How much should your rent be?

A. Historically, experts suggest spending 30 percent of your income on rent. However, this is just an arbitrary number and may vary as per the tenants situation.

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Before you even start perusing the rental listings, it is imperative to calculate the amount of rent you can afford, keeping your current income in mind. If you are not aware of your financial liabilities, you may end up overshooting the limit. For those looking for a new place, but not sure about how much they should be spending on rent, here are some tips for calculating your rental affordability.

Analyse your circumstances

To begin with, examine your current living situation and subsequent requirements. In case you plan to live by yourself, a 1 BHK/RK residential unit would suffice; however, if you plan to stay with your family members, a bigger apartment would be required to cater to various needs, thus garnering higher rent.

Calculate your financial limits

Assess your annual income, including your gross salary, bonus, dividends, or other means of income. Many landlords look for tenants whose monthly take-home income is at least three times the monthly rent. Using this calculation, if you are planning to share an apartment with a roommate, half of your income must be three times your share of the rent. While experts recommend spending no more than 30 percent of your income on rent as a thumb rule, this is just an arbitrary number because every tenant’s situation is different.

Estimate utilities

In addition to paying the rent, you will also need to pay for utilities, which will depend on a number of factors. Experts advise prospective tenants to estimate their expenses for utilities, such as:

Water bills (usually paid monthly)

Gas and electricity bills (usually paid monthly)

Apartment maintenance charges (paid monthly or quarterly)

Overheads outside of essentials, such as your cell phone bill, car loan repayment, or auto insurance premiums, must also be taken into account. You will also have to pay for basic needs like clothing, groceries, and toiletries. Do not forget to factor in the cost of non-essentials that you would not want to give up. This may include:

TV cable bill (paid monthly or annually)

Landline phone bill (plus any connection charges)

Broadband bill (paid monthly or quarterly)

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Calculate monthly rent

Note down a detailed breakdown of the expenses mentioned above against your income. Subsequently, experts suggest using a 50/20/30 method to calculate your rental affordability. This suggests spending your income in the following ratio:

50 percent on fixed costs (such as rent, utilities, and transportation)

30 percent on day-to-day expenses (such as entertainment, dining out, shopping, etc)

20 percent on financial goals (like loan-repayment, emergency saving, and insurance premium)

“Once you subtract proportionate utilities, transportation, day-to-day expenses, and financial liabilities from the proportionate fixed cost, you will know what is left for you to spend on rent,” explains Prashant Nath from PropertYes De Emirates.

Do not forget about one-time expenses

“Many tenants work with a real estate agent to find an apartment. Agents typically charge 10-15 percent of the entire year’s lease,” avers Nath. Though it is a one-time expenditure usually paid at the time of signing the lease agreement, you must be prepared to adjust your financials accordingly. Additionally, landlords often ask for a security deposit, which is typically equivalent to one month’s rent. While this amount will be refunded to you at the time of termination of your tenancy agreement, you would still need to have the amount ready beforehand. You will also need to ensure that you can afford to pay the costs of moving into the property or the premium for moving insurance (if availed). If you are moving into an unfurnished place, do not forget to include the cost of furniture and soft furnishings, such as curtains, in your first month’s budget. Once you know this amount, you can start figuring out how to gather such funds so that all such payments can be made in a timely manner. A due diligence of your economic position in terms of the apartment you are looking for is indispensable. It will save you from many financial challenges in the future as you will be ready for the expenses which may arise.

99acres.com - Tips to calculate your rental affordability - 99acres.com

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