Published April 04, 2014
When searching for a place to rent, planning your monthly budget can be challenging. On one hand, you feel obligated to save for a future down payment and mortgage. On the other, you want to spend enough for a good location and enjoyable amenities. The key is finding a balance between spending and saving. Ultimately, you should aim to determine what price point allows you to enjoy an apartment while preparing for a home purchase.
Some experts say you should only spend 33% of gross income, or annual salary divided by 40, on a monthly lease. Using this formula, individuals making $50,000 a year would allot about $1,250 a month maximum for rent.
However, that excludes utilities and accommodations rates, which are two major budget influencers. Further, many renters wisely choose to budget for emergencies and future investments while leasing.
Elle Martinez of the Couple Money blog says she and her husband put themselves on a strict rent cap — no more than 30% of combined net income. They wanted to prepare with savings in case of an emergency.
While the rent affordability calculation generally estimates the amount smart spenders should disburse, every individual situation differs. Take these other factors into consideration before beginning rental pursuits.
Review your must-haves
Wide, open living spaces are aesthetically pleasing, but not always budget-friendly. Larger apartments generally cost more than small rentals, except in cases when prime location acts as a major constituent. Regardless, skip an extra half bath normally designated for guests and instead make it a priority to regularly clean the main bathroom to share. Investing in a multi-bath unit is more important for resale value in a home purchase, not in a temporary rental.
A family of four requires much more space than a single 20-something. Although a rental isn’t a permanent living option, it should have enough space for you and your family to feel comfortable.
Room for family, safe surroundings and a well-maintained property are the most important must-haves on the rental checklist of personal finance writer Jason Cabler. Moral of the story: don’t downsize to the point of climbing on top of each other or put yourself in harm’s way just to save money on rent.
Financial author Scott Bilker of Debt Smart says he heavily weighed management friendliness when looking for an apartment. A respectable property manager is going to contribute to your overall renting satisfaction, so make sure to read reviews online before making a commitment. A highly accommodating and well-trained staff might be the reason behind price differences in two comparable properties.
Factor in travel time
Location is an essential consideration when shopping around for apartments. For individuals who work full time, a loft closer to the office may be more convenient than a remote cabin. Living closer to work cuts down on commute time and associated travel costs. Bus fees and gas stipends can add up quickly; paying extra now to live close to your job may save you money down the road.
Frugal guru Tracie Fobes stresses the importance of renting close to work when a good chunk of the day is spent at the office.
“Location was key for me. I had to be in close proximity to work and the area where I spent most of my time,” says the mother of three.
Those with small children should check out GreatSchools ratings in prospective neighborhoods before deciding on a property. Spending more to rent in a prime location with top-rated public schools may be less expensive than sending the kids to private academies.
Assess lifestyle needs
Add up your current monthly expenses before budgeting for a rental. Avid exercisers may spend as much as $100 per month on gym memberships. An apartment building equipped with a gym cuts the need for an outside membership, and the convenient location may act as motivation to stick to a health routine.
“It’s important to take into consideration all of the amenities that the property offers,” said Kayla Albert of The Dime Colorado blog. “My current rental came with free parking and a gym — both things I would have shelled out extra for somewhere else, so the slightly higher rent was worth it in the long run.”
Calculate outside expenses that disappear once you move into a new home before deeming a property too expensive. At the same time, don’t begin paying for needless amenities.
Wealth advisor Robert Pagliarini warns against the potential of falling into a rut with a rental property. An expensive unit may be a bit too comfortable and keep you longer than necessary. Simultaneously, you end up spending more each month instead of contributing toward a future home purchase. Opt for a little less renting extravagance to ensure a financially stable future.
Consider utility estimates
Heat, gas, electric, air conditioning, internet and cable are often forgotten about when lessees initially plan out their monthly living expenses. Depending on your location and standard of living, you may blast A/C constantly during the summer or leave your lights on all through the night. While not recommended habits to adopt, factor overindulgences into your budget if you find yourself using more electricity or heat than most people.
It is possible to lower your utility expenses to fit a budget. Personal finance blogger Len Penzo says he spent 6.5% of his monthly take home toward utilities in 2013. Renters can cut back by splitting internet with a neighbor or investing in high-efficiency appliances that require less electricity.
According to financial coach Deacon Hayes, renter’s insurance should also be factored into utility fees. Some buildings might require their tenants to protect their belongings, so keep that in mind when considering the complete budget.
Allocate for investments
Most renters plan to eventually own property so their monthly payments can fund investments rather than leases. Unfortunately, without cash flow or financing for a down payment, purchasing property isn’t probable. While renters may feel they are wasting their money by leasing, they can still save a portion of their monthly paycheck to contribute to their future home.
Once you have the funds for a down payment, buying is the foreseeable next step. Finance blogger Lindsay Meredith quickly realized how her paycheck could be better distributed.
“By the time I left my rental, I was spending $1,157 on my monthly rent. This is part of what pushed me to buy. I knew I could be spending a similar amount of money on a mortgage payment and be building equity,” said the financially-focused high school teacher.
Keep in mind extra savings allotments may take away from how much you can spend on monthly rent. Saving for a down payment might force you to relinquish additional luxuries, but is worth the sacrifice down the line.
These aforementioned factors aren’t the only things to take into consideration. Property details and lease agreements may have a significant impact on monthly rent costs. For instance, short-term leases are often more expensive, but sometimes recommended.
Personal finance blogger Kevin McKee says, “After a few months you’ll find five to 10 things about your new home that you hate, and you probably never thought to look for them before. Your second rental home will be much better.”
Still can’t decide what factors are most important to help budget for a rental property? The experts over at CoverHound give a few pieces of advice for simplified prioritization.
“There are many things to check for before you move into a new place. Being very thorough when scouting a rental property will always be to your advantage, so you don’t end up in a sketchy situation,” states the insurance comparison platform.
Your best bet is to research methodically before deciding on a budget. Make a list of things that have negatively impacted your past living situations and what would have helped to improve them before setting an absolute price point.
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