The Rent Trap Is Real. Here's How to Avoid It

According to a report from Apartment List, rents rose year-to-year at a rate of 2.8 percent between 2016 and 2017. Rent growth is outpacing the overall rate of inflation and average hourly earnings, and has increased in 89 out of 100 major metropolitan areas around the US.

A report from RentCafe confirms that Chicago belongs to this group, with average rent increasing by 2 percent from 2016 to 2017. While that may not seem too significant, these increases really do add up – particularly when you consider how dramatically rents may rise over the span of 10, 20, or 30 years.

What’s more, a report from the Urban Institute, brought to our attention by Keeping Current Matters, suggests that more than 25 percent of renters – or 11.1 million households – are “severely cost-burdened” and spend “at least half their income on rental housing.”

This creates a condition that real estate experts call “the rent trap” – a situation where so much of a household’s income goes to rent that they have to struggle to save enough to buy a home (let alone save for a rainy day, or take on other major bills, like healthcare costs).

One way to break free of the rent trap – and lock yourself into a consistent, manageable monthly payment for years on end – is to purchase a home.

While this may seem like a daunting ask, it’s more achievable than many think – and your wallet will start feeling the benefits before you know it! Here are a few things to keep in mind when it comes to renting vs. owning:

Owning a Home Is Often Cheaper Than Renting

As one recent Zillow report notes:

“Looking strictly at housing market numbers, there is a concrete point at which buying a home makes more financial sense than renting it.”

And that “breakeven” point has a lower threshold than you might think. In fact, in the 100 largest metro areas of the US, homeownership (with a traditional 30-year fixed rate mortgage) is cheaper than renting by an average rate of 33.1 percent, according to a study from Trulia. In Chicago, it is 33.9 percent less expensive to own a home than rent, according to Trulia.

What’s more, with mortgage rates remaining low, chances are good that you’ll be able to lock in a rate that remains affordable for the life of your loan. This means that you’ll be paying a consistent monthly cost, even as unpredictable factors (such as inventory, tax code changes, or interest rate hikes) change and affect home and rental prices.

Owning a Home Comes With Long-Term Financial Benefits

In addition to locking in your mortgage rate and getting a handle on your monthly payments, there is further evidence that owning a home comes with long-term financial benefits that elude renters.

There’s a common piece of real estate wisdom that says, basically, whether you rent or buy, you’re paying a mortgage. When you rent a property, you’re just paying someone else’s mortgage – meaning that you’re making them richer, and seeing none of the benefits for yourself!

When you own, though, you’re investing in your own future. There’s a reason why consumers consistently name homeownership as the single best long-term investment… and why studies have shown that a homeowner’s net worth is typically 44 times greater than a renter’s!

Owning a home is a form of forced savings, allowing you to build equity that you can then use later in life. As a homeowner, you’ll also get to benefit from tax savings, while also paying less than many renters month-to-month.

Bottom line? Owning a home is a surefire way to build wealth for yourself. When you pay rent, you’re still building wealth – it just all goes straight to your landlord.

It’s Easier to Buy a Home Than Many Think

Would you believe that one of the biggest factors keeping people in the rent trap may be all in their heads? (Cue Psycho music and lighting strikes here.)

While there are certainly real financial and personal hurdles to clear before you are ready to purchase a home, many people actually tend to overrate the potential difficulty of getting started with home ownership. In other words? They turn mountains into molehills, and stop themselves from entering the process before it even really gets started!

For example, one study of millennials renters found that 72 percent cited affordability as their primary obstacle to ownership, with many expressing worries about their credit scores and 53 percent saying that a down payment would be an obstacle.

But here’s the thing – many potential homeowners tend to overestimate how much they’ll actually need to make a successful down payment (and there are various resources and benefits out there for households in need of down payment assistance). Many potential home buyers also tend to think that they need a perfect credit score in order to buy a home; in reality, more than 50 percent of all approved home loans come from FICO scores below 750.

Take it from Ellie Mae Vice President Jonas Moe himself:

“You don't need a 750 FICO Score and a 20 percent down payment to buy.”

So, if you’re currently renting, don’t count yourself out just yet! Homeownership – and all the short- and long-term financial incentives it offers – may still be within your grasp!

To talk about your options, or begin the search for your Chicago home, don’t hesitate to drop the Real Group team a line today! Our experienced brokers will do whatever it takes to find you the right home, at the right time.

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