Renting an apartment begins with delving into one’s own finances, so a prospective renter knows exactly how much rent they can afford.
Renting an apartment begins with delving into one’s own finances, so a prospective renter knows exactly how much rent they can afford. Keep reading to see several rules of thumb that can make the calculations easier.
The experts at Investopedia provide one of the most basic rules when getting started. Begin with your gross annual income (GAI). If self-employed, working multiple part-time jobs, or in school, you will have to estimate your gross annual income (generally by taking an average of the past three years’ GAI as reported on federal income taxes).
If you know a better-paying position is part of the reason for seeking a new apartment, the calculation should be made with the new job’s GAI.
You can then calculate 30 percent of this GAI as an initial high-rent threshold, but more work remains. For example, if an accountant is anticipating a GAI of $75,000, they can take 30 percent of $75,000 ($22,500) and divide that by 12 to get a monthly payment of $1,875.
The GAI is not a trivial number. Landlords expect potential renters to show proof of income and will apply the “40x rule”: Whatever the rent is, GAI should be approximately 40 times greater. For the accountant, a landlord looks at a GAI of $75,000 and divides by 40, which calculates to $1,875.
The remaining 70 percent of GAI is allocated by the prospective renter, based on estimates and experience. Categories that should be considered include:
Adding up all monthly expenses, subtract this total from take-home pay (actual or expected). The difference represents money available for rent.
You may struggle at this point to squeeze all of the categorical expenses out of the available 70 percent of GAI. A temptation exists to revise estimates downward, giving an unrealistically low total that now fits into the available funds.
A wiser strategy is to face the reality that many expenses a renter views as necessities are, in fact, luxuries that can be cut to afford your ideal home.