Housing affordability surveys are largely based on the assumption that no person in the US should spend more than 30% of their income on rent. Every year a lot of doom and gloom reports come out saying that housing is becoming increasingly unaffordable as more and more renters pay up to 50% of their income to their landlord. I'm not here to debate whether or not the rising rent rates are a good thing or bad thing. At this point they are unavoidable. There will probably come a time when you as a renter will have to decide whether you're willing to exceed that 30% limit. When that time comes, here are a few things to consider.
The 30% benchmark is an 80 year old arbitrary figure.
30% was a number set by the architects of the New Deal after the Great Depression of the 1930s. It was used to determine how much government support would be given to people who needed help with housing. Since then experts and government agencies have latched onto it as a set-in-stone number not to be exceeded for any reason.
30% is a suggestion. You need to do your own math.
It's your own responsibility to figure out how much you can really afford to pay in rent. For some of you it might be more than others. You need to look at your own current situation and decide what's best. A lot of financial planning sites will tell you to split your costs between the things you need and the things you want. I would say there's actually needs, wants and shoulds.
When you're making enough money to be comfortable, the shoulds become needs. When you're not earning enough to make ends meet the shoulds become wants.
You know that there are some things that you have to pay for in addition to your rent. Transportation. Food. Clothing. Child care. Pet care. Alimony. Student Loans. Taxes. Utility bills – heat, power, cell phone, internet. In some parts of the country those utility bills also include water and trash pickup.
However, you have some amount of control over a few of these costs. You can choose to use public transit, or own a car, or take Uber everywhere. If you take public transit you can even choose whether or not to take the bus home from the train or just walk. Clothing can be purchased on Michigan Ave or at the thrift shop. You may not have kids. You can go without cable. You can order take-out and go out to fancy restaurants all the time. You can buy name brand or store brand food at the grocery store. You can cook for yourself and grow your own vegetables. You can choose to adopt a pet or go without.
Don't forget all those things you want to spend money on. No matter how tightly you restrict your budget, they will always be there tempting you. America is the land of advertising – new to buy with disposable income are being shoved in your face every day. The propaganda techniques used by modern marketers draw on human psychological research to methodically break down resistance to buying things.
It's easy for income to suddenly get spent on wants instead of needs. You tell yourself you need a new phone when your old one is fine. Your friend is getting married and you decide to get them a nice blender instead of the potholders. It's a good idea to allow yourself some wiggle room to indulge now and then – see a movie, go out to dinner, take a vacation.
You all probably know at least one person that does everything they should. They always listen to their shoulder angel. You know the type – they exercise, they only eat good food, they read books and write to their politicians and only feed organic food to their children. You might like them, you might hate them, you might aspire to be them.
When it comes to making your own budget, there's many things that you know you should be setting aside money for. It's up to you whether or not you do, of course. Your choice to spend money on the shoulds or skip them is really the biggest gamble of all when it comes to living with a low income.
The big shoulds that everyone knows about are healthcare, insurance and retirement. You know that there will probably be a point in your life when you need all three, even if you don't need them right now.
You cannot go into a year long lease expecting that your income will get any bigger than what it currently is. Raises and new jobs may happen, but they are never a sure thing. Layoffs and terminations are common, so you might even need to plan for losing your source of income for a while. Is your company on the rocks? How about your partner? Are you sure they'll still have a source of income at the end of the year? Are you sure you'll still even be speaking to each other? You should make sure to have an unemployment cushion socked away in a savings account just in case.
It's important to remember that renting is temporary. No matter how good you are as a tenant, your landlord may still ask you to leave. The building may change hands. The landlord might want to move their family in. If you're living in a multi-unit building there might be some disaster caused by another tenant. You may even decide to buy a house or condo. If you're renting, you should always have enough money set aside so that you can move on short notice.
For some people it's easy to ignore all of the shoulds in favor of a better place to live. The folks who set and study housing policy keep saying that rent in excess of 30% of income is unaffordable. They like to see everyone spending money on all of the shoulds as it means less people winding up in dire situations when things go wrong. But you and I both know that preventive measures are rarely taken despite our best intentions.
What does it mean when a landlord will allow you to rent beyond your means?
Some landlords might not accept you if you are paying much more than 30%.
Your landlord must determine how risky it will be to rent to you. If you're offering to pay half of your income in rent, that's pretty risky for the landlord. It will leave you with very little room for dealing with emergencies. Since most landlords don't report your rent payments to credit bureaus while your other creditors do, they know that you're very likely to skip out on rent first when things get tight.
Many tenants are overjoyed when a landlord will rent to them even if their income is on the lower end when compared to the rent. I would say to those tenants: be careful! When a landlord is willing to rent to you even though the rent is half of your income, that landlord is thinking you will buy fewer things from your wants. What really happens is that you continue to buy your needs and your wants and skip your shoulds.
In the modern era with many options for spending depending on your age, location, race and class the 30% rule looks dated and overly strict. Any landlord that actually expects every tenant to be paying less than 30% of their income is probably a nice person but very unrealistic about the risks involved in being a landlord.
On the other hand, landlords who disregard the 30% rule completely are more focused on avoiding vacancies than they are on getting good tenants that will pay and stay - in other words, they're also focusing on their needs and wants and ignoring the shoulds of being a good landlord. Landlords that allow their tenants to pay way more than the recommended 30% may be causing more harm than they intend. They contribute to the increased demand for government and charity based financial assistance when tenants who don't invest in their shoulds fall on hard times.
The best possible scenario is unfortunately illegal. A landlord who allowed for different rent-to-income ratios depending on the size of the apartment and the demographics of the local neighborhood – this would be practical but it's also a fair housing violation. Really when affordability and fair housing protections collide there's no perfect choice to make. Landlord will err on the side of not breaking the law though, which means the best you can really hope for is a landlord to show their understanding of modern renters' spending habits by allowing you to spend 35-40% of your income on rent instead of the standard 30%.
What do you think? Is the 30% rule still relevant in 2016? Are you one of the many renters paying more than 50% of their income in rent? Tell us your story!
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