The NYC or SF Living Experience: Age, Income, and Rent
A High Earner's Rent Affordability Guide
Living in New York City (NYC) or San Francisco is a dream for many, but it comes with its fair share of financial considerations. As a high earner, you might be wondering how much of your income should go towards rent and what kind of lifestyle you can afford in these bustling metropolises. Should you optimize for your lifestyle or should you start building out your portfolio. This is a big dilemma in a city where something “affordable” likely means being on the 5th floor of a walkup that is 10 minutes from the nearest subway stop. The allure of living in a something “civilized” in Hudson Yards, Chelsea, Williamsburg or Downtown Brooklyn can quickly put you into the “luxury apartment category.” After all - making it in the city of dreams for most New Yorkers means having a washer and dryer in your apartment.
The NYC Newcomer
Let's take a look at a scenario that my friend, let's call him Jake, recently found himself in. Jake is a 24-year-old who's moving to NYC from a medium cost of living (MCOL) college area. Jake works in Data Science, a very highly in-demand field at the moment. He's currently only paying ~$800 in rent, but the rents he's looking at in NYC are significantly higher ($5-6k for apartments he "wants"). His total compensation (TC) will be ~$350k.
Jake's dilemma was how much he should be paying for rent in NYC and what area he should live in. This is a common predicament for high earners who are moving to high cost of living (HCOL) areas like NYC.
The Debate
One evening, Jake and a group of friends gathered for drinks and a lively debate ensued. Michael, a friend who lived and worked in NYC until a few years ago, advised Jake not to spend $5-6k on his first apartment. He emphasized the importance of starting to save and invest early, warning against lifestyle creep, which is a common pitfall in the NYC high earner scene. Michael recommended getting roommates in a larger apartment in his first few years while learning the city.
On the other hand, Jeff, a friend who's a high earner in the suburbs of NYC, suggested basing rent off of salary, not including bonus. He felt that $5k-$6k might be a bit high assuming a $250k base. Jeff’s viewpoint was that bonuses and other stock based comp are not reliable enough to include in your income calculation.
Eric, a friend who recently left NYC, shared his experience. He and his wife made >$1mm and the rent for their last place was ~$6k. However, their first apartment in NYC around 10 years ago was around $3.5k, and their combined total comp was a bit higher than Jake's, so he personally would not spend $6k/mo on $350k income.
Owen, a friend who's 30 with a family income of $800k and rent of $10k, shared his experience. Until he was married at 29, he was living with roommates and paying $1k for a basic apartment. He was happy living on $1k and he's happy now.
Rent Affordability Rules of Thumb
There are several rules of thumb when it comes to rent affordability. The 30% rule suggests that individuals should spend no more than 30% of their gross income on rent. The 50/30/20 rule suggests that 50% of your income should go towards necessities (including rent), 30% towards discretionary spending, and 20% towards savings.
However, these rules may not always apply to high earners or every city. Housing markets still follow the basics of supply and demand. For instance, if you're earning a high income, spending 30% of your income on rent may result in a luxurious apartment that exceeds your actual needs. If you were living in Atlanta on Jake’s salary, this might be the case. On the other hand, if you're living in a high-cost area like NYC, you may find that even the most basic apartments exceed 30% of your income. Plenty of renters in NYC overextend themselves and are “house poor”, but don’t actually own the asset. This is a pretty unwise decision.
Lifestyle Creep in NYC
Living in NYC is not just about high rents. There are other experiences and expenses that pile up. This includes dining at high-end restaurants, going to bars and night clubs, attending Broadway shows, shopping at luxury stores, and even the cost of gym memberships. Dating is also a very expensive proposition. These expenses can quickly add up and make a significant dent in your income. In addition, NYC is known for its high cost of living in other areas as well. Even everyday items like a cup of coffee or a movie ticket can cost significantly more. It's important to budget for these expenses and keep lifestyle creep in check to ensure you're saving and investing enough for your future.
