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  • Philip, brace yourself.

  • I'm about to say something controversial...

  • What is it?

  • The Earth is flat?

  • Tomatoes aren't really a fruit?

  • The Star Wars prequels were better than the originals?

  • Renting isn't always a bad financial decision...

  • Say what?

  • But isn't renting just throwing money away?

  • When you buy a home, your monthly payments are going towards something you will eventually own.

  • Yes, but not for a long time. [Amortization schedule.]

  • Thanks to amortization, the first five to ten years of mortgage payments are mostly interest. -[Amortization schedule: principal, interest.]

  • Butbut the home is appreciating, right?

  • So even if you're not paying down the principal, you're still making money, right?

  • True, but not that much more than inflation. [1967–2019, home price increase rate: 4.23 percent, inflation rate: 3.99 percent.]

  • Home ownership might work out for some, but can become a financial burden for others.

  • So when is renting a good financial decision?

  • And is renting viable as a long-term strategy?

  • [Two Cents.]

  • This is Kira.

  • She just landed a job in a new city, and has already started shopping for places to live.

  • She's trying to decide if she should take the money she's saved up and put it towards a house, or invest it in index funds while she rents.

  • [Check the P/R ratio!]

  • A great way to find out whether you should rent or buy is to look at the price-to-rent ratio.

  • Find two similar houses, apartments, or condos in your area; one for sale and one for rent.

  • Divide the sale price of one by the annual rental cost of the other.

  • Experts say if the P/R ratio is over 15, it's probably less expensive to rent.

  • For example, the P/R ratio for the city of Cincinnati is about 8.3, according to the US Census Bureau.

  • In our hometown of Austin, it's 22.9.

  • And in San Francisco, it's 50.1!

  • Put another way, a 600,000 USD home in San Francisco would rent for only 1,000 USD a month!

  • There are even free rent-vs-buy calculators online that will help you do the math with your own specifics!

  • After shopping around, Kira finds an area that she's happy with.

  • The average home price is 270,000 USD.

  • And the average rent is 1,100 USD a month.

  • That means her area's P/R ratio is 20.5, and she'll get more bang for her buck by renting.

  • She also doesn't know if she wants to live in this city long term, making renting an even more attractive option.

  • She decides against buying a home, and will invest the money she saved for a down payment in an index fund instead.

  • [Set a budget!]

  • When it comes to affording a place to live, Millennials have an uphill battle.

  • Baby Boomers spent an average of 36 percent of their income on rent.

  • Gen-X spent 41 percent.

  • And Millennials now pay over 45 percent of their pre-tax income on housing costs alone!

  • This makes it especially hard to invest, save, and give to charity.

  • Experts suggest keeping your total housing costs below 30 percent of your income.

  • Kira's new salary is 58,000 USD a year.

  • That would mean her maximum fixed housing expense should ideally fall below 1450 USD a month.

  • Since utilities are usually 20 percent of housing expense, this would equate to 1160 USD a month in rent and $290 for utilities.

  • Now she has a budget to start shopping for her new place.

  • [Location! Location! Location!]

  • Kira's new job is downtown.

  • But rents in that area are pretty high.

  • Further out of town, costs are lowerbut then there's the commute.

  • One study found that every mile she has to drive to work costs 795 USD a year through depreciation, gas, maintenance, and lost wages.

  • For Kira, a 10 mile commute might cost her 8,000 USD a year!

  • She makes a mental note to add public transit and carpool meetups to her list of search criteria.

  • One often overlooked resource for renters in a new city is to work with a licensed realtor.

  • That's right, they're not just for home buyers!

  • A good realtor will know the best areas to begin your search.

  • They might know about better deals that aren't widely advertised.

  • And best of all, their commission is paid by the property owner, not you!

  • Kira would be smart to engage with one to help narrow her search.

  • [Consider a roomie!]

  • Kira's starting to get a little frustrated because none of the areas of town she likes fall within her budget.

  • She's momentarily tempted to throw her budget out the window, when a thought occurs to her.

  • Maybe she can keep her housing costs in line and live in a great area, if she will consider living with a roommate.

  • 30 percent of working-age adults lived in a so-called "doubled-up" household.

  • She could rent out a spare room to offset the higher costs!

  • And if she wants to cut costs even more, she might even look at "homeshare" networks.

  • For example, Senior Homeshare or Golden Girls Network pair younger renters with aging homeowners.

  • Rent is highly reduced in exchange for a little help around the house or rides to a doctor's appointment.

  • [Protect yourself!]

  • Another common pitfall renters face is failing to closely read their lease terms.

  • A lease is a legally enforceable document and it's your job to arm yourself with the knowledge of exactly what it says.

  • For example, if you move out early and don't abide by the lease-breaking rules perfectly, you could be liable for the rent of the entirety of the lease!

  • And if you plan to sublet or rent out the apartment, terms will be covered here too.

  • Some people are surprised to find out that damage of their belongings is not generally not covered by their property owner.

  • But renter's insurance is designed to protect against just that.

  • In the event of water damage, fire, smoke, or even theft, she can rest easy knowing her belongings are safe.

  • The best part?

  • Renter's insurance is quite cheap.

  • For the price of a pizza, Kira can know that her possessions will be fine, even if her building is not.

  • Kira is relieved to have found a place at last.

  • And because she has that index fund, she knows she'll keep pace with her homeowner friends.

  • Renting may be the right choice for Kira, but it's not for everyone.

  • If you're not strategic about it, it can feel like throwing money away.

  • But if you're careful to keep housing costs low, and invest the money you save, it can be a viable long-term alternative to owning.

  • And that's our two cents!

  • What's the P/R ratio in your neighborhood?

  • Calculate it and share it with us in the comments!

Philip, brace yourself.

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