How to calculate your rental affordability?

The rental housing market in several cities, including the top metropolitans and top tier 2 cities, has seen growth in recent years. Owing to the growing job and educational opportunities, these cities draw many home seekers from across the country, creating a high demand for rented homes. One of the key concerns of prospective tenants is how much money they should spend towards their monthly rent. The rental rates vary across cities and localities within a city. For example, the average monthly rental for a 2BHK apartment in Mumbai is Rs 72,000, while the average monthly rental for a 2BHK apartment in Jaipur is Rs 25,000. Hence, before choosing a rented home, it is essential to check the rental rates in the city and opt for the one that suits your budget. More importantly, a prospective tenant must check how much rent they can afford without putting any burden on their finances. This aspect refers to rental affordability. In this guide, we discuss how to calculate rental affordability.

What is rental affordability?

Rental affordability is a measure of how much rent a person can afford to spend based on the gross annual income. Typically, rental affordability is determined by considering various factors, including the monthly income, household expenses, location and size of the property, etc. Calculating rental affordability is a crucial step in the journey to renting a home as it helps a renter estimate their expenses and manage finances better.

Benefits of analysing rental affordability

Assessing one’s rental affordability has several benefits, as discussed below:

• Minimises expenses: Estimating the amount of rent one can afford will help a person calculate their overall budget and avoid overspending.
• Achieve savings: It helps to reduce the burden on household expenses, thus ensuring more savings for other unexpected expenses.
• Prevents debt burden: Renters will have more money to cover other expenses and lower the chances of taking additional loans to cover such costs.

What percentage of total income should go to rent?

Rental rates vary from city to city and locality to locality within the same city. When estimating the total expenditure towards the monthly rent for a house, prospective tenants should consider several factors, including their gross income and the cost of living in that city. Experts talk about the golden rule of not spending more than 30% of one’s monthly take-home salary towards rent and utilities. This will help maintain a healthy balance between expenses and savings. Further, experts are of the view that most people do not take into account the utility charges like electricity and water when estimating the monthly rental expenses. Generally, utility bills remain within a specific range, but rent can go from being affordable in a particular locality to being expensive in another locality. Hence, it is crucial to keep the location in mind when doing the calculations.

Moreover, if one’s monthly income is on the higher side, one can allocate 40% of the income for rental. This will also enable the person to find a house in a better location or with more living space.

See also: How much of your salary should you spend on rent?

How to calculate rental affordability?

Estimate monthly expenses

When assessing rental affordability, prospective tenants should be aware if their financial liabilities and decide a budget to avoid overspending. While rent is a major expense, there are various other household expenses that lead to significant expenditure. As a first step, create a list of such expenses. These include:

• Utilities (water, electricity, phone bills, etc.)
• Maintenance charges to be paid monthly, quarterly or annually
• Groceries and other household expenses
• Transportation
• Insurance premium
• Outstanding loan EMIs

Deduct the total amount of these expenses from the monthly income. From the remaining amount, fix a maximum limit you can spend comfortably towards monthly rent.

Factor in one-time expenses

If you are seeking a rental property with the help of a real estate agent, you may have to pay a one-time expense at the time of signing the rent agreement. Typically, agents charge 10-15% of the entire year’s lease. Further, landlords ask tenants to pay a security deposit, which is usually equivalent to one month’s rent. This amount is refunded at the time of termination of the rental agreement. Thus, one should consider these expenses into account and reevaluate finances when estimating rental affordability.

Decide the right location

When assessing one’s rental affordability, make sure to choose a property in the right location that suits your budget. The cost of the rental property will depend on the location. For example, properties in posh or prime neighbourhoods of the city are likely to have higher rental prices. It may be necessary to determine if your preferred location is suited for your budget. Otherwise, you can consider exploring neighbouring areas for affordable rent. Consider the most favourable location based on proximity to the workplace or reputed schools, good connectivity, etc.

Research rental rates for properties

Start by assessing the rental rates in the area where you plan to reside. A crucial point to consider is the type of property and amenities you are looking for – whether a 2 BHK or a 3 BHK house, co-living space, etc. since this will directly influence the rent amount. The bigger the house and the more amenities, the higher the rent.

You can find the latest rental rates in a city online by checking real estate portals. You can also get the help of a local broker who can provide you with the data. Another way to gauge the market trends is to discuss them in online forums or check with friends and family.

Consider long-term financial goals

Taking one’s long-term financial goals into consideration helps calculate rental affordability. To get a clear picture of your financial situation, start by analysing your debt repayment plans, savings and other financial obligations. This also enables you to maintain a balance between your monthly expenses and your financial plans.

 Access the rental affordability calculator online

Nowadays, you will find many tools online, such as a rent affordability calculator, to estimate the amount one should pay based on factors such as monthly income, debts, expenses, desired rent range location, etc. These tools offer personalised results for the user based on financial feasibility and help one make an informed decision.

Financial planning when estimating rental affordability

When planning your finances for the year, one must look at several components such as wealth accumulation, taxes to be paid, household expenses and retirement planning.

The 50-30-20 rule

Financial experts also suggest following the 50-30-20 rule to assess one’s rental affordability by categorising the expenses into different groups:

• 50% on fixed costs: These include rent, utilities and transportation
• 30% on everyday expenses: These include varying expenses such as shopping, dining, etc.
• 20% on financial goals: These include loan EMIs, insurance premium, emergency funds, etc.

Taxation

The most important point to consider is the house rent allowance (HRA), a key aspect of a renter’s tax planning. Under the old tax regime, as per the Income Tax Act Section 10(13A), salaried employees in India can claim income tax deductions on the HRA component of their monthly salary. The exemption on HRA is based on the lower of the three factors:

• The actual HRA
• 50% of the basic salary plus DA if one resides in a metro city; 40% for non-metros
• Actual rent paid minus 10% of your basic salary plus DA

The lowest of the three will be allowed as the HRA exemption, irrespective of the rent one pays. One can leverage this tax benefit effectively when the monthly rent does not exceed the HRA amount.

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Rental affordability will directly depend on one’s financial position, including the gross income and overall expenses. However, one should also consider some planned and unplanned expenses – such as cost of furnishing the house, unexpected repairs, etc. Besides, one can consider options such as sharing an apartment with another renter, especially suited for students and working professionals. This will significantly bring down one’s rental expenses.

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