Friday, 31 January 2014

How much SHOULD you pay in rent?

I have mention in several posts recently that I have moved into an apartment on my own recently.  I decided to continue renting instead of buying as I wanted to save up a larger deposit for my own home as well as the fact that I have several big life goals that I want to achieve later this year.  This post will cover what I thought about when I was thinking about how much I wanted to spend on rent and what you should think about if you are looking into it.

The question is what SHOULD I spend on rent? NOT what CAN I afford?

When most people think about renting a place they think about what they can afford to get.  While it is important to live within your means I think it is much better to think about what type of place you want first and then look at how much it costs to get a place like that.

The problem with looking at what you can afford is that we are all maximisers.  I don't know anyone that would choose a place for $300 per week when their budget is $350 per week because in most cases the $350 place is much much better than the $300 place.

I have outlined a process below that I went through (and that you can follow) to work out what you should be paying in rent.

Step 1: Make a list of what you need and want in your home

Every one of us has different things that we need and want in our own home.  I was very focused on space and entertaining while the newness of the place was much more important to me.  If my girlfriend was choosing the place it would be a place which was smaller but where all the fixtures, fittings and appliances were new.

Work out what is important to you and then make a list of everything you want.  I decided that I wanted a 2 bedroom place - I hated en-suite only bathrooms (which typically come with one bedroom places) and I also wanted to have people over regularly so wanted to extra space that came with a 2 bedroom place.  I also drive so a car park was a must.  I needed to be close to the station because I catch the train into work every day.

Making this list of needs and wants helps focus you mind and will stop you maximising when you are hunting for a rental property.

Step 2: Work out what you can afford

I know I said that the question above should be what SHOULD you spend not what can you afford but it is important to keep your expectations in check.  If what you need and want far exceeds what you can afford then you need to trim back on your expectations.

Also - your rent should never
cause you financial distress.  If you think that paying your rent will impact your life significantly, perhaps you cannot afford as much as you think you do.  As a rule of thumb, landlords will always prefer a tenant where the rent is less than 30% of their take home income.  This does not mean you should go for 30%....something lower is always preferable.

Once you have a number you are not going to start looking for a place.  The temptation to start at places costing that amount will be too high.  You just need to keep this number in the back of your mind.

Step 3: Make a list of acceptable areas

Making a list of acceptable areas normally involve driving to that area and having a look at what is available. Some of the areas I thought were acceptable I didn't really end up liking and other surrounding suburbs I didn't mind at all.  You will never know until you go and have a look.

Your list should cover a range of geographies.  If you are city focused or city centric then you should have a list which stretches from the city to your 'outer limit'.  You will normally have 5 or 6 suburbs at this point (which may include the city itself).

Step 4: Start with the CHEAPEST area and look for apartments with everything on your need and want list

Starting with the most desirable suburb will almost guarantee that you pay what you can afford.  Don't forget that every area on your acceptable list you are happy with.  Don't tempt yourself with the more fashionable area.  If you are happy with the cheaper area then stick to this.

Look at how much rentals in this cheapest suburb with everything you want cost.  I can almost guarantee you that it will cost far less than you imagine (unless your area choice or needs and wants are not in line with your ability to pay for a place).

You don't need to go to the more expensive area because you have everything you want in a house, unit or apartment in an area which you were happy to live in when you started going through this process.  This doesn't mean you need to get the cheapest home in this area or go for the absolute cheapest option amongst what is available but keeping in mind what you want and need (rather than constantly trying to maximise your options for a budget) in an area that you are happy with can save you a fair bit of money.

Step 5: If something when wrong in the process...don't be afraid to start again

Sometimes you will not be able to get what you want, in an area you want for the price you want.  Something has to give.  When I went through this process I went and found areas I had never considered before and some of my 'wants' had to drop off the list.  My 'needs' were met though and I got a great place in an area I was happy with for a price that was lower than I thought I would spend (admittedly I had to clean up the place A LOT).

You May Also Be Interested In
2014 Financial Goals
Should I rent or buy?
Fitting out your home or apartment on a budget
Controversial investment advice: only invest in what you understand

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