Rent-To-Income Ratio

Rent-to-income ratio refers to the measure applied by tenants and landlords to determine the proportion of income attributable to rent. It helps in understanding the tenant's capacity to pay rent and related expenses on a monthly basis. If they struggle to match the average rent-to-income ratio chart figures, it means they might face difficulty adjusting the current rent according to their income. In short, the ratio helps track the tenant's overall financial health. 

The concept of the rent-to-income ratio became popular in 1969 during the Congress rule. At that time, the standard ratio was 25% to ensure accommodation facilities become more affordable and accessible to all. This ratio was increased to 30% in 1981 to reduce the Federal government's housing subsidy. Furthermore, the US Department of Housing and Urban Development (HUD) also classified anything with an insufficient rent-to-income ratio above 30% as inappropriate. The families with incomes lower than what was expected to meet the rental requirements were labeled as cost-burdened. However, a ratio of 30% still leaves enough income for comfortable living, necessities, savings, and other needs. 

In general context, this standard rule does not apply to all individuals. Since the demographic of each region has a varying rental structure, the rent-to-income also differs. For example, rent in City A will be higher, leading to a higher ratio than in City B, where rents are relatively lower. As a result, this differential amount can be further utilized to pay other bills arising during the same time. Hence, the ratio can also help tenants choose cities based on where they would like to live for a comfortable life.

Rent-to-income ratio calculation involves simple math to determine the percentage of their tenant's income that should go to rent. The formula available to calculate the same is given below:

Rent-to-Income = (Monthly Rent Payment / Monthly Income) x 100

Here, 

• Monthly rent payment refers to the amount payable to the landlord every month. The amount can be found in the rental agreement as well. 
• Monthly income is the amount of money earned by the tenant in a particular month. In the absence of monthly income, individuals can divide the annual income by 12. 

The final answer obtained will be in percentage form, hence multiplying the resulting amount by 100. 

In most cases, the rent-to-income ratio by city and state is preferred at 30%. However, there are instances when two regions in the same country may witness variation in the ratio figures. So, let us look at some examples to understand the concept in a much better way:

Example #1

Suppose Brian lives in Dallas City, North Texas, United States, and earns $5,000 on a monthly basis. He has a rent of $1,350 to pay for the property he lives in. So, he puts aside an amount every month to be used for different purposes. However, in recent months, there has been a spike in bills and expenses. As a result, Brian was not able to track the exact monthly rent spent. Hence, he applied the rent-to-income ratio for better analysis. He used the following calculation to check the same:

Rent-to-Income = (Monthly Rent Payment / Monthly Income) x 100

 = ($1350/$5000) x 100

 = 0.27 x 100

 = 27% 

After a few months, Brian shifts to New York and gets an apartment on rent for $3,500. However, the salary increases to $6,000. In this case, the ratio of rent to income witnessed a spike. Let us check how:

Rent-to-Income = (Monthly Rent Payment / Monthly Income) x 100

 = ($3500/$6000) x 100

 = 0.583 x 100

 = 58.3% 

Here, it is clearly visible that Brian was paying more in New York and was experiencing financial hardship, contributing 58% towards rent. At the same time, the rent expenses payable in Dallas had a ratio of 27%, which fell almost around the standard rule.

Example #2

According to the news article dated July 22, 2024, the proportion of rent-to-income ratio by city continued to fall in some of the US cities, recording 22.7% in June 2024, leading to stagnant rent growth across the United States. Prominent cities like Detroit, Chicago, and Pittsburgh registered the lowest percentage in the same month. On the contrary, cities such as Riverside, San Diego, and California were among the highest ratio groups. Likewise, in Miami, rent contributes 54.9% of a person's income, indicating the paced-up increase in the rent with respect to one's income.

This report indicates how the rent-to-income ratio can differ significantly in different regions of the same nation.