1. Budget 30% for rent
Conventional wisdom suggests that renters should never spend more than 30% of their monthly gross income (i.e. pre-tax) on rent and utilities.
While this figure may sound arbitrary, it actually stems from the 1969 Brooke Amendment, which capped public housing rent to 25% of a tenant’s income. By 1981, the limit was raised to 30%, which remains in effect to this day.
The Department of Housing and Urban Development asserts that any household spending more than 30% of its income on housing costs is “cost burdened.”
In other words, individuals and families who spend 30% of their income on rent jeopardize their ability to pay their bills, to build an emergency fund, to pay down debts, and to save for retirement.
After all, rent is a recurring cost — and the most expensive one at that. By capping your rental budget at 30% of your gross income, you’ll help defend your short and long-term financial health.
2. Start saving for fees
Apartments almost always cost more than their list price.
Depending on where you rent you’ll likely encounter application fees, broker fees, and of course, the demands of a one-month security deposit.
In New York City, most broker’s fees range between 10 to 15% of the annual lease amount.
For example, let’s say a consumer with a gross annual income of $60,000 finds an apartment at $1,500 a month (right at the 30% limit). A 15% broker fee would require an additional sum of $2,700 at the start of the lease.
That’s almost worth two months of rent!
In order to get the keys to the apartment, the renter would therefore pay approximately $5,700 up front (not including application fees).
Fortunately, broker fees aren’t a factor in every American city. And if you’re shopping in places like New York, they can be avoided through popular sites like StreetEasy.
However you decide to proceed, be sure to save enough money to cover all of the expected (and unexpected) costs that accompany renting.
3. Rent in the winter (and window-shop in the summer)
In early 2021, rent prices plummeted across America.
By the end of the year, however, rent prices skyrocketed, jumping an average of 11.6% for one-bedrooms (and an average of 13.6% for two-bedroom units).
While percentages and prices are constantly changing, one factor remains true every year:
the winter months are typically the best time to start a new lease.
While you might have a wider selection when shopping in the summer, studies show that apartment turnover rates consistently favor consumers from October to April.
In fact, apartment rental rates are at their lowest between the months of December and February, costing nearly 4% less than they would in June and July.
Consider capitalizing on the cold to get a great deal on your next apartment.
4. Consider a longer lease (and prepare to negotiate)
Landlords love guarantees.
During the height of COVID-19, nearly 20% of American renters fell behind on their monthly payments.
Because landlords love guarantees, many of them will consider issuing extended leases for lower monthly costs.
According to Allia Mohamed, CEO of openigloo (a New York housing startup),
“Landlords are in a position in a lot of places where they want to secure that rent payment every month. If you’re in a position in your life where you can commit to an apartment for two years, definitely use that as a negotiation tool.”
This is great news for renters.
According to the Brookings Institute, while they may lose the short-term flexibility that makes renting appealing, consumers with extended leases will gain:
- A more stable living situation
- Less expensive housing
- Insurance against rising market rents (and annual increases)
- Increased savings from eliminating more frequent moves
Extended leases can be a win-win for renters and landlords alike.
5. Build and protect your credit
Interested in improving your credit? Renting an apartment could provide a pathway to do if you consistently pay your rent on time.
While you can’t report your rent payments yourself, you can ask your landlord to report your monthly rent payments to a third-party platform for reporting to the major credit bureaus (Equifax, Experian, and TransUnion), though there is often a fee.
This could be a way to steadily build your credit if you make your rent payments on time, although your score may initially decrease because the rental payments will be branded as a new loan simply because it’s now being reported.
In fact, a recent TransUnion study found that consumers with no credit score achieved an average FICO® score of 635 by reporting their rental payments on time.
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