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When it comes to renting your first apartment or house, there are a lot of questions you might have in the process: What is a broker's fee? How do I get the security deposit back? How much should I spend on rent, movers and furniture?
Finding the answer to all of these questions may seem daunting. However, if you go into the process of moving with an idea of how much of your income you can spend on rent and other home-related costs — like a security deposit, broker's fee, renter's insurance and new furniture — you'll be better prepared to tackle this life milestone.
First off, one of the largest expenses you'll have is your rent bill. Housing — along with food, transportation and medical care — are considered essential costs. They are expenses that you must be able to cover each month. Therefore, the more you spend on housing, the less you'll have to spend on your other essential costs. You'll also have less money to put into an emergency fund, invest for retirement or pay off your student loan and/or credit card debt.
The conventional wisdom is that you should spend no more than 30% of your annual before-tax income on rent and utilities like heat, water and electricity. The rule is based on a 1969 law, known as the Brooke Amendment, that capped public housing rent at 25% of someone's income (the cap would be raised to 30% a few years later).
But does the 30% rule still hold true for most people? Does this simple rule of thumb work even when median rent is increasing at a rate that outpaces the growth rate of median renter household income?
The answer is: It depends. General personal finance guidelines can be helpful because they can give people an idea of how much they should be spending. But money advice can be oversimplified and doesn't account for every individual's unique financial status such as where someone is living, how much money they're making, how many dependents they have or how much debt they carry.
If you're living in a major metropolitan area like Los Angeles, Boston, Portland or New York City, you'll be shelling out more money for housing because the average cost of rent in these cities or suburbs is much higher than the national average. For example, the average rent in San Francisco is more than 3 times the national average. It might not be feasible to spend less than 30% of your income on housing in a major city or a suburb.
What percentage of your income you're able to spend on rent also depends on your annual income and the size of your household.
For example, a young single person making $50,000 a year with no dependents can likely spend 50% of their income and have enough money to cover their other essential costs, whereas a one-parent household with two children making the same amount of money and spending 50% of their income on rent might not have enough money leftover other expenses.
How much you can spend on rent also depends on what your income level. A 2018 study done by the NYU Furman Center found that more than half of New York City renter households making less than $30,000 a year were considered severely rent burdened (spending more than 50% of their household income on rent). This means that low-income individuals and families typically have to spend a higher percentage of their income to cover the cost of rent, especially if they're living in urban areas.
The 30% rule should be taken with a grain of salt: It's a rough guide for how you should spend your money, but it's not necessarily specific to you and your current financial situation.
"I think it's fine for that, but I think it's also important for folks to dig down deep into their own personal situation because personal finances may be personal," says John Madison, a CPA at Dayspring Financial Ministry.
When I moved to New York earlier this summer, I was surprised to learn how many lesser-known costs were associated with renting and moving. There was a broker's fee and a security deposit, plus I had to purchase new furniture. These things can add up, so it's important to know what they are and how much everything will cost.
Depending on what city you live in, you might have to pay a broker's fee. Unfortunately, you won't get the broker's fee back. There aren't broker's fees for renting in most areas, but you'll typically find them in New York City, and occasionally in other cities like Boston.
Broker's fees are kind of like a finder's fee. Real estate brokers collect fees for listing apartments and arranging tours for landlords. In New York, these fees are typically 10 to 15% of your annual lease amount or the cost of one month of rent. It's important to incorporate these fees into your budget when calculating the cost of renting in New York.
For example, a person with a before-tax income of $60,000 who wants to abide by the 30% rule, will not want to spend more than $1,500 on rent each month. Yet when you add on the cost of a 10% broker's fee for a $1,500 per month rental, you'll have to pay an additional $1,800 at the beginning of your lease.
Another common upfront cost when renting is the security deposit. The security deposit is collected by the landlord or property manager and acts as collateral in the event that you damage the house or apartment that you're renting. The security deposit is usually equal to one month's rent and is returned to the tenant at the end of the lease.
