How to Estimate How Much Rent You Can Afford

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By vlhammett
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Estimate How Much Rent You Can Afford

Renting a home is the best option for people who aren't ready to commit to owning a home. It makes perfect sense to rent for a year or two if you're just moving into an area. You can take that time to discover the best places to live. If your job is temporary, or you get transferred often, renting is makes the most sense, especially when the real estate market is saturated with homes for sale.

You want to calculate your rent payment in much the same way you would if you needed to determine how much of a monthly mortgage payment you can afford. If you use a conservative ratio, you'll have money left to invest or save toward the purchase of your first home.

A conservative ratio of 28/36 will help you determine how much rent you should pay based on your income and debt. You can be more conservative in your estimates by changing the ratio to 25/35.

In order to calculate what you can afford to pay for rent, you first need to know what the ratios mean. For this exercise, we'll use the 28/36 ratio. Each ratio figures into the rental payment calculation as follows:

1. Your maximum monthly rent payment should not exceed 28 percent of your gross income.
2. Your maximum debt (including your mortgage payment) should not exceed 36 percent of your gross income.

This is a simple exercise to determine what you should be able to pay, comfortably, for rent each month. This is not how you would determine if you should buy or rent a house. There are online calculators that will help you make that decision.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

Calculator or spreadsheet program
or Pencil, Paper and a good head for math

Step 1

Calculate your total monthly income before taxes. This includes your annual salary and income from other sources (alimony, child support, rental income, dividends). Total your annual income and divide the amount by 12. The result is your Total Monthly Income Before Taxes.

Example -- $48,000 salary + $2,000 residual income from Ehow = $50,000 annual income/12 or $4,167 per month.
Step 2

Calculate your total monthly debt. Be sure to include everything you owe, such as student loans, car payments, child support, the minimum payment on credit cards, and any other debts you pay on monthly. Total them all. This is your monthly long-term debt.

Example -- $450 (car payment) + $600 (child support) + $300 (credit card) + $150 (HD TV payment) = $1,500 Total Monthly Long-term Debt
Step 3

Determine the maximum monthly rental payment you can afford including renter's insurance. Subtract your monthly long-term debt from your gross monthly income and multiply by 28 percent.

Example -- $4,167 (monthly income before taxes) - $1,500 (total long term debt) = $2,667 x 0.28 = $747 (rounded)

$747 is your Maximum Monthly Rental Payment
Step 4

Determine your maximum monthly debt that includes your rent payment. This helps you understand how much you can spend for emergencies, trips, or new cars once you pay your monthly rent. Enter your total monthly income (remember, this is before taxes are taken out) from Step 1. Multiply this by 0.36. The result is the Maximum Monthly Debt Including Rent that you'll be able to comfortably afford.

Example -- $4,167 (monthly income before taxes) x 0.36 = $1,500 is the Maximum Monthly Allowable Debt Including Rent