Housing, Transportation, and Food are the 3 biggest line items on a person’s yearly spending. Targeting these three items will drastically reduce the amount you spend now, and the amount you need to live off of in the future.
Renting is not throwing your money away if you buy what you need and rent the rest!
Find your way around:
Rent or Buy? That is the question…
Renting is not throwing your money away, and can be better than owning a personal home in many instances.
There is plenty of debate on the differences between renting versus owning. I will share our renting journey and hopefully show other renters that renting is not “throwing your money away”.
Disclaimer: We are biased as we have never been home owners and are serial renters. However, we have rented a number of apartments, condos, and full single family homes over the past 10 years. This post will look at renting verses owning a personal property, not investment real estate. Investment real estate is an entirely different topic.
Our rental journey
I started off renting my “bachelor pad” in 2012. At the time I thought I needed a “nice” place. I found a great 1 bedroom unit available. The price? 30% of my gross salary. I convinced myself that it was worth it and signed the lease. Little did I know this one decision would impact my financial health for years to come.
This period I was “asleep”, and did not understand how my personal spending would affect my future self. I “woke up” when I met my significant other (the other half of ThatScienceCouple).
We moved in together shortly after dating and my rent went from 30% down to 18% of my gross salary. This drastically reduced my need to live “paycheck to paycheck”. Then I got serious about getting my “financial house in order”, and worked to pay off my credit card balance followed by my student and car loans.
We then realized that we were much happier when we spent money on experiences. The experiences started small, with concerts, then grew into wanting to travel internationally. I realized I didn’t want to wait until I was old and tired after working for 30 years to travel (if I even could then), I wanted to do it now!
Reevaluating the granite countertops
Our first place together was a nice 2 bedroom, 2 bath, condo. Complete with a garage, hard wood floors, fire place, granite countertops, and a washer dryer in unit. At the time this was great, we enjoyed all the nice amenities, including the local pool and walking to the grocery store a half mile away.
The best part is that we were still saving money, so I set a goal of traveling internationally. We chose to start planning our first international trip and were soon dreaming of traveling to Ireland.
We picked a date and had 6 months to start saving before we were set to travel. However, when it came time to resign our lease, with the $50/month increase we realized that we couldn’t have both. We looked at our finances and identified that there was still room to improve our budget. The biggest fat to cut was our rent payment.
Looking at our map of Ireland hanging in our dining room we had the tough decision to make. “Was the nice condo worth it? Do we cancel or push back our trip, or find a more affordable place to live?”
After some searching, we found a place that was 45% less than our 1st apartment together. My personal rent amount went from 18% down to 10% of my gross salary. Our choice to move was the only way, so we made it, and we couldn’t be happier.
Choices in Life Matter
We chose to cut our rent in half, which allowed us to save enough money to travel internationally. This was a life changing experience for us both. We learned that we wanted this as part of our life for the foreseeable future. Though we eventually moved from the cheaper apartment and now live in one that is slightly more expensive (<$100 more a month), we never stopped spending far less than we earned each year, especially on housing.
How much should I spend on rent?
Renting does not have take a large portion of your income.
How much you should spend on rent depends entirely on your needs. Traditional advice says to spend no more than 30% of your gross income on rent/mortgage. I would advocate that you aim to spend no more than 20-30% of your net take home pay.
Using a $50,000 USD salary, 30% of your gross salary would be $1250/month, whereas 20-30% of your net salary would be $500-$750/month. This means you would spend $6,000-9,000 per year for housing versus $15,000 using the traditional advice. The money saved ($9k-12k) can easily be used to achieve your other goals in life, such as emergency fund, 529 college savings plan, trips around the world, etc.
Negotiating rent prices
This may sound unachievable but we are living proof that it is possible if you take the time to “shop around” before signing a lease. Even if you are in love with a property, you still can have the upper hand.
The condo we lived in we were able to negotiate $50/month off the asking price for rent because we said that we didn’t need use of the additional garage. However, since it was a part of the landlords property so we still got to use the garage free of charge. In addition, we were able to have them throw in two free pool passes for the year to get us to close the deal since we had cash ready to put down as a deposit.
The townhouse we lived in for two years, we were able to negotiate reduced rent prices in exchange for pet sitting for our landlords when they went on vacation. It just goes to show that when we offer to help one another it can benefit you in unexpected ways.
The resigning increase
Be aware that inflation is between 2-3% per year, so you can expect for your rent to increase this much as well. When we were presented with a 3.7% increase from one year to the next, we knew it was time to move on.
However, with the townhouse and single family home that we rented, we were able to negotiate no rental increases year over year with our landlords. That means that we were paying roughly 2-3% less every year that this occurred!
We were good tenants that took care of their property and helped them out as well. This was repaid to us through not raising our rent multiple years.
Also, every year you don’t have to move eliminates the need for a putting down an additional deposit and other moving expenses. So once you can find a place willing to work with you that you can lock in for a low rate, the savings can continue to add up!
What if the area you work in has a high cost of living?
Sometimes this is unavoidable, but does transportation play a role in your decision?
If you can go from a two car family to a one car, or even better no car, this adds value to the location. Public transportation (when possible) can provide savings to compensate for some of the increase in rental costs. But try not to get carried away, if you save $150 a month on gas and car insurance that could be $150 more for rent, not $500.
Should I rent or buy?
This is highly dependent on your stage in life and where you see your life going over the next 10-20 years. We feel that you should “buy your freedom and rent the rest”. Renting allows you freedom and flexibility that a mortgage does not. Owning property comes with many hidden costs aside from the mortgage (property taxes, home insurance, repairs, utilities, water, trash, etc). You also are physically tied to a location, whereas with renting you can always move to another property if you want to, or break the lease if you wish to go travel the world!
Owning a home is not “bad”, and renting is not “good”. It is a decision we all must make, and we can go back and forth between the two over our lives. We are renters and prefer renting, however if you find that you need to own a home, be sure to sit down and do all the math associated with the costs, rather than just looking at the mortgage and assuming that those are the only ‘costs’ associated with owning a home.
For a great in depth article on home ownership, check out Millenial Revolution’s article on Owning vs. Renting: Home Ownership and Leverage.
The Rule of 150
For a simple calculation to make this decision, the “rule” states that if your rent is less than 150% of your mortgage, it is better to rent. If your rent is greater than 150% of the mortgage, it is better to buy.
Example: If your rent was $1200, but you could get a mortgage for less than $800, it is better to buy. However if your rent is only $800, then your mortgage would have to be less than $533.34 per month for it to be better to buy than rent.
There are many “rules” out there, and this is just one example you can use if you are looking at going from renting to owning your first (or second) home. Consider whether your current rent price is below or above the ‘rule of 150’, and then use that as a metric on whether or not to buy a house payment.
So what now?
Whether you choose to rent or buy a house, don’t let the pressure of society be what makes the decision for you. Instead, do the math and remember that you can buy what you need and rent the rest. If you find yourself paying too much for rent, the next time your lease is up, shop around! The great thing about renting is that you can choose to make a move to follow a dream job, go back to school, or live in a quieter area. You are in control of your own destiny and not the home repair bills!
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