True story: back in July, I got a notice that my rent was being raised. I’d lived in the apartment for almost two years, and they pulled this trick on me the previous year: raising my rent by $104/month.

The first time, I just accepted the rate increase. After all, I’d received a sign-on deal of “$50 off each month’s rent!” when I first moved in, so it only seemed like an additional $54/month rent increase (above the deal wearing off).

But after the second year, they wanted to raise it *another* $114/month! And actually, they offered an “alternative” as well: to install all new appliances in the apartment, and in doing so, raise the rent $141/month (thanks?).

Since the first rent increase, I’d taken some of the burden off myself by moving my boyfriend into the apartment and splitting the rent a bit. But with the additional rent increases, the question became:

*Could we afford to spend an additional $1368-$1692 (total) on rent in 2014?*

## What about Buying?

In some cases, the adage that “*you’re throwing money away when you rent”* can actually be true. In other cases? Not so much. If you’ve got money saved up for a down payment, there’s only one way to be sure whether buying or renting will save you money: run the numbers.

Don’t feel daunted by the idea of running the numbers, because The New York Times has a *super* handy-dandy Renting vs. Buying Calculator which can do most of the work for you!

Do a quick search on Zillow for a place that you would *actually* be interested in buying (be realistic), then enter the purchase price for that into the Times calculator, along with the rent on apartments you’re looking at (or your current rent, if you’re not shopping yet).

In my case? The calculator spit out a pretty clear answer:

“If you stay in your home for 5 years,

rentingis better. It will cost you$13,412less than buying, an average savings of$2,682each year.”

Ouch! $2,682 more per year – and that was based on a comparison to my raised-rent number for 2014! That means it would be an increase of **$4,374 **per year. Yeah: that’s not in the cards.

So if you’re like me, and you determine that renting is better than buying (for your situation), now how do you figure out *how much* you can afford to pay in rent?

## Rules-of-Thumb for Calculating Rent Affordability

### #1: The Rules Apartment Complexes Use: 33% of Gross Income, or Annual Income Divided by 40

If you’re just looking for a really quick calculation, something very general, these are the rules-of-thumb for you.

**Method A: **Just take the total you make in a month, before taxes or retirement contributions or anything is taken out of your paycheck, and multiply it by 0.33 to get the *maximum *rent you can afford. So if you make $50,000 a year:

($50,000 divided by 12 months) = $4,166.66 per month

$4,166.66 times 0.33 = **$1375.00 per month in rent, maximum**.

**Method B: **Take the total you make in a *year* and divide it by 40. In our $50,000/year salary example:

$50,000 divided by 40 = **$1250.00 per month in rent, maximum.**

I find that Method A tends to *overestimate* how much you can actually afford, for most people. So why use it? Because it’s the rule that some apartment complexes will use to check and see if you can afford the apartment (as far as they’re concerned). It’s what my last apartment used when I signed the lease, and there are plenty of other leasing companies that use this rule, as well.

So this rule is good for finding the very maximum amount of rent you can consider and hope to be approved for the apartment. But I can tell you that all things considered, $1375/month seems awfully high to me for someone making $50,000/year.

Method B is still a little high, but again, useful because you know an apartment complex might be using it as *their *formula for what you can afford. So if this is all the calculating you want to do, I recommend Method B. It’s easier math (fewer steps!) and it’s not as overly-optimistic as Method A.

### #2: Debt-To-Income Front End Ratio: 28% of Gross Income

If you were buying a home instead of renting, this is one of the calculations that banks might use to come up with the mortgage payment you could afford. So it’s useful for our purposes – we’ll just substitute in “rent” where a mortgage would be!

But wait, there’s more! For this debt-to-income (DTI) “front end” calculation, that number would include homeowners insurance for anyone calculating it for a mortgage. So you should include renters insurance, instead. My own renters insurance costs me about $150/year, so feel free to steal that number as a baseline, if you don’t know what your renters insurance will cost you.

For our $50,000/year ($4,166.66/month) example:

$4,166.66/month times 0.28 = $1166.66 per month *total rental costs*

$1166.66/month minus $12.50/month renters insurance = **$1145.16 per month in rent, maximum.**

A pretty simple formula, and the resulting number seems much more appropriate for someone making $50,000/year. But can we find *an even better formula*?

