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Renting an apartment: Everything you need to know

At a glance:

To rent or to own is a perennial question with no clear answer. When the housing market changes, the justifications to rent or own also change. Even when the market doesn't change, each side has its list of reasons and its advocates (there are wealthy people who rent, too).

We will discuss those reasons in this tutorial. We will also look at issues to consider when renting and how you can fit renting into your financial planning.

Why rent an apartment?

There are many good reasons for renting instead of buying.

It is often cheaper than owning

Some monthly mortgage payments are lower than rent, but some cost more. And of course, since houses are normally larger than apartments, you should ask yourself whether you actually need the extra space.

Keep in mind, too, that there are the various things that people naturally buy once they get into a house and see all kinds of space just waiting to be filled up with stuff; that's less likely with a rental.

Remember that a large portion of your monthly mortgage payment is interest. By the time you have paid off your mortgage, you may find that half or more than half of the grand total you paid went to interest. The mortgage interest tax deduction does offer some relief, but that requires you to itemize deductions.

Since the proportion of the mortgage loan payment that goes to interest decreases each month over the term of the mortgage, it could stop being beneficial to itemize rather than take the standard deduction.

Another advantage of renting: there are no property taxes to pay. Property taxes add hundreds of dollars to an owner's monthly costs. Again, there is a tax deduction for property taxes, but it is an itemized deduction and may not be as advantageous as the standard deduction eventually.

In fact, federal tax reform legislation now limits the maximum state and local tax deduction (which includes property tax and either income or sales taxes) to a maximum of $10,000 per year.

There are no condominium fees or homeowner association dues to pay, either.

If you are fortunate enough to have some or all of your utilities paid by the landlord, there's another chunk of change you are saving.

No maintenance costs

Mortgage and tax costs are predictable and can be planned. Not always so when your pipes burst, your furnace dies at 2 am on a cold January morning, you suddenly discover termites, or your roof starts caving in. Renters don't have those large maintenance costs. They are typically limited to light bulbs and other small things.

As a rule, then, renters have more predictable housing costs.

However …

Landlords work their own ownership and maintenance costs into the monthly rents that tenants pay, and rents can and do increase over the years. When the housing market tanks and home prices drop over the course of years, renting becomes more attractive, and landlords may increase their rents accordingly.

You can leave your apartment behind

On top of the advantages noted here, a renter isn't tied to a home. He or she can pack up and move across the country without worrying about whether the home will sell.

No fear of losing your investment

Not everyone makes a profit when selling a home. During a bad housing market, millions of owners find that their homes are worth less than what they owe on them (this is called negative equity, or "being underwater"). Renters need not worry about losing an investment.

Advocates for owning often refer to renting as "throwing your money away" because you are not building equity. Though you're not building equity through owning, any money you save can be invested elsewhere to build wealth. There are, in fact, renters who have become millionaires this way. Besides that, renters aren't really throwing their money away, because they are getting the use of a home and its advantages for their money.

What to look for when renting an apartment

There are many factors to look at when renting an apartment. Different people have different priorities; here are the most common ones to think about.

Price

Consider the rent, of course. But don't make that your only consideration. You might find that a more expensive apartment saves you extra money in other ways. For example, if you choose an apartment out in the suburbs because it is cheaper, what about the costs of commuting into the city?

Also, is living in an iffy neighborhood a good idea if, in exchange for lower rent, you have to worry about break-ins and theft? Consider all the factors and add them up.

Location

Just as with buying a home, location matters. Consider the tradeoff of low rent for an iffy neighborhood, but if that's less of an issue, look at what each neighborhood offers. Is there a big grocery store nearby? A college? Recreation? Clean lawns? Think of how much these things mean to you and ask what you are willing to pay to have them.

Reputation

Some landlords' reputations are so bad that they are a standing joke in the community. The reasons can be many—some landlords look for unfair ways to deny you your security deposit when you move out. Consider this, and also consider their responsiveness to complaints and to maintenance issues.

Amenities

Is a more expensive apartment a good deal because it has a nice gym or tennis court, or a party room, or copier service? Perhaps. You might even save money by using these over external ones.

Using a rental agent

Sometimes it pays to use a rental agent to find an apartment for you. It can be worth the time and hassle if you have special needs, or pets, or are new in town, or if you live far away and can't look for places in person.

Negotiating the rent

Most renters simply accept the going price on an apartment. However, you may have room to negotiate. Is the rent too high compared to comparable units in the neighborhood? Is there a surplus of apartments in the area? You could consider asking for a lease longer than 12 months in return for a lowered rent. This is an advantage to the landlord because it won't need to spend money on cleaning, repainting, advertising, and showing the unit after 12 months. Also, if you offer to make some repairs or repaint the place yourself, your landlord may be willing to cut you a deal. And further, if you can spot a unit that has been vacant for a few months, the landlord will be especially eager to get it rented ASAP—this could be your chance to ask for a lower rent amount.

Bottom line: if the landlord can save some money on you, he or she might negotiate.

