By Danielle Keech, MilitaryByOwner.com
What you'll find in this article:
Let’s talk about one of the enormous financial investments in your life: housing. Whether you choose to rent or buy a home, this portion of your monthly budget is typically the most substantial. But for the rest of you, including military families navigating through countless PCS moves, a fluctuating income, and an ever-changing budget, we’re going to break down the finances of renting a home.
We’ll take a look at credit scores, determine whether renting or buying is better for your budget, figure out if it’s cheaper to live on or off base, and learn how to calculate an appropriate budget. Ready?
Breaking Down the Finances of Renting a Home
Your Credit Score, and How It Affects Renting
“A credit score is a statistical number that evaluates a consumer's creditworthiness and is based on credit history.” — Investopedia
While your credit score seems like your twice-removed cousin loosely tied to you, it’s not. It dictates much of your life (financially, anyway). It carries so much weight that some people only see the number and fail to see you. But your credit score isn’t random. It’s carefully calculated based on five key components:
35% - payment history
30% - credit utilization
15% - length of history
10% - types of credit
10% - new credit
Experian breaks down their credit ratings as such:
Exceptional: 800-850
Very Good: 740-799
Good: 670-739
Fair: 580-669
Very Poor: 300-579
A good credit score for renting is typically above 650. But if your score falls below that magical number, does that mean that you can’t rent a home? No. But it will be a little harder. There are more hoops to jump through.
Here’s what you can do:
Show proof of consistent income.
Live on base.
Have a cosigner.
Provide stellar recommendations.
Pursue a rental that doesn’t run a credit check.
Be willing to pay more.
Learn more about your credit score and renting:
When Buying Might Be a Better Option Than Renting
Is buying a home always better for your budget? Contrary to popular opinion, no. We’ve all heard it before. Why would you ever rent? You’re just throwing money away! Well guess what, that’s simply not true. While monthly mortgage payments are often less than the cost of rent, owning a home comes with greater financial responsibility.
Not only do you have to account for homeowners insurance, maintenance, and repairs, but, if you get PCS orders and can’t sell the property or find renters in time, then you’re on the hook for two residences. The point is, there’s a lot of gray area in a discussion that's often painted in black and white.
When buying might be the better option.
If you can get more house for your money.
If you plan to stay and settle in or return to the area.
If it will make a good rental property.
If your finances are in order.
Related: What to Know About Your Finances Before Buying a Home.
Expenses to Consider When Setting Your Budget
The bottom line is, your budget goes beyond your mortgage payment or monthly rent — those bills might be the most significant part of your expenses, but they’re just the starting point.
How to Set a Budget
Nerdwallet recommends the 30% rule or the 50/30/20 rule to help you calculate how much you should spend on rent each month:
“One popular rule of thumb is to spend around 30% of your gross income on rent. So if you earn $2,800 per month before taxes, you should spend about $840 per month on rent. This is a solid guideline, but it’s not one-size-fits-all advice.”
“You can also use the 50/30/20 budget as a guide to figure out how much you can afford to spend on rent. This method allocates your take home pay (after taxes) to 50% for needs, 30% for wants and 20% for savings and additional debt payments.”
So if you earn $2,800 per month after taxes, your budget would look something like this:
$1,400 for needs like rent, utilities, groceries, insurance, and minimum debt payments.
$840 for wants like shopping, happy hour, and concerts.
$560 for savings and additional debt payments.
However, like home buying, just because you’re pre-approved for a mortgage (or can spend 30% on rent each month) doesn’t mean that you should. It’s best to run the numbers, then look at your finances as a whole. How much money do you have pouring into another house payment, student loans, a car payment, retirement, kids' college tuition, etc.? And what’s your goal? If your ambition is to aggressively pay off debt or save, then see how little you can put toward rent each month. If you find a home for $500/month that fits your needs, go for it!
Additional Expenses to Consider in Your Budget
Utilities. Depending on where you live, they could be a heavy burden: water, sewer, trash, gas, electricity, property taxes, HOA fees, etc. Understanding how much you can expect to pay in utilities each month will help you set a proper house-hunting budget.
Maintenance. Maintenance expenses for renters aren’t usually a cause for concern. Since the landlord is normally responsible for the big stuff, you shouldn’t expect to dish out hundreds of dollars in repairs (unless the damage was your fault). However, it’s not a bad idea to create a fund for the little things here and there like light bulbs, lawn care, paint, batteries, etc. that you are responsible for maintaining around the property.
Insurance. Renters insurance is generally benign in terms of your budget. Most don’t exceed $20 a month.
Transportation. If you’re stationed in the D.C. or San Diego area, you might think that you can save money each month by finding a less expensive rental further out of the city. While that’s a nice thought and should definitely be considered, be sure to factor in the cost of transportation. Whether it’s gas or public transportation fees, you might not save enough money in rent to warrant the distance from work.
Basic Housing Allowance. As you start to tally your expenses, don’t forget to calculate your BAH and new cost-of-living — to include the cost of gas and groceries. Your BAH is there to help cover the cost of housing when you move with the military, but it doesn’t replace your budget.
More about BAH: If you’re an E6 with dependents stationed in the D.C metro area, then your BAH is $2,556. It sounds like more than enough when you’re PCSing from Fort Sill, Oklahoma. However, in D.C., you may find that it’s not enough, as many four-bedroom homes are $4,000 or more a month. So, to get a four-bedroom house with the amenities and desired location, you’ll have to supplement with your monthly income. Or, if that’s not an option, then reduce your living standards. The biggest thing to remember is that your lifestyle, budget, and needs are going to fluctuate each time you PCS with the military.
Is It Cheaper to Live on Base or Off Base?
The quick answer is, it depends on your location. You have to factor in the local cost of living, what you need, what you want, what’s offered on base, and what's available out in town. And here’s the thing, what works for you right now might not work for you later!
When it might be cheaper to live on base:
1. If you live in a high cost of living area. If you live in a major metropolitan area, space is scarce, and the housing market is competitive, you might find more amenities for your money on base. San Diego, Hawaii, and the D.C. area are all examples of locations where you may find a larger home and more items on your wish list for less money on base.
2. You want community and convenience to work. Feeling secure and surrounded by the local military community may be best found on the base. While military families often flood to the same off-base neighborhoods, there’s nothing like the community you build when living in military housing.
When it might be cheaper to live off base:
1. If you want to save money. Most military housing takes your entire BAH. While this simplifies your monthly bills, it doesn’t allow you the opportunity to save.
2. If you want to buy a home. It might be time for you to invest in real estate, and if it is, then your options become simple: live off base. If the numbers work out, you might be able to save money by buying instead of renting. Plus, you can start life as a landlord and create passive income by renting the property out to other military families when you head to your next duty station.
Budgeting for a house is no small feat. There are so many factors to consider, and there’s no right way to go about it. The cost of housing is expensive, bottom line. The best thing you can do is make yourself painfully aware of your finances. Pick a goal. Is it to live comfortably with your wants and needs, or to live under your means to pay off debt and save? Your response to that question will help you prioritize how you’ll approach your house hunt. And if you have more questions or need more guidance, then head to our blog where we’ve got all the info you need!
And when you’re ready to start the hunt, take a look at MilitaryByOwner's homes for rent or sale and find the next place to call home--just click the image below to browse our listings!
By Danielle Keech, MilitaryByOwner.com