What Percentage of Expenses should go to Rent?

How to avoid signing your life over to a mortgage
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AugustPlace
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What Percentage of Expenses should go to Rent?

Post by AugustPlace » Thu Sep 22, 2016 6:38 pm

Something I'm curious about, especially for those who have already retired. Out of your monthly expenses, what percent goes to housing/rent?

I have heard a rule of thumb that one third of income for working people should go to rent/mortgage. I expect most of my coworkers are paying at least half of income to rent, here in upstate New York. I'm currently living rent-free in a house that is for sale, but soon I'll have to move. The one bedroom apartments I looked at are in the 900-1200 range, which seems crazy high to me. As I'm saving a large chunk of my paychecks, that is near my total monthly budget.

Of course this will vary by location and there are more creative/social options than an a 1br apartment. Just wondering what % people are currently paying.

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Re: What Percentage of Expenses should go to Rent?

Post by jacob » Thu Sep 22, 2016 6:58 pm

You're asking the question based on middle-class/salary-man income metrics. That gauge is appropriate when working the next 30 years to pay a mortgage. It's what banks like to see. However, for a wealth-perspective or ERE, the appropriate metric is asset-based rather than income-based. Specifically, the rule of thumb is that the value of your home (regardless of whether you're renting or owning) should generally be less than 15% of your NW. If it's higher, you're living too rich compared to what you're worth.

Of potentially related interest: The corresponding metric for transportation is that if you can't write a check for the value of your vehicle/bicycle/shoes right now, you're "driving" or "walking" something that you can't afford. I stole this from @Dragline.

PS: I note that most won't measure up to the ERE/Wealth standards outright. Instead, consider it a goal. If you're there or trying to get there, you'll be wealthy. If not, well ...

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Demosthenes
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Re: What Percentage of Expenses should go to Rent?

Post by Demosthenes » Thu Sep 22, 2016 8:22 pm

the rule of thumb is that the value of your home (regardless of whether you're renting or owning) should generally be less than 15% of your NW. If it's higher, you're living too rich compared to what you're worth.
Wow... I would have to quadruple my target net worth before I'm under that threshold to "afford" to live in my house. What's the logic behind this?

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Re: What Percentage of Expenses should go to Rent?

Post by jacob » Thu Sep 22, 2016 8:49 pm

@D - That if you want to be wealthy(*) only a small part, i.e. <15%, of your NW should be directed towards sunk (permanently and personally wasted) consumption costs. After all, the running cost of your roof and central heating comforts are instantly lost.

I don't think that very many people on this forum will actually meet this 15%NW criteria before they're wealthy already i.e. they've been saving 75% for 10 years or something like that. Those who do choose to meet it from the get-go will likely be in a runaway-scenario and end up with more money than they can ever spend. That's another problem entirely.

This is what I did. I currently have 120 years of expenses saved or a 0.8% SWR. I have a huge degree of freedom(*) when it comes to what I have to spend vs what I can spend. I can pretty much do what I want now, whereas the 30% mortgage rule is dialed in to make the average person die with effectively nothing to their name and keep them locked-in, like a "salaray-man".

Either way is fine, but it's also a choice: 15% of assets => wealthy. 30% of income => not wealthy. The former does require much more effort.

(*) Here, wealthy=freedom of financial movement.

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Re: What Percentage of Expenses should go to Rent?

Post by sky » Thu Sep 22, 2016 9:08 pm

In the accumulation phase, 50% of income is a target for savings, leaving 50% for expenses. Ideally, less than half of your expenses should go to housing.

So based on this rough, rule of thumb guesstimate, 25% of income is the maximum for housing expenses.

AugustPlace
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Re: What Percentage of Expenses should go to Rent?

Post by AugustPlace » Fri Sep 23, 2016 6:42 am

jacob wrote:Specifically, the rule of thumb is that the value of your home (regardless of whether you're renting or owning) should generally be less than 15% of your NW.
Hypothetical example: Retired single man with 400,000 net worth. Value of home should be 15% or 60,000.
Assuming price-to-rent ratio of 20, a 60K property would cost 3000 to rent for a year, or $250 per month rent.
Is that about right?

