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Course: Financial Literacy > Unit 14
Lesson 1: Renting vs homeownership- Renting versus buying a home
- Advantages and disadvantages of owning vs renting
- Owning vs renting
- The true cost of renting a place
- Requirements for renting or buying a home
- Things to consider when renting a home
- Renting requirements
- Things to know before buying a home
- Buying requirements
- Requirements for renting and buying a home
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Things to consider when renting a home
Before renting a home, it's crucial to consider your budget, the total housing cost (including utilities and other fees), whether pets are allowed, and the maximum number of occupants permitted. These factors help ensure the home meets your needs and stays within your financial limits, avoiding unexpected challenges or suprises. Created by Sal Khan.
Video transcript
- [Narrator] Let's talk about things to consider when renting. So the first consideration
is how much should you spend? And a general rule of thumb is that you should spend a maximum of 30%. I could write that neater,
30% of gross income on housing costs. Now, I didn't say rent
here, I said housing costs. And I'm gonna tell you in a
second what the difference is. But, first, let's think
about gross income. That is your income before
you pay things like taxes. So let's say that you are
making $5,000 a month. You don't have a take-home salary after paying taxes of "5,000, but this is what your employer
says they're paying you. Well, in that world, you shouldn't spend any more than 30% of it on housing
costs, 30% of $5,000, that would be $1,500. That should be your limit. Now you might say, "Okay, does that mean I
can spend $1,500 on rent?" Well, that's where we go and think about what I meant by housing costs. Housing costs are rent, plus utilities, plus maybe there's types of insurance. Maybe you have to pay for parking, maybe you have to pay extra
because you have a pet. Who knows? That's rent plus other costs. And if you're going to pay, say utilities, then just $1,500 in rent
might break this rule. Now, this rule isn't written down in law, but it's a good thing for
you to pay attention to so that you don't break your own budget. And it turns out that in many cases, the landlords might
wanna hold you to this. Sometimes they have a rule
that your gross income needs to be at least three times the rent. Now, here, we're saying
30% on housing costs. I just said three times the
rent, the numbers are close, but that's the landlord
imposing this constraint on you. Now, above and beyond that, the landlord's going to look
at things like credit history or let's say a credit report, to see how good you have been
at paying your bills before. They might want to look
at a rental history, sometimes even want referrals
of your previous landlords to make sure that not only
were you paying things on time, but that you were a good tenant and you took care of the property. Now, there might be sometimes
they also wanna look at making sure when you tell them your income that you are good for it. So sometimes they even
might want a reference to, say, your employer. Now, the other things to think about are things like a pet policy. If you have a pet, that usually makes it a little bit harder to find a place, depending on the pet,
depending on its size. Some places might not want
pets, they don't allow it, or they charge extra for pets because they think it might
damage the property in some way. There's also occupancy
limits or occupancy rules. This is how many people
can stay in a place. This is usually if they're going to have some type of occupancy rules, it's usually two people, people, per bedroom. So, if there's a two bedroom place, they might have an
occupancy limit of say four. So it might be hard for a family of five to rent a two-bedroom apartment. Now, once again, this
isn't a hard and fast rule and people might be
willing to make exceptions, but you should definitely ask about that before you go too far down the process. Now, we talked a lot that
housing costs are not just rent. It also could include utilities. So this is a good thing to
ask if rent includes utilities or do you have to pay that separately? Pay that as well? And then last but not least,
you might say, "Okay, I'm good. "This is no more than
30% of my gross income, "the housing costs, I have
a great credit report. "I don't have pets, or I
know that they allow pets. "I can give good references. "I'm not going to violate
the occupancy limits." But, there's also upfront money above and beyond just paying the rent. Usually the upfront money that you have to provide when you get a
place is first month's rent, first month rent, a security deposit, which is usually equivalent
to first month's rent, or it's usually pretty close
to whatever the rent is. And this is a way that the
landlord protects themselves if you were to damage the
property in some place, they would deduct what it would cost to repair from your security deposit. If you take really good care
of the place when you leave, the security deposit is refundable, or most of it will be refundable, depending on how much wear
and tear is on the property. And, then, in a lot of places, they also want last month's
rent, last month rent. And they do this because most landlords want at least 30-days notice
before you leave a place. So this protects them that if
someone were to just leave, they still have that last month's rent. So, that essentially allows
them to have 30-days notice. But this could add up to a lot of money. If we go back to the scenario where the rent is, say, $1,500, then you would be looking
at $4,500 in upfront money before they hand you the keys here. So definitely pay close attention to that. And some places actually
have things like moving costs or things like that if it's in a some type of apartment that charges extra fees. So, just make sure you have
all of that in consideration before you go too far down the process.