Rent a Home: Investment or Liability?

Everybody needs a place to live. But not anyplace will do. Especially when you’re progressing in your career, your goals and standards will change. What may be enough for today may come up short tomorrow.

Think about it: do you really need to buy that house? Are you ready to handle responsibility, depreciation, and long-term financial commitments? Most people prefer to rent because of its flexibility.

Renting also means you get a broader property selection: more chances to live where you want. 

But rentals are also known to be inefficient in the short-term (most price-to-rent ratios are well over 15%). So how much should you spend?

Rent a Home: Investment or Liability?

Although it’s not the smartest financial decision, it makes living expenses more affordable. Rental plans help people whose lifestyle changes rapidly and are still looking for their ideal home.

Choosing the right rate isn’t as easy as making a Google search. Many websites recommend some percentage rules to keep your rent affordable, such as 30%, 43%, or the 50/30/20 rule. Which one should you use? If you add the fact that market prices are always changing, the matter becomes more confusing.

Although these variables do matter, we invite you to take an essentialist approach first. How important is it renting a new place for you? How much value can you get from it?

You see, moving from a 1000$/month rental isn’t the same as moving from your parent’s basement. Although we often consider renting a liability, it can be an investment. What would it be like if you could create the optimal environment for your career? Wouldn’t that make you more money? 

We know most of you are here for the numbers (we’ll get into it). But what’s the point if you don’t know what you value? Let us get specific here:

Most people believe sharing a property helps to reduce expenses. But living with the wrong people may disrupt your environment, hence getting less value from it. If you have high standards but can’t find like-minded people to live with you, it may be more profitable if you lived alone and paid the rent yourself. 

Have you ever wondered why you can’t get things done despite spending hours at work? Even a one-second distraction may take thirty minutes to get you back into deep work mode. Choosing the right location will minimize distractions and help you earn more, thus being able to rent more attractive properties.

How frustrating is it to worry about all these things you need to do instead of just doing them? Even if you live in big cities, you can save that stress by living in the suburbs, and it costs less. Don’t just look at price; these locations can bring calmness and happiness, which is what matters to feel like home.

Think about it and compare these features with your current place. How much could an optimal environment improve your life? If you consider that valuable, by all means, go over your budget and look for better properties. You will make more than what you spend.

How Much Should You Spend on Rent?

Let’s talk about numbers: How much is enough? 

Before you ask, “Can I afford it?” question whether the price point makes sense. Take a brief look at the market offer and determine whether the rate is reasonable.

As a rule of thumb, a property should never go over 20% in a price-to-rent ratio (it depends on the property type). Estimate the property value and take that percentage for rent: the lower, the better (often between 10 and 15%).

It may be common sense, but make sure your rental price includes everything required to live comfortably, such as utilities. Otherwise, you’re fooling yourself with an unrealistically low price.

For most people, the 30% rule will work just fine. Calculate your net income and deduct 30% or less for your rent and complimentary expenses. You will hear anything between 25% and 35%, depending on the website you use. Try these options and choose the one that fits you the best.

General rules aside, let’s consider some common questions:

How much should I pay for rent while in debt?

Do you owe money and still need to move? You can still rent a new place, but your margins should be more conservative. 20% of your net income sounds ideal to save money comfortably. If paying your debt back is your priority, consider lifestyle expenses first. What can you stop doing?

More importantly, what got you into debt in the first place? If you did because of poor financial decisions, you might want to be extra cautious when looking for a new house. Don’t do it without a repayment plan in place.

What if I have no savings?

You’re not in debt but neither making large amounts. Understand that when you first move to a new place, things will change. Unexpected costs may arise, or you don’t find yourself productive for a few weeks. Emergency funds help to counter uncertainty.

Rather than renting on a tight budget, give yourself some time to get savings. You will thank yourself later for getting rid of financial stress.

Can/Should I go beyond the 30% rule?

Sure. You can even go above 100% if you want. But does it make sense? If you have six months or more in your emergency fund, you might.

