Today's newsletter is going to focus on renting. Based on our audience, we know that not everyone rents, but I am 100% sure everyone knows someone that does. Besides, we are all landlords – just not in the traditional sense that we think of. Dean put it best: "I hate how spiders just sit there on the walls and act like they pay rent."
In the Bay Area, we constantly field the question of whether someone should rent or buy. So, we decided to help those thinking about renting better understand all the moving pieces (for those of you that own, this can help your friends/kids/family/etc.).
The first issue that most people seem to consider is whether they have sufficient funds for the down payment. You can read more about this here, but that should never be the starting point. In fact, I believe the most significant factor is your INCOME – as someone once famously said: “If you make it, the lenders will come.” But seriously, the biggest factor we run into with buyers is the Debt-to-Income ratio (if you are flexible with location, low down payment options are out there). As a result, some of the best times to rent are when you are expecting income growth in the near future (i.e. you will be able to qualify for a larger mortgage that puts you into an area/property type that you want to be in) or when you are “testing” out a certain city and want to “try before you buy.”
Let’s look at an example of a renter in Belmont:
-I enjoy/would like to live in Belmont
-I want to be able to bike to Caltrain
-I would prefer not to live with a roommate
Once your living criteria is established, the next question is what the average rent is for the market you are considering. Rents vary, and renting half of a duplex is much different than renting a single-family house, which is much different than renting a condo.
While these are all different properties, they all share a common trait – every landlord or property manager wants proof of income (in addition to other factors such as credit, past rental experiences, etc.). As a general rule, many owners/managers will require your Gross Income to be 3x or greater than the monthly rent payment. And, for those thinking about having a roommate, depending on the owner/manager, you may each have to qualify separately depending on who ultimately is on the lease.
Once you recover from the shock of being required to make about three times your rental payment, your next question is probably, “Why do I need to make so much?” The answer - the high gross income protects the owner/manager.
If you take what you earn in a given month and divide it across your monthly expenditures (housing, food, transportation, clothing, entertainment, savings, etc.) you will realize that a good chunk of change gets tied up in non-housing expenses. As a result, the owner/manager wants to make sure that when the 1st of the month comes around, her check is in the mail.
Based on a 3x rent minimum, here is what you should be using as a rough "upper limit" based on your income:
|Income||Monthly Rent Payment|
At first glance you might be surprised seeing these numbers knowing what rents go for in the Bay Area. But, what is important to remember is that the 3x rule is used by the one getting the rent. And, ultimately, the owner/manager can require whatever income requirement she wants. So, as we double back to rent vs. buy, what we advise clients to do is figure out their minimum living criteria and talk to us about the market rent for such space. From there, we will work with you to establish what options you might have to purchase and at what price point. Depending on a few different factors (i.e. interest payments, property taxes, HOA fees) we then see what is the best scenario for you given your situation.
If you ever have any questions at all, please do not hesitate to reach out. At MinnGo, we realize that real estate is not something our clients think about everyday. Lucky for you, that is what we live and breath.
Until next time.