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Dragline
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Re: What Percentage of Expenses should go to Rent?

Post by Dragline » Fri Sep 23, 2016 8:01 am

Could be. But you need to realize that this question is like "how much time should I spend on personal hygiene"?

The answer in a vacuum is always "as little as possible". The answer in your real life depends more on what else you are doing, where you need to be, and so on and so forth. I would not put a percentage on it, but consider it more as a necessary evil to be minimized.

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Re: What Percentage of Expenses should go to Rent?

Post by henrik » Fri Sep 23, 2016 1:37 pm

If I were to rent my apartment, it would be about 20% of my after tax monthly pay or about 28% of my currently necessary expenses (including that hypothetical rent).

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Re: What Percentage of Expenses should go to Rent?

Post by sky » Fri Sep 23, 2016 2:55 pm

With 400k net worth, you could draw down between 3% and 4% as income, so income could be between 12k and 16k. At a rental rate of 25% of income, annual rent is between 3,000 and 4,000. At a rental rate of 50% of income, annual rate is between 6,000 and 8,000.

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Ego
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Re: What Percentage of Expenses should go to Rent?

Post by Ego » Fri Sep 23, 2016 3:07 pm

sky wrote: At a rental rate of 25% of income, annual rent is between 3,000 and 4,000.
Those prices are not uncommon in much of the world. Creative solutions are there for the finding.

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Re: What Percentage of Expenses should go to Rent?

Post by 7Wannabe5 » Sat Sep 24, 2016 10:10 am

I purchased my camper for $850 and the 2/10ths of an acre upon which it is parked for $400. My taxes on that property are currently around $15/month. My current transportation system bicycle/sturdy-cargo-trailer/lovely-woven-basket was gifted to me, but I could easily replace for $300. So, as soon as I get organized/gutsy enough to actually start living in my camper rather than the apartment I share with my sister, I would meet the criteria suggested by Jacob even if my net worth was only around $9000 and my liquid funds were only around $500. However, prior to occupying the camper, I am going to come up with a plan to mitigate the risks involved by coming up with at least a 5 option web-back-up which will somewhat raise my overall monthly costs. For example:

5 Options for total Monthly Shelter Expense Less than $100.

1) Live in camper on permaculture plot in cold climate: monthly expense = $15 property taxes + propane or other source heat + $10 maintenance/improvement of camper
2) Tent camp in warmer climate during 1.5 winter months: =$100 to transport self/bike/tent to warmer climate and $100 to cover occasional need to pay for campsite.
3) Move camper to other vacant lot I currently own if necessary = additional $15/month property taxes plus towing expense $50.
4) Buy third vacant lot at auction to which I could also move camper which would be located in different political district= $500 purchase plus another $15/month property taxes.
5) Stay with BF or mother for a couple weeks if hassled about living in camper- $0- minor social capital withdrawal
6) Maintain couch-surfing postal-delivery privileges at current shared apartment, but sublet or airbnb my room =$0-$50/month plus some hassle.
7) Designate room in apartment as primarily business rather than personal space, but crash there when necessary, and increase business activity to justify such an expense. (? bookkeeping detail)
8) Register as urban camping hostess and use accumulated proceeds to cover possible need for more expensive emergent need for temporary housing.

So, given that I also plan on covering increasingly greater proportion of my food expense with my homestead, so the $15/month isn't even totally going towards housing expense, I think if I did 3 or 4 of the above and came up with another 2 non-related creative ideas, then my overall risk of finding myself "homeless" would be pretty low and my total expense would be around $2000 investment and an average of $80 in net monthly expenses.

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Re: What Percentage of Expenses should go to Rent?

Post by sky » Sat Sep 24, 2016 10:43 am

Those are eight options.

LarryW
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Re: What Percentage of Expenses should go to Rent?