Do You Want To Own in the Future?
Another important consideration when deciding how much to spend on rent is the trade-off between renting and saving for homeownership. Spending a significant portion of your income on rent can delay your ability to save for a down payment on a condo, co-op or house in another market. On the other hand, choosing a more affordable rental can allow you to save more towards homeownership.
However, it's important to note that owning a home comes with its own set of expenses in NYC, including maintenance costs, property taxes, and potentially higher utility bills. If you look at listings on Streeteasy.com in condo buildings, you will often see very high HOA fees and taxes on many apartments. Interestingly enough, you can be looking at 2 identical units in the same building and a rental unit may have a lower monthly cost than the carrying costs on the same condo unit. While ownership and rentals are related markets, they have their supply and demand curves, seasonality and boom/bust cycles. Some condo landlords are OK with taking a minimal loss in the short term because they believe they can offset it over the long run with property appreciation. Therefore, it's crucial to weigh the benefits and drawbacks of renting versus owning and make a decision that aligns with your long-term financial goals and lifestyle preferences.
The Guarantor Complexity
Most large buildings in NYC have an income requirement of 40X-45X monthly rent. This is in addition to having a solid credit score, which many young people have not yet built up. Lets assume Jake has his eye on a $6K apartment. 45X monthly rent is $270K, which is $20K above Jake’s base salary. If the landlord counts Jake’s anticipated bonus or equity payouts, this would work for him, but if they underwrite his application on his base salary alone - the max he could qualify for is $5555.
Now lets say that Jake still wanted this $6K apartment, but his income was highly variable, such as in a sales job. In most normal scenarios, you could just get your parents or someone else to sign as a guarantor on the apartment. Finding a guarantor for a high-rent apartment in NYC can be a complex process. In NYC, the standard guarantor income requirement is that their salary is at least 80 - 100 times the rent. For example, if the rent is $2,000, most landlords will require the guarantor's income to be at least $160,000 to $200,000. This is probably doable for anyone that grew up in an upper-middle class background.
Now lets extrapolate Jakes scenario on a $6K apartment. He would need to find a guarantor that can prove $600K in steady income. This can be a challenge for many potential renters, especially those who are new to the city or who don't have family members who meet these income requirements. For most people its going to be hard to find an uncle that can prove an income of >$600k. You can get around this by getting rental guarantee insurance from a company such as TheGuarantors, but this is another significant fee on top of your down payment and potential brokers fee.
The Risk of Job Loss
Another factor to consider when deciding how much to spend on rent is the risk of job loss. In a city like NYC, where the cost of living is high, losing your job could make it difficult to keep up with high rent payments. It's important to have a financial safety net in place, such as an emergency fund, to cover your rent and other living expenses in case of job loss. While Jake’s skillset is in-demand today, there are still a significant number of lay-offs happening in tech and it could take a while to find another job with a comparable compensation package.
The Reality of Using Building Amenities
When choosing an apartment, it's also important to consider whether you'll actually use the amenities that the building offers. For instance, while having a gym in your building might seem like a great perk, if you're more likely to attend boutique fitness classes with your friends, the gym might go unused. Similarly, a rooftop terrace might seem appealing, but if you're not one for hosting parties or gatherings, it might not be worth paying extra for.
The Conclusion
Everyone’s preferences and personal situations are different. My personal preference is to have roommates early in your career, and to build up your savings and investment portfolio. Most young people in NYC only use their apartment as a closet, a place to shower and a place to sleep. You are likely to spend your time out and about with friends, so extra money spent on rent wouldn’t be helping you build your long term wealth - or drastically improving your social life. You’d probably be better off getting a smaller place and using the difference on a good gym or joining a social club like Soho House.
So, what's your take on this financial dilemma? Have you ever faced a similar decision? What factors did you consider, and what decision did you ultimately make? Share your stories and opinions in the comments below.