Rent/Income ratio? Opinion please.

[goran]

What is the reasonable proportion of income to be spent on rent (or mortgage)? I understand that it is completely personal preference and depends on what phase of life one is in. I need some reference figures and opinions from financially wise individuals here.

My wife and I live in a 1LDK around 53m2 now. Currently, our rent is about 6% of our total yearly gross salary. We are expecting a child early next year. (couldn’t be more excited about this! ) Both of us also got big raises earlier this year (around 40%) and we expect more work-from-home scenarios. So, we are looking to move to a slightly larger place. And the only places that we seem to like are quite expensive; rent/gross salary ratio of around 13-15%, not considering the initial moving costs.

Or am I looking at this totally in a wrong way? Should I be considering anything else or thinking of it in another way?

for some context:
both of us max out our corporate DC, yearly regular NISA and plan to put in at least 2m+ in NISA next year (aim is 3.6m but it may be out of reach)
we are unsure if we will be in Japan 10 years from now
we don’t have any outstanding debts/loans
we are in our early-mid 30's
both of us non-Japanese citizenship

Edit1: added age
Edit2: added nationality info

[Deep Blue]

How long is a piece of string? For me, the ideal number is 0% which has been the case for us for a while. For others it could be 50% if they're young and saving hard to get on the property ladder before children etc come along.

Depends on so many factors - age, rent vs mortgage, lifestyle, financial situation, family plans, location, single/dual income, job security, potential to relocate in the future.... probably dozens more than don't immediately come to mind.

[Beaglehound]

My instinct is that your current level of 6% seems low, rather than the potential new percentage levels being overly high. New levels don’t seem ruinous for a nice place to live with enough space for your new addition.

[beanhead]

15% should be fine as long as both jobs are stable.
What would be the ratio if your wife does not return to work after the baby is born?

You should also consider if you need to purchase property if you will not stay in Japan long-term.
Trying to sell it or rent it out after 10 years if you are moving overseas would be complicated and could be costly.

[RetireJapan]

We are expecting a child early next year

Congratulations!

Your home is going to be as much an emotional decision as a financial one. Keeping your living cost as low as possible is going to allow you to save and invest more (or spend more money on other things).

Making yourself miserable or uncomfortable to maximize your savings is probably not a good idea though.

Our mortgage + manshon cost us about 8% of our annual income. We are very happy with our 3LDK manshon and I don't think spending more money on a 'better' place would make us happier.

But you will need to run the numbers for yourself. At the very least having an extra room for an office if you are both going to be WFH more in the future, and a bit of room for the baby will probably make things easier

[goran]

15% should be fine as long as both jobs are stable.
What would be the ratio if your wife does not return to work after the baby is born?

You should also consider if you need to purchase property if you will not stay in Japan long-term.
Trying to sell it or rent it out after 10 years if you are moving overseas would be complicated and could be costly.

Thank you for sharing your opinion.
Co-incidentally, my wife and my earnings are almost the same till the 1000's, so I think the ratio will double if one of us stops working.
However, I don't thinking that is an option for us. (considering financial goals and all)

Yes, I agree with you that without a clear understanding of how/where we want our long term future (after 5-10 years) to be, it does not make much sense to purchase here.

[goran]

We are expecting a child early next year

Congratulations!

Your home is going to be as much an emotional decision as a financial one. Keeping your living cost as low as possible is going to allow you to save and invest more (or spend more money on other things).

Making yourself miserable or uncomfortable to maximize your savings is probably not a good idea though.

Our mortgage + manshon cost us about 8% of our annual income. We are very happy with our 3LDK manshon and I don't think spending more money on a 'better' place would make us happier.

But you will need to run the numbers for yourself. At the very least having an extra room for an office if you are both going to be WFH more in the future, and a bit of room for the baby will probably make things easier

Thank you!

Running the numbers conservatively with fewer granularities, it seems that we will be veering off from our financial goals if we go with 15% rent/income place. (FIRE delayed by about 6 years) But we have not considered any potential salary increments, and annual growth of our investments at around 5%. Anyways, the consensus at my household is 15% is too much at this stage for rent. We will be aiming for something lower for now. Within this week, we are going to see some other 3LDK places for slightly lower rent than our current consideration.

For now, 10-13% seems to be the number that allows us to sleep well at night. Let's see what kind of compromises we'd need to do for a place like that.

[goran]

My instinct is that your current level of 6% seems low, rather than the potential new percentage levels being overly high. New levels don’t seem ruinous for a nice place to live with enough space for your new addition.

Thank you for sharing your opinion. We will see a few other places at lower rent before making any decision, and see how we feel about them.
For now, 10-13% rent/income is sitting well with us.

[adamu]

Or am I looking at this totally in a wrong way? Should I be considering anything else or thinking of it in another way?

The important number is what percentage of your income you are saving. If you decide that, you can adjust what's left however you see fit, including how much of it goes towards rent.

If you can save what you want, live how you like, and pay the rent, great. If you can't afford to save what you want, pay rent, and live how you like, you need to save less, cut expenses (rent or otherwise) or earn more.

[goran]

Or am I looking at this totally in a wrong way? Should I be considering anything else or thinking of it in another way?

The important number is what percentage of your income you are saving. If you decide that, you can adjust what's left however you see fit, including how much of it goes towards rent.

If you can save what you want, live how you like, and pay the rent, great. If you can't afford to save what you want, pay rent, and live how you like, you need to save less, cut expenses (rent or otherwise) or earn more.

The target is 40% or above (investments + cash reserves; not counting emergency fund here), with the new location it will fall to 37-38%.