The recent price upswing in the housing market is causing some Americans to put the dream of homeownership on hold. And according to the professionals, that's not necessarily a bad decision.
Walter Molony of the National Association of Realtors says that sometimes renting makes good financial sense. "If you have a short-term time horizon, insufficient credit or uncertain economic security, it is better to rent," he says.
USAA's J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner, agrees. "It's harder to qualify for a mortgage today," he says, "and more Americans are seeking a roof over their heads without the burden of a mortgage, maintenance and other responsibilities."
"Whenever there's doubt about homeownership, I always suggest renting. You can always make owning a home a longer-term goal."
A Look at the Numbers
If you don't own your home, you're part of a trend. According to the latest information released by the U.S. Census Bureau, renters made up 36.1% of U.S. households in 2012, up from 35.4% in 2011. Census statistics also show that rental vacancies fell to 8.2 percent in the second quarter of 2013 — that's 0.4% lower than the same time in 2012.
The drop in the availability of rental homes signals a strengthening economy, allowing landlords to charge more for properties, especially in areas where the job market has improved.
In areas where rentals are scarce, buying a home might be cheaper than renting, says USAA's Sarah Goodwin, assistant vice president of Home Event. However, she adds, you should base your decision on your overall circumstances.
If you're in the market to rent, these five tips can help you choose a good place for your lifestyle and budget.
1. Know the Rental Price and Fees
Figure out your housing budget. "The same rules apply when renting or buying a home," says Montanaro, who suggests spending no more than 28% of pretax monthly income on housing. "Closer to 20% is better," he adds.
Negotiating a lower rental price than advertised is acceptable. Be professional and polite, but don't be afraid to ask for what you want. The worst a landlord can do is say "no."
Some landlords may charge extra for appliances, such as a stove and a refrigerator, so be sure you know what's included in the rental price. Also ask if utilities and garbage pickup are included in the rent. If not, check with utilities companies in the area to get estimates based on ZIP code.
Military renters will know their budget from their basic allowance for housing, or BAH. Active-duty members also can use USAA's Home Circle™ tool to look up the housing allowance based on the ZIP code in which they are — or will be — stationed. Use this figure to help keep rental costs in check, remembering to set aside some of the BAH for utilities and other housing costs.
A Renter's Go-To Glossary
Grace period — Leeway for late payments. This time frame may stretch up to a week or 10 days after rent is due.
Habitable — The legal term that requires a landlord to keep the property fit to live in. Your lease shouldn't limit the landlord's responsibility for upkeep and regular maintenance.
Included vs. available — Typically, what's "included" comes at no charge, while "available" amenities come with additional fees.
Lessee — This is the person legally responsible for the lease. If you have roommates, make sure they sign the lease, too, so you will not be solely responsible if they fail to pay their share of the rent.
Notice before moving out — Typically, 30 days' notice is required for month-to-month leases. Not giving this much notice usually won't result in a penalty, but that depends on the landlord and the terms of the lease. Some landlords allow a shorter notice for tenants with military orders, the birth of a child or other life circumstances.
2. Know What You're Signing
Ask for clarification of any confusing language in the lease agreement, and make sure you understand the terms, such as:
- Length of the lease.
- Deposit requirement and any refund upon moving out.
- Property maintenance policies.
- Pet policies.
- Whether you'll be allowed to make cosmetic changes, such as painting or adding special lighting.
- Whether roommates cosign or negotiate their own lease.
- Consequences if you or your roomies default on payment.
- Any circumstances in which the lease can be broken, such as a new job opportunity or job loss. The Servicemembers Civil Relief Act may provide relief with your lease if you're deployed or receive PCS orders.
Montanaro also suggests finding out what happens when the lease expires. Some leases provide for month-to-month rental, while others automatically renew for a six-month term or longer.
3. Understand What a Landlord Can Ask For
A landlord can check your credit score and criminal history, and they also may ask for a copy of your pay stub or for personal references.
Montanaro says he's noticed a trend of landlords reporting renters' payment records to credit agencies. That can be good if you're trying to establish a credit history or improve your credit score. Ask if your landlord reports payments to credit agencies, and always pay your rent in full and on time.
4. Don't Skimp on Renters Insurance
A renters insurance policy helps protect your personal possessions and your pocketbook. Your landlord's insurance covers damage to the structure only — not, for example, your extensive music collection or other belongings. Some renters policies also cover earthquake and flood damage and provide protection for medical and legal expenses if someone is injured while visiting you.
5. Learn the Local Landscape
The proximity of a grocery store or shopping center, as well as your work commute and the accessibility of highways will help determine your quality of life. "It can be the biggest factor when you buy or rent," says Montanaro of location.
Richard Novak, vice president of USAA's Integrated Solutions, says "Schools also are important when looking for a place to live. Families often choose to rent in order to live in a better school district," he says. USAA Home Circle provides school data and GreatSchools™ ratings to help members identify and search for homes in the neighborhood that is best for their families.
Research neighborhood crime rates, too, so you'll be reassured that you're moving to a place where you and family will feel reasonably safe.
Before You Settle In
Once you've signed your lease agreement, take pictures of the apartment or house to document its condition before you move in. Doing so can help protect you from liability for any damages to the property left by the previous tenant.
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