Rent Calculator

Two ways to ask whether you can afford it

There are two completely different ways to work out how much rent you can carry, and they disagree with each other often enough to be worth knowing apart.

The ratio approach. Take a share of your income and call that the ceiling. Thirty percent is the number everyone quotes. It is quick, it is what landlords screen on, and it treats everybody with the same income identically.

The residual approach. Add up everything you actually have to spend, subtract it from what you earn, and whatever survives is what rent can take. Slower, personal, and it notices that two people on the same salary can be in very different positions.

This calculator runs both, which is unusual and is the reason it deserves more than a formula.

Notice that the last two use the rent you are considering, while the first tells you what you could stand. So the tool is answering two questions at once: what can I take on, and does this particular flat pass the usual tests.

Running the numbers

Someone earning 120,000 a month, saving 15,000, paying 8,000 on loans and 45,000 on everything else, looking at a flat at 30,000.

The residual figure says up to 52,000 could go to rent before anything else has to give. The ratio says the 30,000 flat consumes a quarter of income, comfortably inside the usual threshold. And the third row says a landlord applying the standard screen would want to see 1,200,000 of annual income, which on 120,000 a month is 1,440,000, so this applicant passes with room to spare.

All three agree here, which is what you want to see. When they disagree, that disagreement is the useful signal, and there is a section on it below.

One thing to be deliberate about: whether you enter gross or net income. Landlord screens are almost always gross, so the third row only makes sense on gross. The residual calculation only makes sense on net, since you cannot spend money that went to tax. Running it twice, once each way, is not a bad habit.

The 40x rule and the 30 percent rule are the same rule

These two get quoted as though they were separate tests, one used by tenants and one by landlords. They are not separate. They are one rule written two ways, and the arithmetic proving it takes ten seconds.

The 40x rule says annual gross income must be at least forty times the monthly rent. On our 30,000 rent that is 1,200,000 a year.

Divide that by twelve and the required monthly income is 100,000.

Now ask what share of that the rent is. 30,000 divided by 100,000 is 30.00 percent.

Exactly thirty. Not approximately, and not only for this example. Forty times the monthly rent is the same as twelve months of income at a thirty percent share, because forty divided by twelve is 3.333, and one divided by 3.333 is 0.30.

Which is worth knowing for a practical reason. If a listing says forty times income and you have been thinking in percentages, you already know whether you qualify without doing any new arithmetic. And if a landlord uses a different multiple, you can convert it instantly: divide 1,200 by the multiple to get the equivalent percentage. A 36x rule is a 33 percent rule. A 45x rule is a 26.7 percent rule.

Some landlords apply the multiple to net income rather than gross, which is a much stricter test dressed in the same language. Worth asking which they mean.

Where the 30 percent came from

The thirty percent figure gets quoted as though it fell out of research. It did not. It is a policy decision with a datable history, and the history is short enough to tell.

In the 1940s the maximum affordable rent for federally subsidised housing in the United States was set at 20 percent of income. It rose to 25 percent in 1969, following an amendment introduced by Senator Edward Brooke, and to 30 percent in 1981. Over time the threshold spread from subsidised housing into owner-occupied housing and then into general use, and it is now the standard indicator of affordability in the United States.

The Department of Housing and Urban Development defines households paying more than 30 percent of income on housing as cost burdened, and those paying more than 50 percent as severely cost burdened. The stated reasoning is that keeping housing below that share leaves enough for the other things a household cannot avoid buying.

So the number is real and it is used by real institutions. It is also, on its own terms, a rule of thumb that moved twice in forty years.

And the criticism of it is worth hearing, because it points straight at the other output on this page. A ratio ignores the absolute level of income. As Freddie Mac's chief economist put it in one of HUD's own publications, somebody earning 500,000 a year can pay 40 percent and still have plenty left over, while somebody earning 20,000 will struggle at 30 percent. The same percentage means very different things at different incomes.

Which is exactly the gap the residual figure fills.

Which of the two numbers to trust

When the ratio and the residual disagree, the residual is usually closer to the truth about you, and the ratio is closer to the truth about whether you will be approved.

Four situations where they part company:

High income, high commitments. Someone earning well but carrying school fees, a car loan and support for family can fail the residual test while sailing through the 30 percent screen. The ratio cannot see any of those obligations.

Low income, low commitments. Somebody with no debt and modest expenses may genuinely manage 40 percent of income on rent. The ratio will say they cannot, and the landlord will agree with the ratio, which is a practical problem rather than an arithmetic one.

Expensive cities. In markets where nobody meets the 30 percent test, the ratio stops discriminating between applicants and everyone relies on the residual instead, whether they call it that or not.

Irregular income. Freelance and commission earnings break both measures, since there is no single monthly figure to divide. Use your worst three months rather than your average, on both calculations.

Two things to add to whichever number you land on. Rent is rarely the whole housing cost, so utilities, maintenance charges, parking and internet belong in the comparison, and HUD's own definition of housing cost includes utilities for exactly that reason. And moving in costs money up front, usually several months of rent as deposit and advance, which no ratio captures at all.

If a rent increase is what prompted this, our rent increase calculator shows what the next few years look like at the rate you are being offered.

Questions people ask

Should I enter gross or net income?

Gross for the ratio and the landlord test, since that is what screens use. Net for the residual figure, since you cannot spend what went to tax. Running it both ways gives you both answers.

What does 40 times income mean?

That your annual gross income must be at least forty times the monthly rent. It is the same requirement as rent being no more than 30 percent of income, just stated from the landlord's side.

Is 30 percent a hard limit?

No. It is a policy threshold that was 20 percent in the 1940s and 25 percent in 1969 before settling at 30 in 1981. It is a widely used benchmark rather than a finding about what any particular household can manage.

Why does it ask about savings?

Because the residual calculation treats saving as a commitment rather than a leftover. Enter what you intend to keep saving, and the affordable rent figure is what remains after protecting it.

Do utilities count?

They should. HUD's affordability definition includes utilities in housing cost, so add them to the rent figure before judging the ratio, particularly where heating or cooling is a large bill.

We are two people. Whose income do I enter?

Combined, as long as both names go on the lease and both are responsible for the rent. Landlords generally assess combined income for joint applicants.

The two numbers disagree. Which do I follow?

The residual figure tells you what you can actually carry. The ratio tells you whether a landlord will approve you. Both are real constraints and you need to clear both.

References

A note on the sources. The 30 percent threshold is not a research finding but a policy standard with a specific history, and the two Department of Housing and Urban Development publications below set out both that history and the criticism of it, including the point that a fixed percentage means very different things at different income levels. That criticism is the argument for the residual figure this calculator also produces, so the sources here support the page's main claim rather than merely decorating it.

1. U.S. Department of Housing and Urban Development, Office of Policy Development and Research, Defining Housing Affordability, HUD USER, on the maximum affordable rent for federally subsidised housing rising from 20 percent of income in the 1940s to 25 percent in 1969 and 30 percent in 1981, and on the cost burden threshold. https://www.huduser.gov/portal/pdredge/pdr-edge-featd-article-081417.html
2. U.S. Department of Housing and Urban Development, Office of Policy Development and Research, Rental Burdens: Rethinking Affordability Measures, HUD USER, on the definition of cost burdened and severely cost burdened, and on the argument that income ratios oversimplify affordability. https://www.huduser.gov/portal/pdredge/pdr_edge_featd_article_092214.html
3. Consumer Financial Protection Bureau, Auto loan answers: key terms, on debt obligations and how recurring payments are assessed against income. https://www.consumerfinance.gov/consumer-tools/auto-loans/answers/key-terms/