We’ve seen cases of people taking these bold moves. These risks gave them a motivational boost, earning more than they ever did. It’s empowering, but you must know you’re doing and be free of other responsibilities. 

Some people may like the challenge of paying $1000 per month or more to live in a dream property. Before you jump into it, make sure:

6 Questions You Have To Ask Before Paying More Rent

Some of you may find these rates unreasonable. You may want to get a cheap apartment, or perhaps get an expensive one while paying less. 

Let’s get this straight: rent does not make you money. Although you should get an optimal environment, you should not pay more than what you have to. “Can I afford this?” comes down to at least six questions:

#1 How much have you saved? 

Emergency funds will save you on a rainy day. You can’t focus on making more money when you can’t stop thinking about the rent you need to pay. Those savings minimize that stress.

It may be hard to motivate yourself to make more money than what you need today. But chances are, most things you bought ended up costing more than expected. Don’t underestimate expenses.

#2 Are all these features essential?

While you may want to move as soon as possible, take the time to find the exact place you need. Given the ratios, renting is inefficient long term. When costs add up over the months, you will wish not having spent money on things you didn’t need.

It doesn’t need to match perfectly. It’s temporary; that’s why you rent. Unless you plan to buy in years later, consider smaller properties. Not only would you spend money on unnecessary rooms, but waste your time maintaining them.

#3 Can you choose suburban areas?

Suburbs cost less, people live “better,” and getting to the city only takes a few minutes. If you own a car or can find good transportation, it could save you hundreds over time. Some states offer convenient plans for working citizens, so they can inexpensively travel every day.

Living outside means paying less and earning more (fewer distractions and stress). Since the city is the most popular option, you are more likely to find available properties outside.

#4 Can you share your rent?

If you’re on a budget, sharing rent will make your life a lot easier. The question is, who do you choose as a roommate?

Sharing saves expenses while taking advantage of extra space. Just make sure it doesn’t limit your ability to make more money. After all, your roommates may have other plans and move out anytime.

That’s when your network becomes critical. If your friends share the same goals and lifestyle and are looking for a place to live, it’s a hundred times better than living alone. It’s even better if you could live with a group of likeminded people, not only paying less than 50% of the rent each but working and having fun together.

Let’s say your budget is $1000 every month. You could find a partner to bring it down to $500. Or you could keep paying $1000 and get an apartment worth $2000 if that sounds desirable.

#5 What’s your income potential?

Have you got a job and just started new projects? Are you a brand-new freelancer looking to build a reputation? Do you want to take a small business to the next level? If you have any of these income goals, you may have lifestyle goals as well. Why not enjoy a dream apartment right now?

In a curious experiment, a company asked a new salesman what he wanted to do with the money (buy a Ferrari). So they bought him the dream car on day one and said: “It’s yours now. But if you don’t hit the $100K sales mark this month, we’ll be taking it away.” 

He exceeded the company’s objectives.

You may agree that we are much more likely to keep what we have rather than get more things. We value not losing more than winning, even if we got it for free (because having something is already part of our identity). We guess you see where this is going.

If you’re going to rent, make sure you choose a property that makes you happy, even if it’s unreasonable. In order to earn more, you’ll need to change anyway.

Yet, we understand this approach may not be for everybody.

#6 What’s your lifestyle?

Wouldn’t it be frustrating to be less wealthy, the more money you make? Are you familiar with spending problems? How can a $100K purchase turn into a $400K loss?

Here’s how lifestyle gets everybody. Only to get money out of your income source, you pay taxes. Some liabilities devalue quickly, and even if it’s an investment (a house), they don’t have enough liquidity.

But these inefficiencies aren’t the whole store. What would happen if you took the money and reinvested it in your income stream, or yourself? It would turn into a larger amount. What you’re really saying is the income potential minus the value of your liability.

Wait, there’s more? You have to spend time with your new TV, car, or house to get the value from it! More distractions, stress, and less time to earn.