Post by LarryW » Sat Sep 24, 2016 11:07 am

Dragline wrote:The answer in a vacuum is always "as little as possible". The answer in your real life depends more on what else you are doing, where you need to be, and so on and so forth. I would not put a percentage on it, but consider it more as a necessary evil to be minimized.
Couldn't agree more. Right now I'm spending about 60% of my budget on rent. I only spend this much because my job is in a very expensive area, and I insist upon living alone in a decent neighborhood.

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Re: What Percentage of Expenses should go to Rent?

Post by Sclass » Sat Sep 24, 2016 11:25 am

Dragline wrote:Could be. But you need to realize that this question is like "how much time should I spend on personal hygiene"?

The answer in a vacuum is always "as little as possible". The answer in your real life depends more on what else you are doing, where you need to be, and so on and so forth. I would not put a percentage on it, but consider it more as a necessary evil to be minimized.
Wise. The less the better.

While getting interviewed by landlords last year it seemed they wanted to see 1/3 of my income going to their rent payment.

One simply said just because I could buy her house didn't mean I could make rent. By her formula I guess she's right. It was like a $700k house, 4% of that would be $28,000. A third of that going to rent would be $780 a month which indeed wouldn't make her rent by a longshot.

That indicates I should have bought her house. I guess.

I checked the place out on Zillow and she was underwater. What to do what to do...,

I stopped by last week while going to garage sales. New paint, grass and outdoor lights. Looks like she's doing well.

7Wannabe5
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Re: What Percentage of Expenses should go to Rent?

Post by 7Wannabe5 » Sat Sep 24, 2016 12:09 pm

sky said: Those are eight options.
Right, but 6 and 7 are mutually exclusive, 4 is not immediately implementable, 5,6 and 8 are all reliant on my social skills, and 7 would require adherence to similar rule of thumb for rental expense as percentage of business revenue unless it was just a bit of a cheat. Therefore, it would be my preference to brainstorm a few more options while implementing a few of the more appealing choices I listed. Also, I should back-web multiple solutions to the unique problems each primary solution might pose. For instance, I might worry a bit about the clientele that would be likely to want to pay to crash in my room in my locale.

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Re: What Percentage of Expenses should go to Rent?

Post by Ricky » Sun Sep 25, 2016 9:20 am

Dragline wrote:Could be. But you need to realize that this question is like "how much time should I spend on personal hygiene"?

The answer in a vacuum is always "as little as possible". The answer in your real life depends more on what else you are doing, where you need to be, and so on and so forth. I would not put a percentage on it, but consider it more as a necessary evil to be minimized.
True, but at the same time, don't let this mentality become a crutch that keeps you stagnating.

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Dragline
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Re: What Percentage of Expenses should go to Rent?

Post by Dragline » Sun Sep 25, 2016 9:29 am

Que? Why would NOT spending money/resources on something become a cause of stagnation when it frees up those resources to be allocated to other aspects of life? You stagnate when you reduce your options and move forward to other possibilities when you increase them.

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Re: What Percentage of Expenses should go to Rent?

Post by denise » Tue Oct 25, 2016 6:20 am

I agree, as little as possible. I'm looking into this as well. So far, I pay almost 20% of my income to rent, but, I'm trying to find a job where my family lives, so I can live with my mom and save money to buy a house near downtown, then probably rent that out while still saving, and after I achieve ERE.

Currently I live about 150 miles away, in my own apartment near downtown, 4 blocks from my job. The good thing about where my mom lives is the jobs there pay higher in my field, and I would also be saving around 70% of my income. The only downside is the commute would be crappy, about an hour, even if I take the subway, versus 45 seconds where I am now.

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Re: What Percentage of Expenses should go to Rent?

Post by RusBR » Tue Dec 13, 2016 7:35 am

Yes, there is a rule that rent generally should not be more than 25% of your gross monthly salary. And some landlords require that from their renters.
I should say that it’s better to follow this rule. One time I have the situation when I spent approximately 40% on my rent. And everything was alright.

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