It has long been a truism in the financial world that it is better to own than it is to rent, enabling you to build equity and home value appreciation over time. But with about 20 million renting households in the U.S., is that always the case? For African Americans who have historically heavily invested our resources in home-ownership as a means of economic security, this is a question worth looking at more closely.
The answer lies in a complicated web of factors that will be different for each person -- including the health of the housing market where you intend to live, your age, income and how much you can spend, how long you intend to stay in the property, your long-range financial plans and more.
Condition of Housing Market
Many expensive markets such as San Francisco, California, have sky-high costs for both buyers and renters. But in moderately priced cities like Chicago, even though buying remains relatively expensive, an abundance of rental inventory keeps rental prices low, making renting an attractive proposition.
Of course for many young couples or singles just starting out, who are earning average to low salaries and not receiving financial help from their parents, renting means they can avoid the cash down-payment that comes with buying. In accelerating housing markets, like the one we're in now, those down-payments only get larger. The median existing single-family home price was $191,600 in the first quarter of 2014, up 8.6 percent from last year. Many cannot pull together the average 10 percent down payment in this case $19,000 up front.
Age and How Long You Intend to Stay in the Property
Renting can also make more sense than buying for younger people who expect to change jobs and relocate frequently as they move up the career ladder. The era of the lifetime job is over. Today, by the time he or she is 31 years old, the average worker is expected to hold 12 to 15 jobs. For homeowners, even a few moves would cost a small fortune in closing fees and taxes. For renters it would be far less costly. Can renting make sense even if it costs more on a monthly basis than buying? Yes, for the reasons discussed above.
Income and How Much You Can Spend
A good rule of thumb is to know exactly how much of your income goes to housing costs. According to the U.S. Department of Housing and Urban Development, a family is "rent burdened" if 30 percent or more of its monthly income goes to rent. A family is "severely debt-burdened" if 50 percent or more of its monthly income goes to rent. In a low mortgage interest rate environment such as the one we are in now, buying becomes more attractive simply because the cost falls. Trulia.com has a sliding scale that allows you to input numbers and make a comparison for yourself.
Homeownership remains a good foundational step in wealth building, but renting can also be the right short-term solution for individuals and young families and in some extremely expensive markets renting can be the best long term plan. When deciding to rent or buy you should assess prices and interest rates in your local housing market, know your personal finances and the length of time you expect to stay in the home.
Renting can be the right economic choice for millions of Americans. Calculate the cost and benefits for your particular situation and see if renting is right for you.
The Internet has turned me into a hardcore comparison shopper, and apartments are no different. There are dozens of apartment rental sites listing dozens of properties in my hometown. It pays to check out several of these sites when you're looking for a new pad. I mentioned a few sites you should use (and a few you shouldn't) in The Best (and Worst) Apartment Rental Sites. But don't stop your search with your computer. I found my last apartment through a "For Rent" sign in the window. The place was $150 cheaper than anything else I found, and I never saw an online ad for it.
Location is everything in real estate. If you live in the most popular area, you're going to pay the highest rent. But if you move a couple of miles (or sometimes even a few blocks) away, you can get a serious discount. For example, renters in my city (New Orleans) pay about $1,250 a month to live in studio apartments on a trendy street. I live four blocks away and pay $750 a month for a one-bedroom. I don't get bragging rights, but I'm still within walking distance - and I'm saving $500 a month.
I start looking for a new apartment a month or two before I need one. If I find a place I like, I keep an eye on it. More often than not, private landlords lower their asking price if they don't find a tenant within a week or two.
You're locked into your rent as long as you're under a lease. If you sign a longer lease, you'll be locked into the lower rate if the cost of rent goes up. Two years ago, my friend signed a three-year lease on his apartment. Last year, the landlord raised the rent $200 across the complex. By locking himself into a set rate for three years, my friend has saved $2,400 so far.
I am not a haggler, but when it comes to my single biggest expense, I negotiate. It doesn't always work, but if you do your homework - and give the landlord a good reason - he may be willing to lower the rent. (Learn how to haggle here: The Simplest Way to Save on Everything.) Start by researching the average rent in the area. If the landlord is charging more than everyone else, print out a few ads to prove it. Then convince the landlord that he should want you as a tenant. I ask for referral letters from my previous landlords, make copies of my bank statements, and pull my credit report. By showing the landlord that I'm a good tenant - and I know that he's over-charging - I can negotiate a better rate.
I always compare the cost of the rent with the amenities or the utilities that are sometimes included. For example, I recently looked at two duplexes. One went for $775 a month but didn't include any utilities or a parking space. The other rented for $800 a month but included water, trash, Wi-Fi, and an off-street space. Obviously, $775 is cheaper than $800. But when you consider the average water and trash bill in my area is $50 a month, and the average Internet cost is $45 a month, I'd actually save $95 a month by going with the more expensive rental.
If you have a skill a landlord needs, you might get a discount on your rent. My landlord rents a unit to a tenant who also serves as our maintenance guy. In exchange for doing the odd job, he gets $350 a month off his rent. But you don't have to be handy with tools. Landlords occasionally need people to maintain their website, design rental ads, or manage their properties. If you've got free time, offer to trade your services for a discount.
A few of my neighbors have made a quick profit by renting out their place for the night to tourists. Granted, there are some serious downsides to the idea - like your place possibly getting trashed - but my neighbor made $300 in two nights. If you live in a popular city, you could stand to make a profit a few times a year. Just make sure you get your landlord's approval - and ask for a security deposit before you open the door to strangers. If you're a renter, also check out 6 Myths about Renter's Insurance - and How to Save and 9 Ways to Remodel Your Rental Without Breaking Your Lease.
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