These problems quickly become overwhelming, let alone getting a new apartment. You’ll do yourself a favor if you simplify this lifestyle, even afford better properties.

We know what you’re thinking. What’s optimal may not be what makes you happy. Being responsible for a tight budget will save you the money to enjoy everything later. You can buy liabilities, but understand they cost more than the asking price.

Need Help With Rent? Do’s and Don’ts

Know you know what properties to review, or whether you should rent at all. And although everybody likes a nice place to live, we imagine you don’t want to make just enough for rent. You can get a decent property and still make big numbers.

DON’T: Take loans to cover expenses

Whether you owe money or need to pay rent, avoid using the money you don’t have. Lending has its place, but neither rent nor debt will make you money. You should pay just enough to avoid trouble and invest everything else.

How would you explain that to your lender? Aim to borrow money to make money, not borrow to spend. Of course, an excellent credit score qualifies you for better rates. 

You don’t have an expense problem with a frugal lifestyle, but an income problem.

DO: Apply for benefit programs.

If you’re indeed making less than you should, the government may offer supplemental income to help you get by. Do your research, and you might also qualify for council tax deductions.

Once you make more money, you may still enjoy this benefits a few months more before you no longer qualify. But if you’re looking for “free money,” you should start here.

DON’T: Trust promising programs

These marketers promise to negotiate/forgive all your debt if you give them control. Or perhaps they offer you some get-rich-scheme to fix years of financial problems overnight.

Despite how tempting it may be, do not give control to others. Nobody can solve your problems better than you.

For some reason, people who need money get attracted to fraudulent dealers. Have you ever been in this situation where, suddenly, you find the right person at the right time?

You can find legit programs out there. But who do you think they will help first? Someone who hopes for help? Or someone who already has a plan and makes it his priority?

DO: Take advantage of your credit score

Unless you have years of background, you can fix your score in only a few months for almost no money. A better score means better deals, which will help to rent or buy properties.

Consider credit card churning to get free extra cash if you know what you’re doing. Who knows? A few months from now, you may get a hotel invitation, a plane ticket, or online subscriptions for free. Some firms offer nice perks at a low entry-level, but you may need a high score to qualify. 

We made a guide on this, but the long story short is, never miss a payment, have many credit lines open, and start early (bonus for history length).

DON’T: Increase expenses proportionally with income

You may have made extra money last week and consider yourself more successful now. But if you can’t get consistent results, it didn’t happen.

Once you have everything you need, you should only expand your lifestyle when:

Even if you get the second case, lifestyle improvements stop being fulfilling after some mark (about $60K per year).

If you make more, you can rent a better property. But don’t assume you’ll make the same amount since your environment affects your income indirectly.

DO: Consider extra sources of income

When you Google “make money online fast,” the ideas may not be sustainable, even though they work. But why say no to a few extra bucks for no work?

DON’T: Ignore rental and online scams

You could be the most responsible buyer and still lose money on a bad deal. If your budget requires you to look for underpriced properties, be wary of those which sound too good to be true.

Some scammers will list properties they don’t own. Never buy a place you haven’t visited. Make sure to get informed of all the expenses before accepting the deal.

Don’t set expectations until you talk to the owner by phone or in-person preferably. 

Learn the basics of phishing and identity thieves. People may not be who they claim to be, and they only serve to steal your information and accounts.

DO: Invest in yourself to become more effective

Even if you commit to renting on a tight budget, investing should be an option.

Don’t underestimate how much money you can make in a state of focus. On top of that, you’ll enjoy things more because you can spend more time on them. The long-term ROI you get is invaluable.

The Bottom Line

Paying less than what you make is common sense. But what property should you rent? Ask yourself how important the environment is for you. See if you can reduce costs by choosing another area or sharing space.

Although we’ve covered a lot, it reduces to two options based on your needs. If you don’t have a clear financial plan, you can pick the most affordable rent, 20 to 30% of your income. Or you can go beyond that with a clear income plan and commitment to your career.

And because you’re renting, you can go back as many times as you need to make the best decision.