When people speak about renting a home, many argue that there are just too many reasons not to do it. One of the main reasons is that you could be spending all that rent money on something you can own in the future. Another common reason is that you’re leaving your family open to homelessness if you can’t afford the rent. These are certainly good points, but most of them are exaggerated.
For many millennials renting is the way of life. Compared to other generations that came before them, they have the least need to purchase a home. But it is still on their to-do list, just not now or anytime soon. This strategy generally works for them. In some situations, people can actually rent for the rest of their lives without suffering the worries stated above. They can even save money while doing it. But how does renting save you money, exactly?
Homes are Much Pricier The Last Few Years
The cost of building or purchasing a home has skyrocketed because of the pandemic. It has reached one of the highest percentage increases in history, leaving many people worrying about their future. However, don’t worry about it all that much. Rent hasn’t increased by much because of this, and in some states, rent is actually much cheaper.
By renting this year and the coming years, you can save yourself a decent amount of money. By saving this money, you can get a home loan from mortgage lenders near you. This should give you a head start among your peers, despite renting for a couple of years. How do you strategically do this?
Find a City with a High Price-to-rent Ratio
The price-to-rent ratio (P/R ratio) is an equation that helps you calculate whether if it’s better to rent or purchase a home in a city. Technically, you can find a condominium or a home, check its price, and compare it to the price of rent in a particular city. So it’s the price of a home over the price of renting, which is first divided by 12 months. If the P/R ratio is above 16, renting in that city is cheaper than purchasing a home.
You can also check this list to look into the states where it’s cheaper to rent than purchase a home. Generally, you want to rent in these states and save your money for investing in the future.
Now that you’re renting below the average home value every year, you can then save that money to invest. One robust investment option is index funds.
Index funds have a staggering return rate of 10%-11%. It can decrease to 8% but nothing lower than that. So if you save $20,000 every year, invest that into an investment fund, you can get an average of $2,000 ROI. That’s pretty huge, and once accumulated, you can use that same money to purchase a home.
Gold is also a prime investment you should look into to make your investment portfolio look more diverse. Gold is a stable investment, albeit quite expensive. But since you’re saving a decent amount of money by renting, then why not go for it? In ten years, you can easily purchase a home from this investment.
Spending Below 30% in Housing Costs
To maximize your savings and increase your investment opportunities, you should spend below 30% of your annual income on housing costs. So this means that your rent, cost of maintenance, and home services should be under 30% of your annual income. So, for example, if you’re earning $60,000 a year, you should spend only $19,500 on these costs.
Spending below 30% on housing costs will allow you to save, invest, and enjoy your money. However, if you want to be financially independent faster, we suggest investing this money into the investment options above.
When to Stop Renting?
With the insights above, it seems that renting is a more valuable option than purchasing a home, but there is a time when you should stop renting. Remember the P/R ratio above? Well, if your rent has reached above 50% of the average home price in your state, that means that you’re already spending way too much on housing costs. However, by that time, you should have invested enough money to purchase a home.
Usually, five years is enough to stop renting even in high P/R ratio cities. But it certainly depends on how much you’re saving and investing.
Now that you know all of this information, you shouldn’t be afraid to rent today! Many realtors believe that renting this year is a viable option while waiting for the market to simmer down. So save your money, invest, and wait for when home prices are low to purchase the home of your dreams.