If you can’t or are unsure about buying a home, it might be a good idea to rent instead. However, to not go broke, you should first do the math to see if you can afford the monthly payments. Continue reading to find out how much rent you can afford:
When Should You Rent?
Many people consider that renting as opposed to buying a property is a bad financial decision, but there are some advantages in doing so. For example, you can rent a home for as little as six months, and after that period ends, you can go wherever you want. Therefore there is less commitment than buying a house. Another great advantage of renting is that the landlord usually covers the ongoing maintenance costs, so whenever something breaks, you can call the owner and ask them to fix it without worrying about surprise repair costs.
How Much Of Your Salary Should Go to Rent?
There’s a rule of thumb that says that no more than 30% of your salary should go to rent. The other 70% should go to other expenses such as food, savings, and others. For instance, if you earn 1000 dollars per month, your rent should be no more than 300 dollars.
This comes back from the 1930s, with the National Housing Act of 1937, which was a public housing program for people who had low salaries, and therefore had a benchmark for the maximum amount of rent these families should pay.
Another take on it is using the 50/30/20 budgeting rule, in which 50% should go to necessities such as rent, utilities, food, etc., 30% on wants, and the remaining 20% on savings and debt repayment.
Therefore it’s crucial to do a lot of market research to find the home that meets your needs without breaking your budget, instead of renting the first place you see.
What Do You Need Before Renting a Place?
Even though it’s not mandatory, it is better if you have an emergency fund of at least 1000 dollars, but ideally, 3 to 6 months of monthly expenses in a safe investment such as a high-yield savings account, and have little to no debt.
The vast majority of properties will require you to provide a security deposit, which can be one month’s rent or more. However, it cannot be more than three and a half months’ rent, depending on the state you live in.
Tenants might also have to pay certain other fees, like application fees, utility deposits, parking and maintenance fees, renter’s insurance, and in case you have a pet, a pet deposit or monthly charge.
You will be asked to provide certain documents such as an ID document, proof of employment, bank statements, social security number, and references from previous landlords.
It’s important to make sure that your rental contract has the following information: first and foremost, the duration of the contract, then things like end-of-contract obligations, termination clause, rent due date, method of payment, utility bills payments, maintenance and repairs clause, security deposit terms, and others.