Renters everywhere are feeling the constraints of rising rents. Rising rents erodes your ability to save for the cash needed to buy a home. It becomes a catch 22 because the longer you rent the more you need to save in order to offset rent increases while maintaining the rate at which you are saving.
Saving up to buy a home is no easy feat. You’ll need at least a minimum of $20,000 to buy a home comprised of a down payment plus closing costs. You’ll need at least a 3.5% down payment and closing costs can be upwards of $7k to $10,000 respectively. Generally, expect closing costs about to be two to three percent of the purchase price. This goes without saying, the higher the home price, the more of your funds that will be needed for the down payment with less going to closing costs.
Picture this scenario: you’re diligently putting away at least 15% of your gross monthly income into buying a home in the near future (a figure which you should be anyway if you have a 1-2 year trajectory for this goal). Let’s say your income is $8,333 per month ($100k annual income) either from you or a spouse or combined, you should be saving at least $15,000 per year of your pretax gross income to put a big dent in practically having enough funds to play ball with. On the other hand, your rent payment is $2200 per month, if your rent payment climbs even as little as a few hundred dollars more on a monthly basis, that change will delay your home buying plan. To offset such a change, you have to save even more money to offset the however much your rental increase went up by if you don’t want the rental increase to throw off your home buying timeline. This is a critical concept you must buy into if you intend on keeping your home buying project alive. You also cut expenses to offset the rent increase, more on this in a moment.
Where The Rent, Savings & Home Purchase Come Together
Using our above housing situation example, if the rent rose to $2,500 per month you would need $600 per month more income to offset the rent increase it if you still want to say on the savings rate trajectory at 15% of your monthly income.
A few ways to offset the rent increase:
- cut an expense… if possible equal to the rent increase- most common ways to do this, is to get rid of another loan such as a student loan, car financing or any other high payment consumer debt (anything ‘high payment’ is $100/month or more)
- locate a new place with a lower rental obligation, uncomfortable yes, but worth it for the greater good of buying a home in the near future
- move in with family to aggressively save
- get a roommate to offset the rental increase essentially doubling up on the income to offset the rental increase
- lock in your rent with a lease- a word of caution, a lease binds you to a property which might not be such a bad thing as long as the time frame of the lease is consistent with your savings plan
- buy a home sooner if you are financially able to do so-many 401(k) and retirement fund accounts allow for special privilege borrowing provisions to buy a primary residence. If you have slush fund monies in your 401(k) this could be a good option and the money comes out of your paycheck pre-tax.
The rent is now $2,500 in this depiction. Taking no action and accepting the higher rent payment will lengthen your home buying trajectory as your savings rate diminishes. With the rent now at $2,500 based on the 100k income your savings rate falls to 11.4% which may still get you into a home, but perhaps a cost of a lower purchase price amount or neighborhood or the plan just takes longer. As demand for housing remains strong, monthly rents are subject to change commensurate with what the market will bear.
Savings Tip: using the 15% home savings rate figure, you will need an annual income of at least $60k if you are looking to buy a home anywhere in Sonoma County.
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