Estimating how much to spend on rent

“How can I estimate rent?” is one of the most frequent questions I’ve received from new apartment renters in the past 10 years as the general manager of MyFirstApartment.com, one of the top sites on the web for apartment living info.

Often, the answer to the question of how much to spend on rent...is actually out of your control. It’s decided by the big-city landlords who require you to follow their salary-to-rent formula (if you want to rent with them, that is). What’s the magic formula. It’s your annual salary, divided by 40. For example, a $40,000 a year salary can get you approved for a $1,000 a month rent.

However, the formula varies some, ranging from 35-45, depending on how tight the rental market is in that particular city. For example, in the hottest neighborhoods of New York City, the landlord may divide your salary by 45, requiring an income of $45,000 for that same $1,000 rental. Or in a less hot market, the number may drop to 35, qualifying you for the $1,000 apartment with a $35,000 salary. If you’re a salaried employee, determining how much rent you can qualify for is a cinch, just find out what formula the largest landlords use.

Many new apartment renters are millennials who don’t have the safety of jobs with fixed annual salaries. Instead, they may work as baristas, paralegals, nannies and cashiers, stringing together several hourly jobs, gigs and freelance assignments to earn a living. Their take-home pay, after taxes, fluctuates from paycheck to paycheck. For them, determining an affordable rent target is more complicated.

A typical question we get on our site, MyFirstApartment, might be this: “I make $300-$450 biweekly and my future roommate makes $250-$350 a week. Can we afford a $700 a month rental?” (By the way, the answer to that reader is “no.”)

With a fluctuating paycheck, we recommend avoiding broker-rented apartments. Brokers are often renting out the more desirable apartments that cost more – and demand more income assurance from their tenants. That doesn’t mean you won’t find a place – just that you need to find a landlord who is more flexible. Sometime, you may also be asked to give a higher security deposit or be asked to get a co-guarantor who will add their name to the lease.

To estimate how much you can afford to spend on rent, start by estimating an average monthly after-tax take-home from two to three recent months of pay stubs. Then estimate the average again, but use only the lowest paychecks. Unless you are really disciplined about budgeting and watching your cash-flow, you could easily get into trouble if you have a string of low-income months after basing your rent target on the higher average.

Overall, we recommend spending no more than 35% of your monthly income on rent. If the average and lowest paycheck numbers are close, you can afford to base the rent target on 35% of the monthly average paycheck. However, if you have a big discrepancy between the two numbers, use 35% of the lower paycheck average as your rent target. If you limit your rent to the lower number, you’ll know that you can always make your rent and you’ll be able to save money when you have a good month.

We also recommend using a four-week paycheck average, even though a bi-weekly pay calendar gives you two extra paychecks each year and a weekly calendar gives you four extra paychecks. The four-week paycheck, meanwhile, enables you to use this extra cash to add to your savings or pay down credit card balances.

These formulas assume that all your other expenses are at normal budgeting levels. Some of our readers tell us upfront that they have high car payments or above average student loans. In those cases, we ask them to start with the basic formula for rent, but then actually run through all the other expenses to verify that their bills can still be covered. If not, they need to lower the target rent.

What about utilities, though? How much do they cost? While it depends on your usage, monthly utilities often are about 15-20% of your rent if you live alone and 10% if you have roommates.

We understand that there are places where the above guidelines are not high enough to find any apartments (cough: New York City or San Francisco). If you must go higher, you can – you’ll just need to spend less in other places, like going out. Not to worry, though, many cities also have websites that detail everything that is free and cheap in your new hometown.

My personal advice would be to consider living at home for an extra month or two while saving the majority of your paycheck or to try finding a sublet so that you can see how far your money can go – without being tied to the apartment for a full year.