Rule of thumb for how much to spend on rent?

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panchilly
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Rule of thumb for how much to spend on rent?

Post by panchilly » Mon Feb 05, 2018 5:47 pm

What is a good rule of thumb for how much someone should spend on rent based on their income?

bloom2708
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Re: Rule of thumb for how much to spend on rent?

Post by bloom2708 » Mon Feb 05, 2018 5:56 pm

Can you provide any details to narrow it down? There is no rule of thumb that works in high cost of living areas vs low. Making $150k vs. 40k.

Example:

30% of your net take home pay after doing pre-tax 401k at 15%.

What amount does this give you for rent allowance?
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

panchilly
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Re: Rule of thumb for how much to spend on rent?

Post by panchilly » Mon Feb 05, 2018 5:58 pm

bloom2708 wrote:
Mon Feb 05, 2018 5:56 pm
Can you provide any details to narrow it down? There is no rule of thumb that works in high cost of living areas vs low. Making $150k vs. 40k.

Example:

30% of your net take home pay after doing pre-tax 401k at 15%.

What amount does this give you for rent allowance?
i suggest rules of thumb be on pre-tax income since you can ignore pre-tax deductions like 401k, etc.

Also i suggest having a separate rule of thumb for HCOL vs LCOL vs MCOL

bloom2708
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Re: Rule of thumb for how much to spend on rent?

Post by bloom2708 » Mon Feb 05, 2018 6:02 pm

Pre-tax income means very little. You have to pay for your benefits, taxes and if you don't save pre-tax in your 401k (if you have one), then you are not saving enough for retirement. Even starting out.

This is why rules of thumb don't help anyone other than confirm some thought you may have.

If your number fits, the rule of thumb passes. If your number fails, the rule of thumb is wrong. :annoyed
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

panchilly
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Re: Rule of thumb for how much to spend on rent?

Post by panchilly » Mon Feb 05, 2018 6:10 pm

Many on this forum have rules of thumb for how much to spend on a house. Interestingly many of these people do not have a similar rule of thumb for how much to spend on RENT.

Rent and housing prices are intimately related. If you give me a maximum you are willing to spend on rent, I believe it is possible to work backwards from that to determine what you should spend to buy.

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Pajamas
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Re: Rule of thumb for how much to spend on rent?

Post by Pajamas » Mon Feb 05, 2018 6:12 pm

There is no rule of thumb because incomes vary and rent varies. In many large cities in the U.S. the rent burden is over 50% of household income. In most other places, it is lower. If you want more information about a particular city, you can use the search terms "rent affordability" and "rent ratio" or "rent burden".

The data is a couple of years old but here's an interesting article with a scatterplot and other charts showing every county in the U.S.

http://overflow.solutions/demographic-d ... ch-county/
Last edited by Pajamas on Mon Feb 05, 2018 8:44 pm, edited 2 times in total.

nimo956
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Re: Rule of thumb for how much to spend on rent?

Post by nimo956 » Mon Feb 05, 2018 6:43 pm

If you're just starting out in your career, then it will be a larger % of your gross income; if mid-career then smaller.

My rent is actually lower than when I got my first apt 8 years ago. I think I was paying about 33% then, and I'm down to 13% now. Somewhere in that range is probably a good answer.
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miamivice
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Re: Rule of thumb for how much to spend on rent?

Post by miamivice » Mon Feb 05, 2018 6:47 pm

When I was a renter, I had to show monthly income 2.5x the rent payment
In other words, rent no higher than 40% pretax income.

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dm200
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Re: Rule of thumb for how much to spend on rent?

Post by dm200 » Mon Feb 05, 2018 6:49 pm

Many ways to look at this question.

One way is to only spend what you really need to spend to meet your needs. In other words, spend less than you can "afford".

littlebird
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Re: Rule of thumb for how much to spend on rent?

Post by littlebird » Mon Feb 05, 2018 6:50 pm

Long ago, in a simpler era, landlords generally enforced a 25% or less rule. Worked for us, even in our VHCOL city, that is, we rented in a cheaper outer neighborhood.

tesuzuki2002
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Re: Rule of thumb for how much to spend on rent?

Post by tesuzuki2002 » Mon Feb 05, 2018 6:55 pm

panchilly wrote:
Mon Feb 05, 2018 5:47 pm
What is a good rule of thumb for how much someone should spend on rent based on their income?
Some say 20%.... My max limit is 11% and really try to keep it around 5%.

sksbog
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Re: Rule of thumb for how much to spend on rent?

Post by sksbog » Mon Feb 05, 2018 8:34 pm

NYTimes has a neat calculator which recommends which one is better, based on your answers.
Check it out.

https://www.nytimes.com/interactive/201 ... 0002&abg=0

Jags4186
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Re: Rule of thumb for how much to spend on rent?

