Things to consider when renting a home | Housing | Financial Literacy | Khan Academy

Let's talk about things to consider when renting. So the first consideration is how much should you spend. A general rule of thumb is that you should spend a maximum of 30%—that’s 30% of gross income on housing costs. Now, I didn't say rent here; I said housing costs. I'm going to tell you in a second what the difference is, but first, let's think about gross income.

Gross income is your income before you pay things like taxes. So let's say that you're making $5,000 a month. You don't have a take-home salary of $5,000 after paying taxes, but this is what your employer says they're paying you. Well, in that world, you shouldn't spend any more than 30% of it on housing costs. Thirty percent of $5,000 would be $1,500; that should be your limit.

Now, you might say, "Okay, does that mean I can spend $1,500 on rent?" Well, that's where we go and think about what I meant by housing costs. Housing costs are rent plus utilities. Maybe there are types of insurance; maybe you have to pay for parking. Maybe you have to pay extra because you have a pet—who knows? That’s rent plus other costs.

If you're going to pay say utilities, then just $1,500 in rent might break this rule. Now this rule isn't written down in law, but it's a good thing for you to pay attention to so that you don't break your own budget. It turns out that in many cases, the landlords might want to hold you to this. Sometimes they have a rule that your gross income needs to be at least three times the rent.

Now, here we're saying 30% on housing costs, and I just said three times the rent. The numbers are close, but that's the landlord imposing this constraint on you. Now, above and beyond that, the landlord is going to look at things like credit history or credit. Let's say a credit report to see how good you have been at paying your bills. Before, they might want to look at a rental history.

Sometimes they even want referrals from your previous landlords to make sure that not only were you paying things on time, but that you were a good tenant and you took care of the property. Now there might be times they also want to ensure when you tell them your income that you are good for that. So sometimes they even might want a reference from your employer.

Now, the other things to think about are things like a pet policy. If you have a pet, that usually makes it a little bit harder to find a place, depending on the pet and its size. Some places might not want pets; they don't allow them, or they charge extra for pets because they think it might damage the property in some way.

There's also occupancy limits or occupancy rules. This is how many people can stay in a place. This is usually if they're going to have some type of occupancy rules; it's usually two people per bedroom. So if there's a two-bedroom place, they're probably going to have an occupancy limit of say four. It might be hard for a family of five to rent a two-bedroom apartment.

Now once again, this isn't a hard and fast rule, and people might be willing to make exceptions, but you should definitely ask about that before you go too far down the process. Now, we talked a lot that housing costs are not just rent; it could also include utilities. So this is a good thing to ask if rent includes utilities, or do you have to pay that separately?

Pay that as well. Last but not least, you might say, “Okay, I’m good. This is no more than 30% of my gross income for housing costs. I have a great credit report, I don't have pets or I know that they allow pets, I can give good references, and I'm not going to violate the occupancy limits.” But there’s also upfront money above and beyond just paying the rent.

Usually, the upfront money that you have to provide when you get a place is first month's rent, a security deposit—which is usually equivalent to first month's rent or pretty close to whatever the rent is. This is a way that the landlord protects themselves. If you were to damage the property in some way, they would deduct what it would cost to repair from your security deposit.

If you take really good care of the place when you leave, the security deposit is refundable, or most of it will be refundable, depending on how much wear and tear is on the property. In a lot of places, they also want last month's rent. They do this because most landlords want at least 30 days' notice before you leave a place. This protects them so that if someone were to just leave, they still have that last month's rent.

So this essentially allows them to have 30 days' notice, but this could add up to a lot of money. If we go back to the scenario where the rent is, say, $1,500, then you would be looking at $4,500 in upfront money before they hand you the keys here. So definitely pay close attention to that. Some places actually have things like moving costs or other fees if it's in some type of apartment that charges extra fees.

Just make sure you have all of that in consideration before you go too far down the process.