### #3: Debt-To-Income Back End Ratio: Total Debt Payments <36% of Gross Income

We touched on this calculation back when we had this same discussion about how much you should spend on a car. As I noted then, the problem with this calc is that if you apply Calc #2 (DTI Front End Ratio) as well, that leaves only 8% of your income for all debt payments other than housing. This still seems insane to me – are banks assuming no one ever has any student loans or a car payment that’s more than $100/month?

But let’s do the math with our $50,000/year earner example, just to see how it shakes out. To make things easy, we’ll use my *exact numbers* from my real life for the other debt payments:

$4,166.66/month times 0.36 = $1500/month for *all *debt payments, including rent

$1500/month

– $194.02 (car payment for a used 2004 Camry)

– $284.52 (student loan payments)

– $12.50 (renters insurance)

– $6.61 (car property tax – yeah, that’s a thing I have to pay in Virginia)

——————–

**$1002.35 per month in rent, maximum.**

Does that sound reasonable to you? It might – depends completely on the region you’re living in. What it means is that where I’m living (northern Virginia, just outside of Washington, D.C.) you can’t get a studio or 1-bedroom apartment on $50,000/year (without a roommate, and using this calculation, of course).

It also means that a bank would probably not approve me for a mortgage around here, if I were making $50,000 or less, based on my other debts. But in another part of the country, that might be plenty for rent or mortgage payments.

If you’re using this formula, you’ll need to do a lot of adjusting for your own situation. For example, if you don’t have a car (and thus no car payment), but you rely on public transportation, you’ll want to include some or all of what you pay for public transit when you do the math.

## And the winning formula is:

Personally, **I like rule #2 (DTI Front End, 28% of gross income) the best**. It’s a really simple calculation that gives you a realistic answer, fast. I think the formulas in #1 are too optimistic about how much a person can pay, which could leave you renting an apartment you can’t *actually* afford.

And while I like that #3 takes into account how much you are spending monthly on your other debts, I think that for most people it’ll end up being too restrictive. But, there’s hope for it still – if you adjust the percentage to something that give you a bit more leeway (40% of gross income for all debt repayments, maybe?), you might just find a number that suits you better.

*(Photo credit: **turkeychik on flickr**)*

Somebody @ Bitcoin Branches says

Interesting formulas you have here. I wouldn’t have thought to go this in depth but for those on a strict budget this is a useful tool.

When in doubt, be pessimistic about what you can afford.

Nancy says

Great!!! Thank you! Moving to Baltimore. Super advice. Leaving a house behind. Haven’t paid a mortgage or rent since 2003. Im sure I will experience many monthly unexpected expenditures!

Brook Hurd says

This is great advice. I never know how much I should spend on renting an apartment. I think I agree with you, I like rule #2 (DTI Front End, 28% of gross income) the best. However, eventually I’d like to buy a house so that I feel like I’m actually paying something off.

Brook | http://rentersguide.ca

Random Blogger says

The whole “rent vs. own” dilemma is something I have been pondering over for a while. I didn’t realize there was this many possible formulas for such things, but it was very interesting to read nonetheless!

The good thing that stands out about buying, is if you actually stumble upon a really good deal and can get an excellent return on your investment. One could still move after a few years, sell the place for roughly the same amount, and then it would be like living there for free all that time – well, almost. ๐

Jane says

Thanks for sharing. I have heard some loan officers push the DTI to as high as 45%. It’s really scary to think that the mortgage take about half of your income. Personally 35% is about the max I’m comfortable with.

Sepenuhnya says

That’s great advice… overall, I agree with you.

Harold Maat says

Yeah, I think your ratio’s are good, but the number’s MUST reflect net income and not gross.

Stephanie says

Thanks for the comment Harold, but I wonder why do you say that? Personally, I hate using “net income” for pretty much any calculation, ever. “Net” of what? There are too many variables, in my opinion.

For example, I’m partially self-employed, so my take-home pay for my self employment income is 100% of my gross. I also have a part time W2 job, but that job offers no benefits, so “net” income from that job is only gross minus taxes (federal, FICA, and state). BUT, I have more than the usual amount of taxes withheld from that job, so that I don’t have to pay quarterly estimated taxes on the self employment job. So is “net income” from that job what I take home, or is it what I

wouldtake home if my withholding wasn’t set so high? What about for people who just have their withholding set incorrectly (or inefficiently)?Also, I pay for my own health insurance out of pocket, since I don’t have a job that deducts it from my payment. My retirement savings is also out of pocket, as well. These last two things are a part of what people would normally subtract from “net income,” I believe, but it’s a tangled web!

Gross income makes for much, much cleaner calculations.