The goal of this blog is to give our readers real world advice and practical tips on how to improve their finances no matter what stage of life they’re at. We’ve already given you basic information to help you understand your personal relationship with money, as well as how that all changes when you add a partner or child into the mix. But, many of us are just starting out and while it’s nice to have that information for our future selves, we wanted to make sure we’re addressing concerns that millions of Americans have about their living situation. In particular, we want to talk about renting.
Not all of us are ready to buy a home, get married, or start having kids, but almost all of us have been or currently are renters, and there are many ways that renting can work to your financial advantage or disadvantage. Wherever you’re at, it’s important to know the basics to protect yourself, your possessions, and your finances.
Pros and Cons of Renting
There are a number of reasons why people choose (or need) to rent. Some people move around a lot, some may be saving up for a home, some may not be able to afford to buy, and some just prefer to rent. Whatever your reason, there are definitely perks to being a renter, but as with all things there are cons too. This list is not meant to sway you one way or the other, rather to ensure you’re thinking about things from all angles.
Before You Rent (or move into a new rental)
KNOW YOUR FINANCES
You should approach renting like you would approach buying a home. First, you need to figure out how much you can afford to pay and ensure your finances are stable enough to support that. A lot of the same criteria that lenders use to vet potential homebuyers can provide good lessons for renters as well.
DTI (debt to income ratio): Any savvy consumer should know their DTI whether they’re renting or buying. Your debt to income ratio is an indicator not only of your creditworthiness, but of your overall financial health. To determine yours you’ll take all your monthly debt including rent (or sub in your proposed rent), any regular payments you make like car loans, student loans, or credit cards, then divide this by your gross (before tax) monthly income. Example: Your rent, credit card, and student loan payments come out to $1,300 a month. If you gross $3,500 a month, your DTI would be 37%. When lenders calculate DTI they’re generally looking for a number below 36% to 43%. This indicates that enough of your income is not already earmarked for debt.
30% rule: The 30% rule can be tricky, especially with the way rents keep climbing across the country, but this “rule” states that you shouldn’t be spending more than 30% of your gross monthly income on housing (note this does not include things like utilities – only the rent or mortgage). If you calculate yours and you’re way higher, it may be time to consider getting a roommate or expanding your search area. Research shows that spending considerably more than 30% of your income on rent is unsustainable, and puts you in the category of being “rent burdened.”
Credit score: Many landlords or rental agencies perform credit checks on all applicants. While there is no standard minimum score that you will need to hit, it can be helpful for your potential landlord to get an idea of your spending habits. With this they can look to see prior evictions and any major credit issues. If you have a history of missed payments on your credit cards and loans, this will be an indicator that you may not be the most responsible renter. Get a free copy of your credit report here.
Your Lease (actually read it!)
It’s essential that you fully understand your lease before you sign it, and there is a LOT in there. I know it sounds like a burden (and boring), but we highly recommend reading the whole thing. When you sign your lease, you are agreeing to all the terms laid out in it and you can legally be held to them – even if you didn’t know they were in there! Your landlord should also be familiar with the lease they’re using, and you can and should ask them to walk you through the major components of it.
TYPES OF LEASES
Fixed Term: Depending on what kind of rental you have, you could have a fixed term lease that only lasts a few months, or you can be on a year-to-year lease. You’ll usually find the former for places you know you’ll only be staying for a short while. Year-to-year leases can be common if you are moving into a place for the first time, and after the first year is over you’ll have a chance to move to month-to-month. Year-to-year leases can be beneficial because you know your rent won’t increase and the terms won’t change for at least a year.
Month-to-Month: Month-to-month leases don’t have specific time limits and are also very common. These can be beneficial for both the renter and the landlord, since they end whenever one party gives sufficient notice (usually a month) they want to terminate the lease. They can also be riskier because as long as your landlord is following the lease and the law, you could have your rent increased more often.
Subletting: Subletting is when you keep your original lease and have someone else move into your space while you are away. Some landlords allow this while others don’t, and some will require an additional subletters lease.
What’s Included in Your Lease
All leases will look a little different based on the state you’re in and they type of property you’ll be renting, but at minimum your lease should cover:
- List of tenants: All states have a legal requirement to know all people who will be living on the premises.
- Rent due: Your lease will outline what your rent is, when it is due, and how it should be paid. It will also list the process for late payments and how late fees are charged.
- Time period (term): As outlined above, all leases outline a time frame (whether it’s for a full year or every month). Fixed term leases must be renewed at the end of their term, while month-to-month leases can go on in perpetuity.
- Deposits and fees: The lease will also note any deposits (security, pet) that were paid and any additional fees (application, background check).
- Utilities: The lease will indicate which utilities will be paid by the landlord and which will be paid by the tenants.
- Right to enter the premises: It will be noted the circumstances in which your landlord can enter the premises, and how much advance notice they are required to give.
- Maintenance/repairs: There should be a section about basic maintenance that the tenant is responsible for and what the landlord is responsible for. They should also indicate the best way to communicate about issues with the rental unit.
- Occupancy rules: There may be special provisions listed for additional guests, or what happens when one tenant wants to move out and a new tenant moves in.
Before You Sign
PREPARE FOR HIDDEN COSTS
All leases differ by state and local rules, and the type of unit you will be renting. Make sure you know about the following things before signing so you have a complete picture of what your monthly expenses will be.
- Utilities: Know what utilities are paid for by the landlord and what utilities are paid for by you. This has the potential to affect your monthly expenses drastically. Garbage service is a common one that is the landlord’s responsibility. Also, ask your landlord about average monthly utility bills – some of these may increase your costs due to the age of the property, drafty windows, or poor insulation.