Post by Jags4186 » Mon Feb 05, 2018 8:37 pm

Spend as little as possible on rent to be tolerable. You need to pay for rent and save to potentially buy something, or at minimum build up taxable savings. Comparing renting and buying is not apples to apples. You rent what meets your needs right now. If your needs change you can easily change your rental. Buying should be a long term commitment and should meet your needs for at least the next 5-10 years.

My wife and I spend 10% of our gross base salaries on rent.

miamivice
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Re: Rule of thumb for how much to spend on rent?

Post by miamivice » Mon Feb 05, 2018 9:06 pm

Just as an aside, I remember signing my first lease for a 1 year single bedroom apartment. It was $610 and I felt bad about kissing away $7200 that year.

Now compared to my expenses, like daycare and home mortgage, $7200 sounds like a paltry sum for a years rent. But that was a lot of money to me back then.

Lonestarz
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Re: Rule of thumb for how much to spend on rent?

Post by Lonestarz » Mon Feb 05, 2018 9:21 pm

I have consistently spent around 20-25% of after tax spending on housing. I find this provides me with comparable experiences to my accommodations.

I do tend to eat/drink out a bit more before I started blowing all that money on child care.

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GerryL
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Re: Rule of thumb for how much to spend on rent?

Post by GerryL » Mon Feb 05, 2018 9:26 pm

Google the "50-20-30 budget" (or rule) for a simple way to figure out how much of your income you should be spending on various categories. Housing falls within the 50%, along with other necessities.

itstoomuch
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Re: Rule of thumb for how much to spend on rent?

Post by itstoomuch » Mon Feb 05, 2018 9:28 pm

I think a comfortable maximum is 33% of gross.
However, We do have a rental where we do rent with 50% of gross. They met all other requirements and we tried to dissuade the renters but they wanted the unit; Desireable area of Seattle, on bus line, view of water, and restaurants. They are also good tenants. We will unfortunately lose this month when they get another roommate (3G) and a 3+2 apartment in the same general location.

I had looked into renting ourselves in a mediocre, large apartment building Seattle but our retirement income would not meet their 33% gross income requirement. About 6 months later we bought a rental for cash and rented to above tenants. We get 7% ROI.
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raisinsaregrapes
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Re: Rule of thumb for how much to spend on rent?

Post by raisinsaregrapes » Mon Feb 05, 2018 9:30 pm

This is the rule of thumb equation I use every time I move....
y=s+|_frac_{{x};{m}}({t-s})+60sin({({|_frac_{{x|sqrt{π}};{m}}-|sqrt{π}})^{2}})+|_frac_{{240};{m^{2}}}abs({m-x})x

Joking aside, I think rent varies a lot from place to place and different people have different needs. Ex. Families need more rooms. I liked this answer.
dm200 wrote:
Mon Feb 05, 2018 6:49 pm
One way is to only spend what you really need to spend to meet your needs. In other words, spend less than you can "afford".

Slacker
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Re: Rule of thumb for how much to spend on rent?

Post by Slacker » Mon Feb 05, 2018 9:36 pm

I don't know of any rules of thumb - others mentioned qualification rules that landlords/Property Mgrs might apply.

My personal rule of thumb is that rent be no more than 12.5% of our gross monthly income. Last rental we were in we were at around 8% of gross income. However, our household tends to be in the top 5% of household incomes (or sometimes top 1%) for the cities and neighborhoods we choose to live in.

mpsz
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Re: Rule of thumb for how much to spend on rent?

Post by mpsz » Mon Feb 05, 2018 9:54 pm

30% of net is a good place to start, but this is not a one-size fits all rule. When I say net, I mean that you should be contributing at least 15% to your 401k before calculating this number.

I am currently spending 25% of my net, after maxing 401k and HSA. When I was fresh out of college (within the last 10 years) it was about 30-35% because my starting salary was lower and I'm in a higher-COL area. This could work in the opposite direction, for example if you have high debt payments, you may need to spend less than 30%.

I also like the 50-30-20 rule.

kaeltor
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Re: Rule of thumb for how much to spend on rent?

Post by kaeltor » Fri Oct 19, 2018 1:31 pm

mpsz wrote:
Mon Feb 05, 2018 9:54 pm
30% of net is a good place to start, but this is not a one-size fits all rule. When I say net, I mean that you should be contributing at least 15% to your 401k before calculating this number.

I am currently spending 25% of my net, after maxing 401k and HSA. When I was fresh out of college (within the last 10 years) it was about 30-35% because my starting salary was lower and I'm in a higher-COL area. This could work in the opposite direction, for example if you have high debt payments, you may need to spend less than 30%.

I also like the 50-30-20 rule.
30% of net after 401K and pretax savings makes it near impossible for anyone to rent at all in you aren't making 100K+

Anyone have better , more realistic suggestions?

