In a context of high housing costs, how to determine what you can spend on rent

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There is often a chasm between theory and practice, what we should be doing and what we are actually doing. Yet when it comes to the longstanding advice to renters not to spend more than 30% of their income on housing, the target is increasingly unattainable, experts say.

“The old 30% guideline is just unrealistic these days,” said Marc Hummel, licensed real estate salesperson at Douglas Elliman in New York.

More often than not, Hummel said, renters spend 40% or more of their income on housing. “With vacancy rates at record highs and some of the highest rents on record, it’s getting harder and harder to spend less,” he said.

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Indeed, nearly 15 million renter households in the United States are considered cost-overloaded, meaning they spend more than 30% of their income on rent and utilities. In some cities, the situation is particularly dire. For example, in New York, a household with the area’s median income would have to pay almost 69% of their income to rent the apartment at the average price, according to Moody’s Analytics.

There are major consequences of taking rent that consumes too much of your income, Hummel said. “Spending more on rent means less money for savings, retirement, family goals and less to pay other debts,” he said.

Housing is the biggest financial area where people get trapped, according to personal finance blogger and author Ramit Sethi. “That’s why it’s so important to follow some general guidelines when deciding how much you can afford,” said Sethi, who wrote “I’ll Teach You How to Be Rich.”

“One week’s pay for one month’s rent”

Renters were once advised to spend even less than 30% on housing, said Andrew Aurand, senior vice president of research at the National Low Income Housing Coalition. In 1969, the Housing and Urban Development Act required residents of public housing to contribute only 25% of their income towards rent, Aurand said.

“That percentage stemmed from the depression of the 1930s, when a general rule was ‘one week’s pay for one month’s rent,'” he said.

New York's median rent exceeds $4,000 a month in January

In practice, there are a variety of factors that should determine how much a household should spend on housing, Aurand said. For example, a married couple without children may be able to spend more on their rent than another married couple with the same income who have children.

A simple way to gauge whether your housing costs are affordable, Aurand said, is to calculate how much of your income is left over to cover your other bills after your rent is paid.

“After paying for housing, does the household have sufficient income to pay non-housing expenses?” he said. “Otherwise, they are considered to have high costs.”

30% is not an absolute rule

Tenants shouldn’t view the 30% guideline as a hard and fast rule, said Allia Mohamed, co-founder and CEO of Openigloo, which lets tenants review buildings and landlords across the United States.

“Every tenant is different,” Mohamed said.

High-income renters, for example, would often have to spend below that threshold, she said. “Just because you make $300,000 a year doesn’t mean you should rent a $7,500 apartment just because you can,” she said.

After paying for housing, does the household have sufficient income to pay for non-housing expenses?

André Aurand

senior vice president of research at the National Low Income Housing Coalition

Meanwhile, a low-income tenant may be able to spend more than 30% of their income on housing if they don’t have other major recurring expenses, such as loan repayments, Mohamed said.

She advises renters to create a detailed budget of their monthly expenses, but also include what they would like to set aside for savings and/or investments. This can help them determine how much is left for housing costs.

“We can’t raise our arms”

Too many people, especially in expensive cities, decide finding affordable rent isn’t realistic and end up spending way too much, Sethi said.

“We can’t give up on the highest price of all,” he said. “We have to develop a real strategy to deal with it.”

Ideally, Sethi said, people should aim to spend no more than 28% of their gross income on rental fees. (These include, he added, utilities, furniture, repairs, etc.)

“If you don’t have debt, you can increase the number a bit,” he said. In some expensive cities, Sethi added, “they might spend 30%, 32%, even 35%.”

However, he warned, “beyond that, you put yourself at serious risk” should you lose your job or suffer another setback.

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