The rent-to-income ratio is a metric that compares how much a household earns to the cost of renting a particular apartment or home. In most cases, it’s expressed as a percentage, showing what percent of a person’s income goes towards rent.
As a general rule, you want to spend less than 30% of your income on rent. Any more than that, and you qualify as rent-burdened – at that point, it can become hard to cover all of your expenses any given month.
Both landlords and tenants can use rent-to-income ratios for various purposes. Usually, landlords calculate them when deciding whether to let an applicant rent an apartment or house. Renters could use the calculation to determine how much rent they can reasonably afford or if what they’re paying in their current place is reasonable.
However, a rent-to-income ratio only tells part of the story. It doesn’t account for a tenant’s debt burden or the average amount they spend in other cost categories. Instead, it only compares rent rates to gross monthly income levels and nothing more.
As a result, rent-to-income ratios are usually one factor in a broader equation. For example, a landlord may review the metric along with credit scores and reports, giving them a better picture of overall affordability based on other tenant data.
Calculating a Rent-to-Income Ratio
Calculating a rent-to-income ratio is simple. All you need to do is take the monthly rent amount and divide it by monthly gross income. Then, you multiple that result by 100 to get the percentage, as such:
([monthly rent] / [monthly income]) * 100 = debt-to-income ratio
For example, if you’re household earned $5,000 per month in income and you were looking to rent an apartment that cost $1,200 per month, the debt-to-income ratio would be:
($1,200/ $5,000) * 100 = 24%
You can also use rent-to-income percentages to estimate how much rent a person could afford based on their income. By multiplying the monthly income by a target percentage (expressed as a decimal), you get the monthly rent payment amount, as such:
[monthly gross income] * [target percentage expressed as a decimal] = [monthly rent]
For example, if a person with $3,500 in gross monthly income wanted to limit the amount they spend on rent to 25% of gross income, the calculation would be:
$3,500 * .25 = $875
It’s important to note that all income sources should be factored into the equation, not just money earned from traditional employment. That way, it’s a comprehensive picture of a tenant’s financial potential and not just part of it.
Additionally, it’s critical to understand laws regarding income discrimination do vary. Some states have laws that apply across all jurisdictions that ban the practice. Other areas may not have state laws but are covered by local ordinances. Some areas have no regulations at all.
Both tenants and landlords should review income discrimination-related laws in their area. That way, landlords can follow the requirements, and tenants know what to expect.
Why Rent-to-Income Ratios Matter
As mentioned above, rent-to-income ratios are used to assess affordability. It lets both landlords and tenants know how much of the tenant’s gross monthly income would be covering their housing costs.
Rent-to-income ratios matter for both landlords and tenants. Landlords can use it as a quick way to assess whether a tenant can reasonably afford the rental. As a result, most do include it in the applicant assessment process.
For tenants, rent-to-income ratios matter for two reasons. First, there’s a high likelihood that a prospective landlord will check it when reviewing a rental application. It’s a standard metric to assess affordability. Since landlords want to ensure that incoming tenants can afford the rent, they’ll factor the rent-to-income ratio into the process.
Second, it helps tenants determine whether they’re directing too much of their income toward housing expenses. In most cases, rent is one of the largest line items in a tenant’s budget. Additionally, it’s a long-term obligation, lasting several months, a year, or more depending on the length of the lease. As a result, a high rent-to-income ratio can be incredibly limiting for extended periods, potentially leading to financial hardship.
Common Guidance on Rent-to-Income Ratios
One of the most widespread guidelines is that rent and utilities combined shouldn’t exceed 30% of the household’s adjusted gross income. That number actually aligns with standards set by the Department of Housing and Urban Development (HUD) in regards to its programs. By staying within that amount, the likelihood that the tenants will struggle to pay rent is significantly lower.
When a tenant dedicates more than 30% of their gross monthly income toward housing costs, they’re considered “rent-burdened” and are more likely to have trouble paying rent and handling living expenses with their available funds. Those who spend over 50% of their gross monthly income are “severely rent-burdened” and have an incredibly high likelihood of not being able to cover rent and living expenses with the income they have available.
However, not all landlords use that specific metric when assessing tenants. Instead, they go with a different approach, requiring prospective tenants to provide proof that their income is at least three times the monthly rent.
The principle behind the three-times-rent approach is very similar. If the tenant meets the requirement – which means their rent-to-income ratio would be no higher than 33% before utilities – there’s a good chance that the rental is reasonably affordable.
Is a 30% Rent-to-Income Ratio a Good Indicator of Affordability?
Some argue that the 30% figure isn’t genuinely a mark of affordability for several reasons. One of the biggest is that it doesn’t take into account differences in income levels.
For low-income households, even 30% could be incredibly burdensome, making it hard to handle basics like food and transportation. However, many high-income households could safely exceed that amount and still have plenty of money to live.
Another reason why the approach might be flawed is that it doesn’t account for a household’s expenses. Incredibly frugal lower-income households may be able to spend more than 30% on housing without an issue, while a high-expense, high-debt, higher-income household may find 30% hard to shoulder.
You can’t genuinely assess affordability based on a single figure alone. Instead, a more holistic picture is usually best.
However, as mentioned above, many landlords draw a line by requesting proof of income showing at least three times the monthly rent, particularly in areas with higher costs of living. In a higher-cost city, exceeding the 33% of income mark may not be possible regardless of the tenant’s broader financial situation. As a result, getting far beyond 30% may not be possible.
Does It Ever Make Sense for Rent to Exceed 30% of Income?
There are situations where rent exceeding 30% of income could make sense. It may come down to the state of a tenant’s budget, income, and expenses, as well as their priorities.
For some tenants, having a nice home is what matters most to them. As a result, they’re willing to keep other costs down to ensure they have the house or apartment of their dreams. Essentially, they view their home as being more critical, so exceeding the 30% mark doesn’t necessarily put them at risk because they’re frugal in other areas.
Similarly, higher-income households may be able to exceed the 30% threshold and still cover all of their expenses. If a household earns $100,000 per year, that works out to around $8,333 per month pre-tax. Even if half of that went to rent, they’d still have thousands of dollars to handle other expenses, which could be enough to live comfortably depending on their debt load and overall budget.
However, in any case, going above 30% can be risky. Since housing costs are primarily fixed expenses, you can’t reduce your rent if you experience a sudden financial hardship. That’s one of the big reasons to keep this expense down. A lower rent-to-income ratio could make it easier to navigate the unexpected, ensuring tenants aren’t strained by the cost of their housing.
