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Theory and practice, what we should do and what we actually do, often diverge. But when it comes to the long-held advice for renters to spend no more than 30% of their income on housing, the goal is increasingly elusive, experts say.
“The old 30 percent rule is just unrealistic these days,” said Marc Hummel, a licensed real estate salesman at Douglas Elliman in New York.
More often, Hummel said, renters spend 40% or more of their income on housing. “With vacancy rates at record lows and rents near all-time highs, it’s becoming increasingly difficult to spend less,” he said.
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In fact, nearly 15 million renter households in the US are considered cost-burdened, meaning they spend more than 30% of their income on rent and utilities. The situation is particularly bad in some cities. In New York, for example, a household with the area’s median income would need to spend almost 69% of its income to rent an apartment at the median price, according to Moody’s Analytics.
Taking on a rent that eats up too much income has significant consequences, Hummel said. “Spending more on rent means less money for savings, retirement, family goals and less for other debt obligations,” he said.
According to personal finance blogger and author Ramit Sethi, housing is the biggest area of finance people get trapped in. “That’s why it’s so important to follow some general guidelines when deciding how much you can afford,” said Sethi, who wrote I Will Teach You To Be Rich.
“A week’s wages for a month’s rent”
Renters were previously advised to spend less than 30% on housing, said Andrew Aurand, senior vice president of research at the National Low Income Housing Coalition. In 1969, the Housing and Urban Development Act required public housing residents to contribute only 25% of their income toward rent, Aurand said.
“That percentage dates back to the 1930s Depression, when a common rule of thumb was, ‘One week’s wages for one month’s rent,'” he said.
In practice, there are a variety of factors that should determine what is the right proportion that a household needs to spend on their home, Aurand said. For example, a couple with no children may be able to spend more on their rent than another couple with the same income who have children.
A simple way to measure whether your housing expenses are affordable, according to Aurand, is to calculate how much of your income is left over to cover your other bills once your rent is paid.
“After paying for their housing, does the household have sufficient income to pay for their other expenses?” he said. “If not, they are considered cost-burdened.”
30% no fixed rule
Tenants shouldn’t take the 30 percent rule as a hard and fast rule, said Allia Mohamed, co-founder and CEO of Openigloo, which allows tenants to inspect buildings and landlords across the United States
“Every tenant is different,” said Mohamed.
For example, high-income renters should often spend less than that threshold, she said. “Just because you make $300,000 a year doesn’t mean you should rent a $7,500 apartment just because you can,” she said.
After paying for their housing, does the household have sufficient income to pay their non-housing expenses?
Andrew Aurand
Senior Vice President of Research at the National Low Income Housing Coalition
Meanwhile, a lower-income tenant can potentially spend more than 30% of their income on housing if they don’t have other large recurring expenses like loan payments, Mohamed said.
She advises renters to create a detailed budget of their monthly expenses, but also to include what they plan to set aside for savings and/or investments. This allows them to determine how much is left over for housing costs.
“We can’t throw up our hands”
Too many people, especially in expensive cities, decide that finding affordable rent is unrealistic and then end up spending way too much, Sethi said.
“We can’t throw our hands up at the greatest price of all,” he said. “We have to develop a real strategy on how to deal with it.”
Ideally, Sethi said, people should aim to spend no more than 28% of their gross income on their rental expenses. (This includes, he added, utilities, furniture, repairs, etc.)
“If you don’t have debt, you can stretch the number a bit,” he said. In certain expensive cities, Sethi added, “they can spend 30%, 32% or even 35%.”
However, he warned, “Furthermore, you’re putting yourself at serious risk” if you lose your job or face another setback.