You walk into a friend’s expansive three-bedroom apartment with a stunning view of Lake Michigan and wonder: “Why can’t I live in a place like this?”
Well, maybe you can.
Before you make that move, though, consider just how much space you really need. And the view? It won’t be nearly as enjoyable if it’s the only joy in life left that you can afford. So, weigh your wish list against your bank account to determine how much you realistically can spend for your next apartment.
How much you can spend “certainly does depend on the individual and resources he has,” says Judie Benson, a certified financial planner and owner of Benson Financial Group, Inc., in Lisle.
Benson suggests spending no more, and preferably less, than 30 percent of your gross (before taxes) income on rent. “If you have considerable debt, then 30 percent would be too high because you’ve already allocated other resources to maintaining those costs,” she says. “If somebody had adequate funds set aside in investments and securities, they might be able to exceed that.”
Renting may be seen as a less serious financial commitment than buying a home, but they really are a lot alike, both from the tenant’s point of view and the landlord’s. The landlord, rather than the lender, must assess whether he or she thinks you can afford to pay the rent, and that depends a lot on your income and other assets, your bills, and your creditworthiness.
And the choices, obviously, aren’t just financial ones, although money influences just about every decision, from the size of the apartment you rent to the neighborhood in which it’s located. As you begin your search, make a mental or written note of your major possessions: furniture, stereo, bicycle, books, closets full of clothes. Employees from apartment management companies also suggest you consider your lifestyle and habits when thinking about what type of space you want.
Do you like having private space in which to contemplate the stars or write a screenplay? That may not work if you’re trying to live in a one-bedroom apartment with a roommate. This is where the financial angle comes in again: Perhaps you could opt for a large studio–smaller space, but more privacy. Or could you afford to split the rent on a two-bedroom flat in a less trendy or convenient neighborhood or in a complex without a pool and tennis courts?
Even if income doesn’t seem to be a deterrent to moving to a larger or more luxurious apartment, your spending habits might make the decision for you. Or your prospective landlord might make the decision for you.
“We want to make sure we don’t get someone who earns $60,000 a year and who spends it just as easily,” says Kathy Drenth, property manager at Maple Lake Apartments, a 762-unit development in Woodridge.
“If it’s a credit problem or a high debt load, we may ask for an extra month security deposit and/or require a cosigner,” Drenth says.
While income requirements will vary with each landlord, many use 30 percent as a guideline. At Maple Lake Apartments, for example, a renter would need a gross monthly income (once again, income before taxes) of $1,350 for a studio apartment, which rents for $480 to $490, and a $1,850 monthly income for a two-bedroom unit, which rents for $670 to $680.
Remember, though, that a landlord will look at your overall credit and employment history, and references from other landlords. If you’re self-employed, you should be prepared to show tax returns to prove just how much you have made and can expect to make.
If your credit report shows a few late loan payments and a huge credit card bill, a landlord may question your ability to pay the rent each month.
Your credit report can work to your advantage, though, if it shows a good payment history. A landlord may choose to overlook the late payments and high credit card debt, for example, if you’ve been paying on time for the last year and have a stable work history.
Other landlords might deduct your monthly debt payments from your gross income and multiply that figure by 30 percent. If, for example, your gross monthly income is $3,000 and your debt payments add up to $400 per month, a landlord would allow you to spend 30 percent of $2,600 a month for rent–or $780.
Jennifer Haddon, president of Home Discovery Inc., an apartment locator firm in Lincoln Park, says she deducts debt from income first to get a realistic picture of what a prospective tenant can afford.
Individual owners, particularly those with properties that rent for several thousand dollars a month, could have additional requirements, she says. They may want to see a higher income or larger security deposit, for example.
Additionally, a landlord also might seek a higher security deposit if a potential tenant has credit problems.
“If it’s something we can work with then we can get a cosigner and we (sometimes) double the security deposit,” says Elizabeth Pavia, assistant manager at Deer Glen Apartments, a 216-unit complex in Bloomingdale. “If they have really bad credit, then they would be denied.”
While many renters want to spend as much as possible to get a nice apartment, Benson cautions that you should add a place in your budget for unexpected expenses, such as a car repair bill or medical bills for a sick child.
“It would be an ideal situation if (a renter) could set aside 20 percent (rather than 30 percent of income for rent) so that they could put the other 10 percent aside” to buy property in the future, she says. “I don’t think we’ll find people willing to do that. If they can spend 10 percent more and get a bigger apartment with a better view, they will.”
You may want to ask yourself several questions before committing to an apartment and possibly stretching to afford it:
– How stable is your job?
– Does the rent include utilities, parking, cable television or other extras?
– How will you be using the space and how much time do you plan to spend there?
– How many people will be living there, including periodic guests?
– Do you plan to add more furniture during the lease term?
– What type of storage is available inside or outside the unit?
Now that you’ve narrowed down your checklist, you can save time by calling for information before visiting apartments. “If they know the price range and the area they want to live in, they should call the place first to see what the criteria are (for qualifying for the rental),” says Tammy Gross, director of marketing for Draper & Kramer Inc., a Chicago-based apartment management company.
As you walk through apartments, income requirements in mind, remember that you’ll have other expenses in maintaining your own place.
Haddon suggests renters ask themselves a key question before signing that lease: “Can you afford to eat after paying the rent?”
