Before you choose your dream rental, you'll need to calculate how much rent you can afford to pay. Of course, there may be a difference between how much you feel you can pay, what a landlord thinks you can pay, and how expensive a given area's rental market is.
To avoid signing up for a lease you can't afford or losing out on properties that interest you because the landlord wants to see more income, you'll need to familiarize yourself with three prices: What you personally feel you can pay for rental housing; what local landlords think renters can pay (typically, landlords like to see rent not exceed a particular proportion of your gross income and use that proportion to screen applicants); and what average apartments and rental homes cost in your particular area. Depending on where you are in life and where you live, the proportion of your income that you pay for rent can vary. Also, depending on where you liveâ€”an expensive market such as New York or San Francisco or a more modest market in a smaller communityâ€”the locally-acceptable percentage of income devoted to rent can vary.
To develop a sense of how much rent you are comfortable paying, you'll need to take a look at your income, debt, general living expenses (like groceries and dry cleaning), and social spending. To develop realistic personal expectations, play with budget calculators and get a sense of how much money you're spending on necessary expenses (debt, groceries, medical care) versus discretionary interests (travel, dining out, hobbies). Because each person's debt levels and goals differ, only you can determine what you are personally comfortable spending. Try these budget tools to monitor your spending: http://www.ed.gov/offices/OSFAP/DirectLoan/BudgetCalc/budget.html and http://www.mint.com/features/budget/.
For the record, The US Department of Housing and Urban Development and many state housing authorities recommend that you spend no more than 30% of your gross (pre-tax) household income on housing and utilities. This means if you earn $50,000 per year, you should spend no more than $15,000 per yearâ€”or $1250 per monthâ€”on rent and utilities. The Mint, a budgeting and personal finance web site, recommends you spend no more than 33% of your gross (pre-tax) income on housing, meaning that on $50,000 you should spend no more than $16,667 per yearâ€”or $1388 per monthâ€”on rent and utilities.
Ginnie Mae, the federal housing lender, offers a quick and easy calculator that generates a ballpark amount you can afford for monthly housing costs. This calculator was developed for home buyers, whose housing budgets may differ somewhat due to the different mix of expenses and tax offsets associated with owning, but it still offers a conservative idea for renters of what constitutes affordable housing spending.
Then there's the question of what average rents are in your market and how much rental inventory is available in your price range. In many more expensive markets, such as New York or San Francisco, high rents mean that residents may routinely pay more than 30% of their gross incomes for rental housing. In dense urban areas higher rents are a fact of lifeâ€”unless you want to move outside the urban core. But even in these pricey urban areas, landlords like to see that tenants are keeping housing expenses in the 30% ballpark. In New York, for instance, many landlords like to see tenants earning 40 to 50 times the monthly rentâ€”meaning you (along with any roommates) would need to earn a total of $60,000 to $75,000 annually for an apartment with a $1,500 monthly rent, according to Tungsten Property.
When you begin looking at apartments, it never hurts to ask a broker (if one is helping you look), a landlord, or a management company what rent-to-income ratio is necessary for a lease and when, and if, a particular landlord or building is willing to occasionally break the rules. If you're just starting out in your career and have a relatively low income, or are self-employed with sporadic income, you may need to persuade a landlord that you can afford their property. If low-paid, you may need to get a roommate so that, together, your incomes satisfy landlords' requirements. (One plus: If a roommate moves out and your rent rises, you can often modify your lease to keep the place for yourselfâ€”provided you've demonstrated a history of on-time rental payments and talk to the landlord.) If self-employed, a healthy savings account and showing gross income on taxes should cool any fears about your credentials.
Many landlords will also accept your signing a lease with a co-signor or guarantor who won't be living with you but is willing to take up the slack if you are unable to afford the rent. But keep in mind that some landlords require local guarantors, meaning that if you move to New York from, say, the Midwest, Mom and Dad may not be able to serve as guarantors even if they are willing. In some urban areas, commercial guarantor services such as Insurent will, for a one-time fee, serve as your locally-based guarantor.
If you're in the market to rent, you need more than a decent salary, a firm handshake, and legit references to impress landlords. The most important thing you need is good credit to demonstrate that you're capable of paying the rent on time. That's because ...