The apartment itself

Be sure to see the actual apartment and make sure that it is clean and maintained and in good surroundings. Believe it or not, some people rent a place based upon a model unit or pictures in an ad.

The lease

Read the fine print carefully to ensure that you know what you are and are not responsible for. Some landlords require you to pay for this or that when you move out. Some leases state specific responsibilities that you will have to pay for, such as broken windows. If you want to run a business on the side, the lease may prohibit that. Many leases also spell out who is responsible for what legal costs in the event of lawsuits.

How to rent an apartment when your credit is bad

Many landlords, especially corporations running large apartment complexes, do credit checks on renters and will refuse those with bad credit. This is true even if the renters have sufficient income and a spotless rental history.

What can you do if you have bad credit and you need a place to rent? Here are some options.

Go with an individual landlord

Look for individually-owned, smaller apartments or homes. Many individuals who own apartments or homes don't look at credit. They may be more interested in your references from past landlords. There is also the option of staying with friends and family.

Be honest

If you are unable to find a landlord who doesn't check your credit, then you may need to talk with potential landlords. Sometimes the right sob story helps. Divorce, job loss, and other such events can lead to bad credit. Explain your situation to landlords and detail how you have cleaned up your finances and how you will handle the rent. Remember one thing: don't give such an explanation unless you're sure that the landlord even does credit checks in the first place.

Get help from someone else

You might get a cosigner—a person with good credit who agrees to guarantee your rent. The cosigner is on the hook for any rent you don't pay, which makes the landlord more willing to rent to you. Friends and family members are popular choices as cosigners, but remember that this can strain relationships now and in the future.

Use a bigger security deposit

Another option: pay a larger security deposit up front in order to cover your risk of default and eviction. The larger the deposit, the more vigilant you will be about getting it back. Many states regulate how much of a security deposit a landlord can demand, so you could try to offer something above this limit.

Above all, work on your credit

Of course, work on getting your credit back in shape, because you will eventually need it for other things. Get your credit report and find out exactly what is dragging you down. Not all things affect your rentability easily. Pay any past due balances, especially to previous landlords. Being on the path to better credit is itself a positive sign, which can sway some landlords.

How to fit rent into your financial planning

Many people view renting a home as a temporary stage on the way to home ownership; some of them save up funds for a down payment on a home while they are renting.

But others prefer to rent all their lives. Just like owners, renters have financial planning issues and can also benefit from creating financial plans and sticking with them.

Renter's insurance

Although there is no homeowner's insurance to pay, there may be renter's insurance. Renter's insurance is not very expensive, and it can buy peace of mind for your belongings and valuables. Insurance is an important part of financial planning because it protects the wealth you have been building up for years; if you do not have renter's insurance yet, it pays to look into its cost and its coverage and set aside funds for it.

If you already have some other form of insurance like auto or health, you may qualify for a discount if you get renter's insurance with that same company. Working with an agent can help you determine the amount you need to cover and at what cost.

If you are self-employed and work out of your home, you may be able to take a tax deduction on part of your renter's insurance cost.

Rent and invest the difference

Some avowed renters find that the money they would otherwise have spent on ownership costs can be substantial, and they invest that amount in the stock market, mutual funds, currencies, or various other investments. Consider making an estimate of what you might pay for a home, then take the difference between that and a typical rent.

The difference can be put into investments to build wealth. Remember to include utilities such as water, garbage collection, and possibly heat and electricity to make the comparison accurate. What this means is that renters can build equity through means other than their homes.

Your budget as a renter is typically more predictable than an owner's budget because you don't have to worry about a sudden repair sucking up a huge amount of your budget or your credit card. Because your housing expense is predictable, you can stay on track with your investing plan.

In this June 20, 2019 photo Irene Scully tours an apartment for rent in Escondido, Calif. (AP Photo/Gregory Bull)
In this June 20, 2019 photo Irene Scully tours an apartment for rent in Escondido, Calif. (AP Photo/Gregory Bull)

Profit from other savings

Some renters find that they pay less in various lifestyle expenses such as health club memberships because those things are already provided for at their apartments. If you are one of these people, consider diverting the money you would have spent on these amenities into an investment instead.

Many people have counted on their home equity to help fund their retirement. Of course, this only works when home prices rise. If you are not counting on it, you will have to rely on other means instead (and even if you do have equity, it might be canceled out by your home's maintenance and interest costs).

That means having a 401(k), IRA, or other retirement account and funding it regularly. Contrary to popular opinion, it IS possible for renters to get rich, provided that they invest in assets that grow. A visit to a financial planner can get you on the road to investing in assets that build your wealth as a renter.

Summary of renting an apartment

Though there's no investment potential in it, renting is still a wise choice for many people. There are many hassles you don't have to worry about, the costs can be much lower than owning, and you can still work on creating wealth through other means. Also, you're not stuck in a home that you cannot sell.

Young people and those of limited income are not the only renters out there. Sometimes retired people choose to rent as a way to make their savings last longer and cut out the maintenance hassles that they might be tired of tending to.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

Read more information and tips in our Housing section

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