It’s that time of year again. Med students are getting ready to graduate and young physicians are about to start their first doctor jobs or move up in the current ones. Some folks will have to move across the country and others may only be moving a few hours away. Regardless of which camp you are in, one question inevitably ensues: What should you do about housing?”
As most of us know, inflation has skyrocketed this year. Rent prices are higher than they’ve ever been. Homes are selling for more than they are worth. It’s a catch 22. Either you struggle to buy a home in this crazy market, or you resort to paying ever-increasing rent amounts on an apartment. Here are some things to consider before you make your decision:
1. How much can you afford to spend on housing?
This is the first question you should honestly ask yourself. As someone who has contemplated the rent vs buy question almost yearly, I’ve come to learn there is a difference between what you’d like to spend on housing and what you can comfortably afford. Don’t confuse the two. The general rule of thumb is to spend no more than 1/3 of your gross income on housing. This may be a bit more challenging in these current times of rapid inflation and rising housing costs. It may also be challenging for those of us living or planning to move to high-cost-of-living areas. Keep in mind that if you end up spending more than a third of your income on housing then you may have to cut back in other areas. It may even prevent you from meeting some of your savings goals, being able to take the vacations you desire, or buy the type of food you’d like. Take some time to write down all of your sources of income and use that number to determine what you can reasonably afford to spend on housing each month.
2. What is the average rent price in your area?
Once you figure out what you can afford to spend on housing each year, try to determine what you’d reasonably spend on different types of housing—the first being rent. Go to apartments.com or Zillow and get an idea for how much rent is in your area or the city you will be moving to. Does a one-bedroom cost $1,000/month, $2,000/month, or $3,000+? Look at newer places and at older styles. Consider different areas of the city. Although prices are subject to change, doing this type of research will help you determine what you can expect to spend for an apartment monthly. (It may also help you decide if you should consider getting a roommate or not).
3. What would it cost to buy a home in your area?
Once you get an idea for rent prices in the area, take a look at home prices as well. Many folks see the rising rent prices and automatically assume it is better to buy a home. That assumption is not true. Rent may be high, but home prices and estimated mortgage payments may be even higher. Even if the mortgage is affordable, there are other home buying costs to consider. You may need a down payment which can often be at least 3 to 5% of the total home cost. You also have to account for the transaction costs of buying a home (attorney fees, inspections, appraisals, etc), yearly property taxes (which can be up to 1% of the home value), homeowners insurance, homeowner’s association fees, and maintenance costs. These costs can add hundreds if not thousands of dollars to your monthly housing costs each month. Be sure you have a good idea for what your total housing costs would be if you were to purchase a home.
4. What are your future plans?
Another decision that could alter your decision to rent or buy is your future plans. Although no one has a crystal ball (or at least not a working one), take a few moments to contemplate what your life may look like in the next few years. Do you plan to stay in your current city or is there a good chance you could move? Renting gives you more flexibility and the transaction fees of buying a home may be hard to recoup if you live in it for less than 5 years. Do you foresee a change in your family size? Oftentimes, the type of house you may like or the area you may choose to live in as a single person is vastly different from what you would choose if you were married with had children. Lastly, is there a good chance you could have a change in your income? Are you fairly confident that you’ll get an income boost which will make things more affordable? Or, maybe you or your spouse will cut back on work to focus more on family which will result in an income drop or increased expenses? Although it is hard to predict what will happen, taking a few moments to contemplate your future plans could drastically change your decision to rent or buy in this market.
To summarize, the decision to rent or buy may not be as easy as you think. As stated above there are several things you should consider before making your decision. Being honest with yourself about what you can reasonably afford is key. Choose wisely.