- Yard maintenance: This is more typical if you’re renting a house, but you should know if the yardwork is your responsibility or the landlord’s.
- Parking: Does the rental provide a reserved parking space for a car? Will you have to pay extra for parking? Many newer apartment buildings in big cities either charge extra for a parking space or are built with no tenant parking at all.
- Renters insurance: We’ll talk more about renters insurance below, but know if this is required or not in your lease. Renter’s insurance covers you and your possessions and sometimes landlords will ask that you keep it as a condition of the lease.
- Rental application fee: If you’re at the point of signing a lease, you’ve already paid this, but it’s something to think about when budgeting for your move.
- Credit/Background check: Not all landlords perform credit and background checks and not all of them will charge extra for it. Oftentimes the rental application fee will cover this service.
- Security Deposits: You will almost assuredly have to pay a refundable security deposit which is typically one to two times your monthly rent. This must be noted on your lease. This is extra insurance for the landlord should you leave the rental in a damaged condition. Ask ahead of time what the conditions are for receiving it back in full and how long after vacating can you expect to get it.
- Pet deposits: If you have pets, you will likely also have to pay a pet deposit, and these can be refundable or non-refundable. Like the security deposit, this must be noted on your lease.
- First/Last: It’s typical to pay the first and last month’s rent on your move-in date. And yes – this can be a lot of money when coupled with a security deposit. The good thing is that you’ll likely get the deposit back, and the last month’s rent you’d have had to pay anyway. Again, this is extra insurance for landlords against renters who may vacate without giving notice.
DO A WALKTHROUGH
Ideally this is done with your landlord where you will be documenting any existing damage in the rental. It can be helpful to have a checklist that covers all rooms, features, and appliances, and most landlords will already have a checklist that they use. Point out anything that jumps out at you like a stain on the carpet, dent in a wall, missing blinds, etc. As you go, take pictures and ask for a copy of the completed document and keep it with you even after you move out. You shouldn’t be held liable for any damage that was there before you moved in (nor anything considered “normal wear and tear”) and a landlord typically has 30 days to either refund your security deposit or send you an explanation. Keeping this walkthrough checklist could mean the difference between getting your deposit back or not.
Renters insurance is not always required, but you may want to obtain it to safeguard your personal belongings. Sometimes landlords will require their tenants to purchase renters insurance to help minimize their risks. This is helpful if your personal belongings are somehow damaged while on the property as it can shield them from liability claims. It can also be very beneficial to renters as well since it protects your stuff from theft or damage, and is usually pretty cheap. Average costs of renters insurance is about $180 a year, or $15 a month.
Know Your Rights
Many renters aren’t aware of all their rights. And, though these will differ based on where you live, there are some basics that cover everyone. You can find specific information for your state on the HUD site (Dept of Housing and Urban Development). In general, you have a right not be charged more for a security deposit than your state allows, and you have a right to a “habitable environment” which covers a broad range of housing features including:
- Heating and air conditioning must work
- Toilets and hot water heater must work
- Door locks must work
- The roof must be in a good condition (e.g., it should not leak)
- Windows must be in working order and not sealed
- Appliances that are supplied (like the refrigerator, stove, and garbage disposal) must be in working condition
If any of these breaks or is not functioning correctly, you’ll need to report it to your landlord immediately, and they must act within a reasonable time frame to fix it.
Landlords are also held to the Fair Housing Act which prevents discrimination againts tenants and applicants. Under the Fair Housing Act, a landlord or seller cannot discriminate against a renter or buyer based upon race, color, nationality, religion, sex, disability or familial status (the number of children you have). If you feel that you have been discriminated against, you can file a complaint online here.
YOUR RESPONSIBILITIES AS A RENTER:
- You will maintain the property in a clean and habitable condition
- You will inform the landlord when issues arise that could harm the value of the property or that fall within your rights to a “habitable environment”
- You will pay for any repairs due to your negligence or misuse of the property
- If you can’t pay your rent on time, you run the risk of additional charges and eviction. Contact your landlord before this happens and try to come up with a plan:
- Ask to negotiate a late payment in advance of your payment date
- Offer to pay some of the rent by the due date
- Explain your circumstances and how you expect to resolve them so that your rent will be paid on time in the future
Dealing with Disputes
Hopefully, this section won’t pertain to you, but if you live anywhere long enough things are bound to break or stop working, and you’ll have to be in communication with your landlord when that happens. Ideally, these issues are dealt with respectfully and swiftly so you can continue to be a good renter and your landlord can rest easy knowing they have a responsible tenant in place. However, if disputes do come up, here are some basic protocols to follow:
- Review your lease: Know what you’ve signed up for in the first place to avoid potential issues. This comes back to thoroughly reading and understanding your lease agreements. Many disputes come up as a result of one or both parties not understanding the terms of the lease or their legal responsibilities. When in doubt, review your lease first to ensure you know where you stand.
- Be a proactive communicator: Don’t wait till an issue gets out of hand before you tell your landlord. Landlords appreciate tenants who communicate promptly about issues as they come up. If you report a leaky faucet right away, you could be saving lots of time and money in the future should the problem get worse.
- Documentation: When you do communicate, document it. Take pictures of the issues and if possible have things written out in an email. If you communicate via telephone, it’s always a good idea to write a followup email outlining what you talked about and what next steps were agreed to.
Get help: If you can’t resolve it, offer mediation. We hope it doesn’t come to this, but sometimes enlisting the help of a mediator can help resolve a dispute without it going to court, breaking your lease, or getting evicted.