How much rent can you afford?

Found your dream house? But can you really afford it?

Nowadays, looking for a house or an apartment to rent is a fairly common thing to do in Sri Lanka. Homes constructed with innovative technology combined with standard classy designs are plentiful and could suit every need of an individual. However, is it always easy to find properties that align with your needs while satisfying your budget?

Maybe you’ve been waiting to get your hands on a specific property in a prime location like Colombo 04 and you have finally reached an income status that is sufficient to pay your rent. But what’s next? Do you earn enough to comfortably afford regular payments? If you don’t know the answer to this question, there are a couple of ways to find out.

How do you determine if you can afford the property rental in the long term?

The Technical Approach

Based on an article published on Investopedia, property owners follow several rules of thumb to determine if their potential homeowner can afford the property.

  • One of them suggests dividing your annual pretax earnings by 40. This gives you the amount you are able to spend monthly as your rent amount.

Example – Assume an average working individual earning 600,000 LKR per annum

600,000/40 = 15,000 per month

  • The second rule of thumb follows the 30% rule. Where you take 30% of your annual income and divide it by 12 months to determine how much you can pay off as rent.

Example – Assume an average working individual earning 600,000 LKR  per annum

600,000 x 30% = 180,000/12 months = 15,000 per month

  • The final rule of thumb is the 50/30/20 approach. This suggests that 50% of your total income should be spent on fixed expenses like rent and transportation, 30% goes into day to day expenses while 20% is for savings and recovering from debts.

Example – Assume an average working individual earning 600,000 LKR per annum

600,000 x 50% = 300,000 for fixed expenses including rent, transportation etc.

The Practical Approach

While the rules of thumb act as a theoretical way to determine provisionally if renters can afford their rent, these rules might not be directly relatable to you personally. In this case, it’s best for you to conduct a short analysis of your income and expenses.

Determine how much you will be carrying home

First understand your actual net income because once taxes and other loans are deducted you will be left with a smaller amount to deal with.

Analyze all your expenses and understand how much you’ll need to allocate

Expenses are mainly divided into two categories:

Fixed expenses = Transportation, Utility bills, Insurance, College fees etc.

Variable expenses = Debt, Personal comfort, House equipment, medical etc.

Allocate for savings

Just because your income permits you to spend a certain amount as rent, this does not mean you should.  When obtaining a property for rent, saving is a habit that every individual should practice; especially if you are running a family. Therefore be mindful and allocate a reasonable amount for your savings.

From the above information, determine how much you are able to pay as rent

Finally once you have taken every expense into account, fixed, variable expenses,  personal comfort, and savings, you can now set aside a reasonable amount as your rental payment.

Things they do not tell you

Rental prices may vary depending on the location

Depending on the selected location, rental prices may vary. While locations like Colombo 03, 04, 05 and 07 may indicate higher prices, locations like Dehiwala, Mount Lavinia and Colombo 06 show comparatively lower rental prices. However bear in mind that even though highly urbanized locations indicate higher rental prices, you are able to enjoy residential facilities close at hand. Thus you are able to allocate a higher rental payment while saving  on necessities like food, transportation, grocery shopping etc.

Sharing houses/apartments

Even though this might decrease your rent expenses, be mindful when sharing with housemates. Consider the expenses they will bring and calculate your expenses accordingly. You might need to allocate money for grocery shopping and house equipment together with your flatmates.

Additional expenses apart from your rent

Be informed about the additional costs that you will need to bear once you get the property. If the property is fully furnished, it means you will have to take care of utility bills, TV, Wi-Fi, and air conditioning bills.  Ask your landlord if these bills are included in the rent or if they are paid additionally.

Watch out for pitfalls

To ensure the quality of the property, take a tour around the house/apartment during the day time when there is enough light to observe the property well.  This will help you see the setbacks of the space.  If there are any fixes to be done, speak to your landlord about it and determine if you should allocate money for any repairs.

Conclusion

Real estate in Sri Lanka is rapidly evolving. As the demand for property is elevating, purchase and rental prices are increasing. Therefore if you are planning to obtain a house or an apartment for rent, be smart about it. Make sure you enjoy the fruitful rewards of every penny that you invest in it.

Looking for ways to save money when renting? Have a look at our suggestions here.

 

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