When I got my first full-time job, I remember being overwhelmed by a lot of financial questions.
One of the pressing issues was finding an apartment. Specifically, I wanted to know how much rent I could afford to know which neighborhoods and areas were within my budget.
I did a bunch of research and amazingly pretty much every source came to one magic number. Almost every expert said that rent should be no more than 30 percent of your annual income.
Another way the advice was written was like this. Experts said your annual income should be at least 40 times more than the monthly rent. It later dawned on me that both were mathematically equivalent. (If you spend 1/40 of your income per month, then that is 12/40 = 30 percent of your income annually).
Thus, we have the magic rule about rents:
I should mention the rule is a bit stricter in New York city and high rent areas. Landords sometimes require your annual income to be 50 times your monthly rent (or equivalently no more than 24 percent of your annual income), unless you have a guarantor.
To get an idea of this rule, I made a table that shows how much monthly rent is affordable for salaries under $100,000.
This was good enough for me during my first apartment, and I just went along with it. I ended up spending a bit less than 30 percent as I had a couple of great roommates to help keep costs down.
But upon reflection, I was always bothered by how random the advice seemed. I mean, where is this magic number of 30 percent coming from?
I did some research and came across the history behind the rule.
Why 30 percent of income on rent?
The 30 percent figure in fact comes from a government agency, the U.S. Department of Housing and Development.
Here is what their website says about housing affordability:
Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care.
So the short answer is the 30 percent rule of thumb comes from the government guideline on what is affordable.
But we can ask a deeper question: who decided that 30 percent is affordable?
A longer history about the 30 percent rule for rents
A paper released by the U.S. Census Bureau from 2007 goes into the history. There are three paragraphs that give the details about why 30 percent was used as the standard for housing affordability.
The summary is that the 30 percent number came out of a series of government guidelines for establishing eligibility for public housing. If a family needed to spend too much on rent, it was considered “burdened” and could qualify for aid.
The more detailed explanation can be read in the following excerpts from the paper:
The conventional 30 percent of household income … evolved from the United States National Housing Act of 1937 … Income limits rather than maximum rents were established for family eligibility to live in public housing; that is, a tenant’s income could not exceed five to six times the rent.
By 1940, income limits gave way to the maximum rent standard in which rent could not exceed 20 percent of income … the Brooke Amendment (1969) to the 1968 Housing and Urban Development Act, established the rent threshold of 25 percent of family income; that is, a family would be required to pay one-quarter of its income in rent. By 1981, this threshold had been raised to 30 percent, which today remains the rent standard for most rental housing programs.
Because the 30 percent rule was deemed a rule of thumb for the amount of income that a family could spend and still have enough left over for other nondiscretionary spending, it made its way to owner-occupied housing too [such as Fannie Mae and Freddie Mac]
So the standard of 30 percent came out of an old, old rule about affordable housing, which began at 20 percent, and was later increased to 30 percent.
The 30 percent figure is somewhat arbitrary, therefore, and the authors admit there are notable exceptions. Wealthy families may afford more rent without a problem.
Many households whose housing costs exceed 30 percent of their incomes are choosing then to devote larger shares of their incomes to larger, more amenity-laden homes. These households often still have enough income left over to meet their non-housing expenses. For them, the 30 percent ratio is not an indicator of a true housing affordability problem but rather a lifestyle choice.
Still, the paper says the 30 percent guideline is useful for determining aid for lower income levels today just as it was from its inception 40 years ago.
I think the 30 percent guideline is useful as a baseline (or anchor) when you are starting out to find your first apartment or home.
But truly the matter of how much rent you can afford depends on your other expenses. It is important to track your expenses and see how much money is leftover when you account for taxes, daily purchases, and planned savings.
Senior Director, Coldwell Banker New Homes Division
With over 200 condominium, townhome and loft projects successfully marketed
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