Quick Summary
- To quickly work out your maximum monthly rent payment, multiply your monthly salary by 30%
- To calculate the required annual salary of a rental applicant in a flash, multiply the monthly rent by 40
How To Calculate Rent-To-Income Ratio
The following methods can be used to complete the income ratio calculation.
Method 1: 30% of Gross Monthly Salary
This is the most popular way to work out your recommended rent-to-income ratio.
You simply multiply your gross monthly salary by 0.3 (i.e. 30%).
The result you are left with is your maximum rental amount if you follow the 30% guideline.
Example
- Monthly Income: $4,000
- Maximum Rent Amount: $4,000 * 0.3
- Maximum Rent Amount: $1,200
Method 2: Divide Your Gross Annual Salary By 40
Mathematically, this method is exactly the same as the first method, except it’s faster if you are working with your annual income rather than your monthly income.
All you need to do is divide your annual salary by 40.
Example
- Annual Income: $50,000
- Maximum Rent Payment: $50,0000/40
- Maximum Rent Payment: $1250
It’s also worth pointing out that landlords, can use this method in reverse, to quickly calculate the required annual income of an applicant. As a landlord, you simply need to multiply the monthly rental amount by 40, to calculate the annual gross income of the applicant.
Method 3: Multiply Monthly Rent By 3
This is arguably the fastest way to work out the rent-to-income ratio. You simply multiply the monthly rental amount by 3.
An applicant’s gross monthly salary must be higher than this amount, in order for the rental property to be considered affordable.
Example
- Monthly Rent Amount: $1,800
- Required Monthly Salary: $1,800 * 3
- Required Monthly Salary: $5,400
The only drawback of this method is that it inflates the required salary ever so slightly (by 3% to be precise). Nevertheless, it’s a quick way to calculate the numbers in your head.
Lastly, it’s worth noting that each of the three methods listed above is perfectly valid. They are just slightly different ways to get to the end goal of calculating your maximum rental amount.
Why Is Rent-To-Income Important?
For landlords, the rent-to-income ratio is important because:
- It helps prevent landlords from taking on tenants that may have difficulty paying rent during certain times of the year.
- It can help landlords quickly screen out potentially troublesome tenants, saving time and money that can be required to complete a full background check on a more suitable applicant.
For tenants, rent-to-income is important because
It allows tenants to quickly estimate what they can actually afford in terms of monthly rent. It makes no sense for people to apply for rental properties that will almost certainly reject them. By knowing your maximum rental budget, it can be much faster and more efficient to find a suitable property to rent.
What is the Recommended Rent-to-Income Ratio?
Simply put, the recommended rent-to-income ratio is 30%. This means that your monthly rent should not exceed 30% of your gross monthly salary. While certain landlords may be willing to make exceptions, 30% is the industry standard that most tenants will have to meet in order to secure a successful lease agreement.
What if you can't afford the recommended rent amount?
If you are reasonably close to the 30% rent-to-income guideline, there’s nothing stopping you from applying for the property. However, to increase the likelihood of your application being successful, you may benefit from the services of a guarantor.
A guarantor is someone that is legally responsible for paying your rent if you happen to fall short at any point during your lease agreement. It is common for students and young professionals to use a parent to act as a guarantor, but there is also another option if this arrangement doesn’t work for you.
If you find yourself in this situation, a rental guarantor service would be your best bet. Just remember to secure your guarantor, before you fill out any applications.
In addition to using a guarantor, you can also:
- Offer to pay a larger security deposit, to help keep the Landlord’s mind at ease
- Setup an automatic rent payment
- Make a lump sum payment towards your credit card debt
- Research additional ways to improve your credit score before you submit your application
Final Thoughts
In the end, the 30% rent-to-income rule is used by many landlords to filter out potentially troublesome tenants. With that being said, if you have a good credit history or make use of a rental income guarantor, it may be possible for you to work around this rule, in certain instances.