Welcome to the last entry in the “How to Manage” series! We have been going over different tools you can use to build your financial toolbox. We went over budgets here, over expenses here, and over credit here. Today we will be going over rent and how to make an educated decision on it.
But before we start, there’s a question I want to ask you to see where you stand in the buy vs. rent dilemma:
1) Should You Rent?
This should be the first question that comes to your mind. There are some of the things you should be asking yourself:
- Do I need to be flexible with my location?
- Do I have $10,000 to $20,000 laying around?
- Do I want to be responsible for repairs in my home?
Now that you have answered the questions above, let’s assume you want or are currently renting. Renting is ideal when your job or your lifestyle requires you to consider moving from time to time. I work in the construction industry, and one of the biggest factors about my work is the willingness to relocate. Think about relocation before buying a house.
Moreover, the price and the size of the home you could buy depends on your annual income and the down payment you make. If your income steadily increases at a slow rate, the money you put down will be the biggest variable. The more money you put down, the bigger house you can buy. If you don’t have enough cash at the moment, you can always rent while you save to buy the type of house you want.
Lastly, you must consider if you enjoy making repairs or not. As the owner of a home, you are responsible for everything from the roof to the basement, and from the fence to the driveway. When you rent, the owner is responsible for wear and tear repairs. If you want to be responsible for repairs, you can go ahead and buy, otherwise, think about renting.
2) Make It Less Than Half
When I say less than half, I mean less than half of your budget. To do this, take a look at your post-tax income and look at your potential yearly rental cost. Divide the yearly cost of the rental by your yearly post-tax income, multiply it by 100 and see what number you get. Try doing this exercise and get back to me. What number are you getting? Also, please note that I use post-tax income because it best reflects your purchasing power.
According to the Department of Numbers, Americans are spending close to 20% of their income in rent. This a good target to keep in mind when looking for a place to rent. We all want to live comfortably, and we should, but it really should fit within your budget and your financial goals.
3) Look Twice Before You Commit
Just like buying a house, renting comes with a certain degree of accountability. Basically, you can’t just rent anywhere and expect to move out a month later with no repercussions. When you sign a contract to move somewhere for a certain period of time, you are legally bound to live there. The rental contract may have contract release fees, or early termination clauses that could really set you back.
Knowing this, you need to do your homework. Look around the area you want to live and find comparable options. Read the rental contract from top to bottom. Know the length you need to live there and the amenities the place offers. Also, look into the average cost of utilities of the area, because sometimes certain places have specific utility and network providers. These are some of the items you want to consider in order to make sure you don’t commit to a place you might regret later.
And that’s a wrap! Thank you for following this series, I hope you enjoyed it! If you have any questions or would like more topics about finances please let me know!