InvisibleAerobar
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Re: Rule of thumb for how much to spend on rent?

Post by InvisibleAerobar » Fri Oct 19, 2018 6:17 pm

kaeltor wrote:
Fri Oct 19, 2018 1:31 pm
mpsz wrote:
Mon Feb 05, 2018 9:54 pm
30% of net is a good place to start, but this is not a one-size fits all rule. When I say net, I mean that you should be contributing at least 15% to your 401k before calculating this number.

I am currently spending 25% of my net, after maxing 401k and HSA. When I was fresh out of college (within the last 10 years) it was about 30-35% because my starting salary was lower and I'm in a higher-COL area. This could work in the opposite direction, for example if you have high debt payments, you may need to spend less than 30%.

I also like the 50-30-20 rule.
30% of net after 401K and pretax savings makes it near impossible for anyone to rent at all in you aren't making 100K+

Anyone have better , more realistic suggestions?
as you may have realized perusing this forum, this place is loaded with dogma and wealth, which leads to some rather unrealistic expectations

ask yourself, are you contributing at least 15% of the salary to your 401(k) or equivalents thereof? This amount may actually sound low to many of the forumites here, but it's the amount suggested by William Bernstein. If your housing cost allows you to do at least that (and pay your taxes and other recurring costs), then the housing cost isn't a financial burden. In an ideal world, you'd be able to save even more than that (10% of take home is a good place to start). But the overall message should be that those are icings on the cake for now, the cake being a place allowing you to contribute 15% to your 401(k).

When i lived in the DC area (HCOL), I choose to live in a somewhat shabby studio relatively far away from places. It's the opposite of a happening place. Rent was $1250, but I liked having a place to myself. A friend paid a similar amount in a place shared with two others, but it's a lot more convenient for him. Sometimes we have to choose, make a decision re: what you'd be willing to give up and go from there.

fwiw, I contributed less than 10% to my 401(k) equivalent for the first two years (and didn't hit 15% until 4 years in), and the place was ~20% of my gross. Some here may say it's too much to pay.

fulltilt
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Re: Rule of thumb for how much to spend on rent?

Post by fulltilt » Sat Oct 20, 2018 9:37 am

kaeltor wrote:
Fri Oct 19, 2018 1:31 pm
mpsz wrote:
Mon Feb 05, 2018 9:54 pm
30% of net is a good place to start, but this is not a one-size fits all rule. When I say net, I mean that you should be contributing at least 15% to your 401k before calculating this number.

I am currently spending 25% of my net, after maxing 401k and HSA. When I was fresh out of college (within the last 10 years) it was about 30-35% because my starting salary was lower and I'm in a higher-COL area. This could work in the opposite direction, for example if you have high debt payments, you may need to spend less than 30%.

I also like the 50-30-20 rule.
30% of net after 401K and pretax savings makes it near impossible for anyone to rent at all in you aren't making 100K+

Anyone have better , more realistic suggestions?
I try to keep mortgage or rent at 25% of net pay.

There isn’t a one size fits all answer. One answer is just to save less until you can save more. Maybe take on a roommate? Spend more on rent and cut back in other areas?

Maybe if you lay out some specifics of your situation, people can help you figure out what is right for you. What other people are doing on this board is likely not realistic for most people.

mpsz
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Re: Rule of thumb for how much to spend on rent?

Post by mpsz » Sat Oct 20, 2018 9:54 am

kaeltor wrote:
Fri Oct 19, 2018 1:31 pm
mpsz wrote:
Mon Feb 05, 2018 9:54 pm
30% of net is a good place to start, but this is not a one-size fits all rule. When I say net, I mean that you should be contributing at least 15% to your 401k before calculating this number.

I am currently spending 25% of my net, after maxing 401k and HSA. When I was fresh out of college (within the last 10 years) it was about 30-35% because my starting salary was lower and I'm in a higher-COL area. This could work in the opposite direction, for example if you have high debt payments, you may need to spend less than 30%.

I also like the 50-30-20 rule.
30% of net after 401K and pretax savings makes it near impossible for anyone to rent at all in you aren't making 100K+

Anyone have better , more realistic suggestions?
I do not make over $100k and I am able to meet these rules I outlined. Sorry this isn't the answer you wanted to hear.

As I said, there's no one-size fits all answer. This is just a suggestion.

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cheese_breath
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Re: Rule of thumb for how much to spend on rent?

Post by cheese_breath » Sat Oct 20, 2018 10:22 am

I've never operated by rules of thumb myself. I consider all my other expenses, both current and projected and choose a number I can afford. I use the same idea when determining my retirement spending. No 4% 'SWR for me.
The surest way to know the future is when it becomes the past.

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