To rent or to buy? It can be a major dilemma and life decision, especially for young professionals in their 20s. And now the choice is becoming more and more complex as demand for rentals continues to skyrocket and, as a result, the price of monthly rent. A recent New York Times article shed light on the issue, explaining how the middle class simply can’t afford rentals like they used to.
Traditionally, renters aimed to spend no more than 30% of their income on housing and utilities. This benchmark is important as it allows for other important categories on a budget such as savings. The rental website Zillow conducted a study this week that examined how rental rates have been increasing and are now approaching or exceeding this 30% line in many cities. This issue is especially important for soon-to-be graduates, as pricey rent may stretch budgets and have a series of side affects. For one, saving for retirement and paying back student loans are often the first things to go in order to maintain a certain lifestyle for today. Both have severe consequences due to interest accruing. For savings, losing years of compounding on retirement accounts is crippling for goals of having an adequate amount of future wealth. On the contrary, paying the minimum in loans rather than a targeted monthly payment could end up costing thousands down the road as the higher balance continues to punish the lender via interest costs. Alternatively, it is possible to save money in other places – like buying cheaper, more unhealthy food. I recently wrote a blog post examining why the easy access to junk food is a huge threat to the U.S. population that can be found here. A graph showing trends for rental and mortgage rates is shown below:
Of course, high rental rates aren’t just a problem for those headed to the real world. Ann Arbor’s off campus housing can be expensive and hard-to-find, and these increases in rent prices are going to have serious consequences for college students in the area. As shown in the graph below featuring Ann Arbor-specific data, Ann Arbor rental rates already are close to 35%. With many students either working part-time or using loans to pay rent, raising rates further could cause housing located near campus to cease being an option for many students.
But what can be done? The other feature on the above graphs is the affordability of taking a mortgage. Unlike rental affordability, mortgages have seen a favorable trend since the recession. One potential option for students is to purchase an off-campus home. While this may seem extreme, especially for those planning to leave Michigan following their graduation, it could have a plethora of benefits. Most importantly, the thousands accrued in rent over the years wouldn’t be going to a bloodthirsty Ann Arbor housing company. Instead, those monthly payments would be available in asset value down the road.
Sure, I personally recommend living as close to campus as possible and enjoying the once-in-a-lifetime college experience. Commuting to school would be a completely different lifestyle and would turn many (including myself) away. However, having a home partially paid off coming out of college would be an absolute game changer and set a student far ahead from their peers. To conclude, I wanted to offer an actual example of buying rather than leasing as a student. A cousin going to school in Wisconsin decided to partner with two others and purchase a “fixer-upper” three years ago. Recently while home for the holidays, he mentioned to me that his group now own three homes in the area and he has yet to pay a cent in rent while in college.
While it may not be for everyone, a radical change could be on the horizon for student living. With rental rates across the country skyrocketing, it may be time to take a risk and choose to buy, not rent.