Homeownership is something that most people aspire to. However, there are a lot of roadblocks that can prevent one from owning a home. A few include poor credit, not having enough money for a deposit, and not being able to afford a monthly mortgage. In this article, Andrew Shader explains the rental trap and how to avoid it.
What Is the Rental Trap?
The rental trap occurs when an individual or family rents properties without ever owning a place to call home.
It’s an easy trap to fall into. It typically starts immediately after college. At this stage, most people don’t have enough savings to use for a down payment on a home. They are hired for a job and instantly find a rental place that will be affordable on their salary.
They may tell themselves that they will be able to afford to buy a home in the future when their salary increases or after they have been able to save enough toward a down payment. In reality, their financial responsibilities only continue to increase, and the dream of homeownership moves further and further into the future.
How to Avoid the Rental Trap
While you may have no alternative to renting right after college, it’s important to establish a goal date for owning your own home. Instead of renting a nice place that meets your tastes, choose something cheap and small.
Avoid purchasing a new car or taking on additional debt during this time. Instead, use that money to save for a down payment on a small home. Typically, the down payment for a house is around 20% of a home’s typical value.
Budget for the smallest place that you can afford. Within a year or two, you should have enough saved up to put a down payment on a modest, inexpensive property.
Fund Management
After moving into the property, continue to manage your funds wisely. The payments you make toward your mortgage will add up and build into the equity for your home.
As time goes by, the equity will increase. Within a few years, you can sell your starter home and use the equity and other monies you have saved towards a down payment on a larger property.
In fact, it’s possible to purchase a new place while keeping the other property as a rental for other people. This will provide you with a regular monthly income towards the equity in your second home. By using this strategy, Andrew Shader advises that you will continue to see the positive repercussions of your savings efforts well into the future.
