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There is often a gap between theory and practice, what we should do and what we actually do. But when it comes to the long-held advice for renters to spend no more than 30% of their income on housing, it’s increasingly impossible to even try to meet the goal, experts say.
“The old 30% guideline is just unrealistic these days,” says Marc Hummel, a licensed real estate salesperson at Douglas Elliman in New York.
More often, Hummel said, renters spend 40% of their income, or more, on housing. “With vacancy rates at historic lows and rents among the highest ever, it’s becoming increasingly difficult to spend less,” he said.
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Indeed, nearly 15 million renter households in the US are considered cost-taxed, meaning they spend more than 30% of their income on rent and utilities. In some cities, the situation is particularly dire. In New York, for example, a household with the area’s median income would have to pay nearly 69% of their income to rent the mid-priced apartment, according to Moody’s Analytics.
There are big consequences of taking on a rent that eats up too much of your income, Hummel said. “Spending more on rent means less money for savings, retirement, family goals and less to pay other debts,” he said.
Housing is the biggest financial area where people get trapped, according to personal finance blogger and author Ramit Sethi. “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 used to be advised to spend even less than 30% on housing, says 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 to rent, Aurand said.
“That rate grew out of the Depression of the 1930s, when a general rule of thumb was ‘a week’s wages for a month’s rent,’” he said.
In practice, there are several factors that should determine the right proportion for a household to spend on their housing, Aurand said. For example, a married couple with no children may spend more on their rent than another married couple with the same income who do have children.
An easy way to gauge whether your housing costs are affordable, Aurand said, is to calculate how much of your income will be left over to cover your other bills once your rent is paid.
“After paying for their housing, does the household have enough income to pay for their non-household expenses?” he said. “If not, they’re considered cost-taxed.”
30% no hard and fast rule
Tenants shouldn’t view the 30% guideline as a hard and fast rule, says Allia Mohamed, co-founder and CEO of Openigloo, which allows tenants to rate buildings and landlords in the US
“Every tenant is different,” said Mohamed.
High-income renters, for example, would often have to spend below that threshold, she said. “Just because you make $300,000 a year doesn’t mean you should rent an apartment for $7,500 just because you can,” she said.
Meanwhile, a lower-income tenant may be able to spend more than 30% of their income on housing if they don’t have other major recurring expenses, such as loan payments, Mohamed said.
She advises renters to make a detailed budget of their monthly expenses, as well as to include what they would like to set aside for savings and/or investments. This way they can determine how much remains for housing costs.
‘We can’t throw our hands in the air’
Too many people, especially in expensive cities, decide that finding affordable rent is unrealistic and end up spending way too much, Sethi said.
“We cannot raise our hands at all costs,” he said. “We need to develop a real strategy to deal with it.”
Ideally, Sethi said, people should aim to spend no more than 28% of their gross income on their rental costs. (These include, 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 might spend 30%, 32%, even 35%.”
However, he cautioned, “In addition, you are exposing yourself to serious risks” in case you lose your job or experience some other setback.