you cost on fares or fuel (if you decide to own a car).
Plan for monthly savings goals and retirement contributions – Make sure you include the cost of your savings to a retirement account such as a 401k or a Roth IRA. It is a wise decision to plan for when you eventually stop working or decide to become a homeowner.
Include renter's insurance cost – Renters' insurance is an insurance policy that covers loss or damage to a tenant's possessions. It provides some of the benefits of homeowners' insurance by protecting against fire, theft, and vandalism or liability protection if you are sued because someone is injured on or in the property you rent. If you don’t already have insurance for accidents, you might want to consider this extra cost.
Account for debts, loans, and discretionary spending – the cost of debts such as student loans or credit card debts that cannot be scaled down should be included in your monthly expenses while factoring in these payments' interest charges. Other expenditures on entertainment, vacations, clothing and grooming, gym membership, etc., are discretionary spending you can scale down or eliminate if you need to. But they also need to be included in your overall budget.
After completing this budget analysis, add up your monthly expenses and input the figure into the monthly expenses field in the rent calculator for them to be subtracted from your estimated monthly take-home pay. The result is the most amount you can pay for rent.
This approach may be a time-consuming process, but it will provide an accurate and realistic view of how much rent you can afford while ensuring that:
- You avoid running out of money to pay bills; and
- You can reassess your living expenses if the actual amount you can afford is less than the standard 30% recommended for rent expense.
Knowing your financial capability will help you search houses for rent within your limits. Even though the rent may take the largest percentage of your monthly income, it is wiser to establish a baseline for rent after you've set up a monthly living budget based on your disposable income rather than figuring out the rest of the monthly budget after paying rent.
Things to consider before renting a property
The cost of a rental agreement goes beyond the actual rent amount. Making a full consideration before arriving at a final decision will save you from becoming quickly dissatisfied. As stated earlier, how much you can afford for rent depends on several factors – beyond the actual rent amount and the rental commissions. The rent calculator is designed to help you decide the first dimension of the rental cost, which is whether the actual rent amount is affordable or not. Other factors that influence affordability for different people which you must consider are:
Location – the more desirable a property's location is, the pricier its rent. So, renters will find that urban properties are generally more expensive than suburban and rural environments. Other considerations for an intended property are its distance to frequented places such as work or school, closeness to family and friends, access to a good transport network for an easy commute, and a locale's crime rate. It would be best if you visited a neighborhood first to feel its scenery and serenity before deciding on your new community.
Size – smaller rental properties are generally cheaper in terms of rent. If you want more space, you will need to pay more per square footage.
Property condition – renting a newly built or renovated apartment with all its appliances in good working condition will cost more in rent. Still, it's more rewarding than renting a neglected or deteriorated property. It is essential to thoroughly inspect the property’s overall condition and quality before committing to a new home.
Amenities – the presence of specific amenities can make a rental property more satisfying. It is good to have a list of desired amenities when searching listed houses for rent. Is there a pool? Can you save costs on gym membership elsewhere by using the fitness center on-site? How about a doorman, laundry facility, adequate parking space, alarm, or security system?
Rental restrictions – some properties have restrictions and rules to protect the property and its tenants. For example, some rentals have restrictions on the improvements tenants can make to the building and pet ownership rules. You will need to check your rental terms to understand or negotiate these restrictions.
Extra costs – renting comes with associated costs aside from rent when you begin your rental application and contract. Some of these costs are application fee, security deposit if you have poor credit or a pet owner fee, and moving expenses. Sometimes, a landlord can add a recurring utility bill for water, gas, electricity, trash, and parking to your rent.
Landlord and co-tenants' relationship – your relationship with the landlord and co-tenants can decide how satisfying your renting experience will be. A landlord can even relax restrictions if you build and maintain a good relationship by making timely rent payments and keeping the rental property in good condition. It is best to avoid renting a property if you anticipate a problematic relationship with your landlord or co-tenants. One way to prevent a potential dispute is to have all rental agreements in writing.
Rent vs. buy – finally, if you're relocating to a new place and you reckon you can afford to purchase a home, you might want to consider gauging the cost of renting vs. buying to save money in the long term. You can use the rent or buy calculator to make a comprehensive comparison. If you decide to purchase a home instead, use the mortgage calculator to determine an affordable home or the biweekly mortgage to plan how to pay off your mortgage loan quickly.
Ways to reduce the rental cost
Nobody wants to experience difficulty meeting the obligation of their rent payment, yet it happens. The less rent you have to pay, the lesser the financial burden on your income.
Some ways you reduce your rental costs are to:
Consider only the best deals within your monthly budget or after-tax income. The budget approach may be time-consuming, but it ensures that you don't get overwhelmed by surprise expenses that could derail your ability to pay rent.
Negotiate the lease and rent price with the landlord. Some landlords may refuse to be flexible on the rent amount, but it is worth a shot negotiating a lower rent.
Offer to handle renovations cost or maintenance work in exchange for lower rents.
Seek rental properties in a low-cost area with a good transport network for your daily commute.
Live with a roommate(s). It's never a bad idea to share the bills with a friend or someone that comes highly recommended.
Live with your parents or family until you have enough funds for your desired rent. It is worth showing some appreciation when you eventually leave.
How landlords protect themselves against default in rent payment?
Sometimes, even renters who meet a landlord’s rent-to-income ratio can default or delay rent payment. So, expect a landlord to require that you meet certain conditions before a lease agreement is signed. Some of these conditions required of renters can be:
- To provide a co-signer on the lease. A co-signer is an individual with a strong credit history and steady income to take legal responsibility for paying the rent if the primary leaseholder defaults.
- To make a security deposit. The deposit covers cases of damage to the rental property or missed rent.
- To set up recurring rent payments. Recurring payment assures the landlord of early and convenient rent payment directly from the renter's account.
- To submit information for a thorough background check. A landlord may decide to review prospective tenants' rental and financial history and conduct routine inspections of the rental property.