To find out how much rent a rental tenant can afford, the “Rule of 1/3” is often used. The rule of 1/3 is a formula used to make sure the price of monthly rent is affordable for the tenant. Typically, landlords don’t want to see tenants spending more than 1/3 of their monthly income on rent. Staying at 33% or less of income towards housing is a typical recommendation for sound personal financial management. By being within that range, landlords feel safe and secure that tenants will be able to make their monthly payments. The tenant can pay their rent, yet still have enough income left over to actually live their life and not be in a huge money crunch each month, when time comes to pay the rent.
To convert this to a simple “rule” we can see that 33% of your monthly income is just another way of taking your annual income and dividing by 36 to come up with a monthly affordable rent.
The Rule of 1/3
- If the monthly rent of an apartment is $2,000, then 3 times the monthly rent is $2000 x 3 = $6000 (monthly income required to keep housing payments less than 1/3 of income)
- $6000 x 12 months = $72,000 (annual income required to keep housing payments under 1/3 of income)
Backtracking with the annual income and monthly rent from above, you can see $72,000 / $2,000 = 36
Hence the Rule of 36!
The “Rule of 36” can also be used to quickly find how much rent you can afford monthly. All you need to do is take your annual income (and that of your roommates), and divide it by 36 to come up with your Monthly Affordable Rent! Simple!
The Rule of 36
- As an example, if you make $100,000 per year then divide that by 36 to get $100,000 / 36 = $2777 in monthly rent that you can afford.
- If you have roommates, just add up your incomes and use the total for your combined income, then divide by 36.
Have you done your math, know how much you can afford and are ready to start searching?