Considering the previous example, a tenant would have to put a total of $4,800 down upon move in: $1,500 for the first month's rent, $1,800 for the broker fee and $1,500 for the security deposit, for a rental that costs $1,500 a month.
In order to save up for a down payment on a rental, you might consider placing your money in a high-yield savings account, some of which offer a rate of return that is 10 times the amount offered by traditional savings accounts. High-yield savings accounts allow people to withdraw money from their account up to six times a month, which makes it a good choice for people who want higher returns but who still need access to cash.
Lastly, you'll have to cough up money to pay for moving expenses and new furniture. When I moved, I racked up charges for a new mattress, bed frame, desk and chair, among many other items I purchased on Amazon. If you're unable to pay for your new furniture upfront, a 0% APR credit card could be a useful tool to finance your purchases.
A 0% APR card gives new cardholders an introductory period, typically between 12 and 20 months, where they won't have to pay interest on new purchases and/or balance transfers. A 0% APR credit card is a great way to finance new purchases but you'll need to have a good or fair credit score in order to qualify for one. Make sure you know when your introductory period ends so you can avoid incurring any interest on your purchases. Cardholders will, however, still be required to pay the minimum amount on your bill each month.
The Chase Freedom Unlimited® Card is one card that has a generous 0% APR introductory period on purchases. New cardholders can take advantage of 0% APR for the first 15 months on new purchases and balance transfers (then a 20.49% - 29.24% variable APR). It's a good option for people who want to receive simple cash-back rewards on their new furniture purchases.
Enjoy 3% cash back on drugstore purchases and dining at restaurants, including takeout and eligible delivery services, 5% cash back on travel purchased through Chase Ultimate Rewards®, our premier rewards program that lets you redeem rewards for cash back, travel, gift cards and more; and 1.5% cash back on all other purchases.
Special Offer: Unlimited Matched Cash Back. Use your card for all your purchases and at the end of your first year, Chase will automatically match all the cash back you earned! There is no limit to how much you can earn. Every dollar in cash back rewards you earn is a dollar Chase will match.
0% for the first 15 months from account opening on purchases and balance transfers
20.49% - 29.24% variable
Balance transfer fee
Intro fee of either $5 or 3% of the amount of each transfer, whichever is greater, on transfers made within 60 days of account opening. After that, either $5 or 5% of the amount of each transfer, whichever is greater.
Foreign transaction fee
Member FDIC. Terms apply.
Read our Chase Freedom Unlimited® review.
Another 0% APR card you might opt for is the Blue Cash Everyday® Card from American Express. You can earn 3% cash back at U.S. gas stations, (on up to $6,000 in purchases per year, then 1%) as well as a grocery benefit where you'll get 3% cash back at U.S. supermarkets on up to $6,000 per year, then 1% thereafter.
3% cash back at U.S. supermarkets on up to $6,000 per year in purchases, then 1%, 3% cash back at U.S. gas stations, up to $6,000 per year, then 1%, 3% cash back on U.S. online retail purchases, on up to $6,000 per year, then 1%. Cash back is received in the form of Reward Dollars that can be easily redeemed for statement credits.
Earn a $200 statement credit after you spend $2,000 in purchases on your new Card within the first 6 months.
0% intro APR for 15 months on purchases and balance transfers, from the date of account opening
19.24% - 29.99% variable
Balance transfer fee
Either $5 or 3% of the amount of each transfer, whichever is greater.
Foreign transaction fee
See rates and fees, terms apply.
Renting an apartment for the first time can be a costly endeavor. You'll have to know how much of your annual income you can spend on rent, how much your upfront costs will be to secure housing and how you'll pay for new furniture.
There are no hard and fast rules about how much you should be spending on rent, but know that the more money you budget for housing, the less you'll have available for other living expenses, investing and saving.
Purchasing furniture is another costly expense, but using a 0% APR credit card is a great option for people who need a longer period of time to pay off their balance.
For rates and fees for the Blue Cash Everyday® Card from American Express, click here