As a renter, it can feel difficult to save money for a future down payment on a home, but there are steps you can take to do so.
The following are some of the big things to know about saving money if you’re currently a renter to meet other financial goals you have for yourself.
One of the first things you should consider if you’re a renter is protecting yourself financially with renters’ insurance. Renters’ insurance is surprisingly affordable and can help prevent a financial catastrophe that could completely derail your goal of owning a home at some point.
The average cost for renters insurance in Tennessee is just $199 a year as one example, and in other parts of the country, it’s even lower. Renters’ insurance is usually less than $20 a month, but you’re protected against theft, fire, and liability. If these damages were things you had to pay for out of your own pocket, it would completely erode your savings, which could include the money you’re setting aside as a down payment.
Save On Your Actual Rent
There are things you can do to save money on what you’re actually spending on rent.
For example, you can get a roommate, but you still have options if you don’t want to.
You can negotiate when it’s time to renew your lease. A landlord is going to want to keep you if you’ve been a good tenant, so don’t forget that you’re probably going to have leverage.
If your landlord doesn’t negotiate with you, it might be time to look elsewhere.
An independent landlord will have much more room for negotiation than a property management company, so keep that in mind.
A private rental, which means it’s owned by an individual or maybe a family, will often give you a lot more chances for negotiation or saving money compared to a big complex. A private landlord has a lot more leeway in everything they’re doing since they don’t have to follow corporate guidelines.
A private landlord is much more likely to negotiate your rental amount and other fees, or they might overlook past evictions.
Another way you might be able to save on your actual cost of rent is to pay your lease upfront. You might pay the entire lease or a few months’ worths. You may be able to get a better deal, and then the landlord can have cash in hand.
Don’t do this if you don’t have the cash available—it’s not worth the savings if you’re going to have to accrue credit card debt to make it happen.
Signing an extended lease can help you have negotiating power because landlords want stable tenants.
Maybe you sign for two years instead of a year or a year instead of six months.
If you can, try to find a new rental in the winter. Landlords tend to have a tougher time finding renters in the winter, so you might have the option to negotiate.
Rent goes up in the summer, as people are out and about more, college students might be looking for new housing, and recent college graduates also tend to flood the market in the warmer months.
If you can find a cheaper location, do it. Maybe you will move further away from the center city. Just moving a few miles out from where you are currently could save you hundreds of dollars a month.
Pay Off Credit Card Debt
People tend to overlook the importance of paying off credit card debt when they’re trying to save money to buy a house. If you’re paying a lot in interest every month, it’s going to erode what you’re able to save.
Plus, your debt-to-income ratio and credit score are major factors that a lender is going to look at when you try to qualify for a loan. Getting a handle on high-interest debt as early as possible is key for buying a house later on and potentially getting a lower interest rate when you do so.
Look for a Rent-to-Own Property
An alternative to a traditional rental is a rent-to-own property. You can save up cash for a down payment or build your credit score while you’re in a rent-to-own agreement.
In most of these setups, you’re going to pay a one-time fee that’s not refundable, known as option money. This fee will then give you a chance to buy the house sometime in the future. The price might range from 2-7% of the purchase price.
You will then pay the rent for a certain period of time, which is often between one and three years, and then after that point, you have the option to buy the property. You are able to save money and build your credit score, and the owner may put a percentage of your rent toward the credit to buy.
Closely Follow a Budget
If you’re going to buy as a renter, and a lot of your income is toward that rent, you have to set a budget and follow it. There are a lot of specific ways you might decide to budget.
For example, some people follow a 50/30/20 budget rule, where they put a portion of their check toward first essentials, which would include their rent and then food. Then, 30% goes toward their lifestyle, such as entertaining or dining out, and then 20% is for other financial priorities, like saving for a down payment and paying off student loans.
As you create a budget, you’re going to have to find places to cut back on expenses. This isn’t optional and might not be fun, but you need to offset whatever you’re putting toward your monthly rent.
Finally, if you’re in a rental with amenities like a gym, ensure you’re using them and not paying for things you already have access to.