It’s the age-old question … how much is too much rent? Some use a metric of 30% of your net monthly income as the rent+happiness sweet spot. But I take a different approach. Ask yourself, ‘would it be cheaper to own the property?’ Check out my reasoning below in my chat with Domain.com.au, as I (and other experts around the country) discuss how much rent you should be paying.
How much is too much rent to pay?
By Nicole Madigan, Domain.com.au, August 20, 2020
Whether we’re looking to buy or rent when on the hunt for a new home, it’s easy to get caught up in the moment.
You find your dream home, and you’re more than willing to move the budget goal posts in order to make it yours.
When buying a home, having home loan pre-approval helps keep things in check – if you overcommit to a purchase, chances are the bank will reject your mortgage application.
But how much is too much when it comes to paying rent?
“Generally, spending more than 30 per cent of your income on rent is considered too much and can lead to rental stress,” Finder insights manager Graham Cooke says.
SCROLL DOWN for my advice to renters paying too much.
“A good framework to use is the 50/30/20 budgeting rule. This suggests you spend 50 per cent of your income on essentials like rent, groceries and bills, 30 per cent on non-essential items like streaming subscriptions, eating out and other luxuries, and 20 per cent you should put into savings.
“When determining how much you’re willing to pay for rent, you’ll need to consider your personal circumstances as well as the current state of the market.”
While it’s a good idea to try to stay within that 30 per cent figure, factors such as location, property type and size will also play a role in determining the value of the property.
“Research similar properties in the area to get an idea of what you might be paying before you start attending open homes,” Mr Cooke says.
“You don’t want to fall in love with a suburb and realise it’s way outside your budget.”
Australian Housing Initiative founder Ian Ugarte says demand for rentals is often driven by an inability to afford to buy in an area.
“Unfortunately, this can drive up prices in an area, as it can result in higher rental prices due to a lessening of supply of available rentals in that area,” he says.
“In turn, if property owners are able to command a good rental return in an area, the value of the property increases due to the high rental yield/demand to live in the area.”
CLICK HERE to learn how micro-apartments can help solve Australia’s housing affordability crisis.
Mr Ugarte says a simple way to assess how much is too much when it comes to calculating rent, is to consider how much it would cost to service a loan in the same area.
In short, if it’s cheaper to service the mortgage than pay rent on the same property then you know you’re paying too much rent.
Of course, priorities also come into play when determining how much you’re willing to pay to rent a property.
“Some people may be happy to spend more on rent in order to reduce their commute time, or to get a place with an extra bedroom for instance, and just cut back in other areas to make it work,” Compass Housing Services manager of research and public affairs Martin Kennedy says.
But for the average income earner, spending more than 30 per cent of your income on rent is considered a sign of rental stress.
“People who are in rental stress inevitably have to cut back on spending in other areas,” Mr Kennedy says.
“In serious cases, this can mean people are forced to choose between paying the rent and other necessities like utilities and groceries.
“If housing stress becomes widespread, as it has in Australia, it doesn’t just impact the quality of life of the individuals themselves, it acts as a drag on the rest of the economy because people in housing stress will obviously spend less on discretionary items.”
For those on higher incomes, spending more than 30 per cent of their income on rent won’t necessarily lead to rental stress, but that doesn’t mean it’s a good idea.
“By paying too much for your rent, you’re throwing away money that could be going towards getting you on the property ladder,” Mr Cooke says.
If the horse has already bolted and you think you’re currently paying too much rent, Mr Cooke says it’s worth asking your landlord for a reduction – but be realistic about what you’re asking for.
“Use other properties as a benchmark,” he says.
“If you can show that your rent is higher than that of similar properties in your area, your landlord is more likely to be sympathetic.”
But realism needs to work both ways, according to Mr Cooke, who says with the rental market now seeing record vacancy volumes, and some landlords struggling to fill their properties due to the COVID-19 crisis, renters should be careful of signing a short-term lease which may increase significantly after six months.
“Look to get a 12-month price guarantee at the very least, and possibly some written confirmation from the landlord that the rent can only increase by a certain percentage per year after that.
“It’s a renter’s market right now – so use that extra leverage to gain some value.”
LANDLORDS, CLICK HERE if you’re looking for ways to increase your rental yield while supporting the affordable rental market. In my Free Positive Cash Flow Live Webinar, I break down the strategy I use to create double digit returns on ordinary residential properties.