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How Much Rent Can You Afford?

One of the first things to do when considering a move to NYC is to determine how much rent you can afford.

Committing to a lease that is too expensive is one of the fastest ways to fall into debt. Follow these tips to help you stick to a reasonable budget.  

Do the math

Most landlords in New York City require your gross annual income (before taxes) be 40 times your monthly rent. So, for example, if you want to rent a studio for $1,500 a month, you must prove that you make at least $60,000 a year.

An easy way to determine how much rent you can afford is to divide your income by 40. Let’s say you make $45,000 dollars a year:

45,000/40 = 1,125

Using this equation, you can afford to pay $1,125 in rent every month. You can also use this simple, little math trick to calculate 30 percent of your income. Most financial advisers and real estate professionals cite 30 percent of your annual income as an appropriate amount to spend on rent.

But! Do you really want to spend 30 percent of your income on rent? Before you commit to a lease, consider a few things:

Account for the taxes

As mentioned above, landlords generally will want to see that you make 40 times the monthly rent – before taxes. In New York, state and federal taxes deduct 35 percent of your annual income. So, let’s say you make $60,000 a year:

35% of 60,000 = 21,000

60,000 – 21,000 = 39,000

That’s right. When taxes are deducted, you’re actually taking home only $39,000 dollars a year. (Can’t wait for that rebate right about now, huh?) It’s important to be aware of exactly how much money you’re going to have in your pocket every month so you can budget accordingly.

Don’t forget utilities and other expenses

Consider all the other expenses that come with life: perhaps you want to put aside money every month for retirement, or you have a health insurance plan that requires monthly payments. Factor those in. There are also other apartment costs that come into play, besides rent: utilities and cable bills are usually not included in standard leases. Then there are miscellaneous costs that come from living in a big city: laundry, a MetroCard, the occasional cab ride, an evening out on the town. Don’t forget to budget for a little fun!  

The broker’s fee

If you choose to look for an apartment using a broker, remember that will come at a price; brokers generally charge 12-15% of the annual rent or one month’s rent. Landlords often ask that renters pay first and last month’s rent up front, and they may ask for a security deposit on top of that – which is generally the equivalent of one month’s rent. You’ll get the security deposit back in the end, and it’ll be a relief not to have to pay your last month’s rent when you do indeed decide to move out, but renters must be prepared to fork over a lot of money up front when they first sign a lease.

OK, enough with the scare tactics. If you have found your dream apartment and cannot prove that you make 40x the monthly rent, but know that you are good with money and can hold yourself to a strict budget, there are a few options to consider:

  • GuarantorGuarantors are legally and financially obligated to pay your rent if you, for some reason, cannot. Guarantors need to have an annual income of 80-100x the monthly rent. Guarantors can be useful for renters with bad credit or no rental history.
  • RoommatesSharing your apartment with others will allow you to afford a much bigger place on your budget, or perhaps a more desirable neighborhood. They help cut the cost of rent, not to mention other monthly expenses, like utilities and cable. If you decide to sublet, you may even avoid having to buy furniture!

Finally, just remember: the New York real estate market can be intimidating, and most first-time renters will experience “sticker shock.”

It can be hard to come to terms with the fact that you may not be able to afford the dream apartment you pictured from the movies, but you live in New York City — you don’t want to spend all your time in your apartment! Make sure to get the best bang for your buck, with enough disposable income to enjoy everything this crazy city has to offer.

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