Freaked by the housing market>, more would-be home buyers are opting for rentals driving rents up along the way. But it's not just rising rents that new renters have to worry about. A handful of new costs could make renting less than the bargain it appears.
The average national vacancy rate for rentals fell 17% last year to 6.6%, according to Reis, Inc., which tracks rental performance data. And as renting has gotten more popular, prices have jumped. The average monthly rent, including studios, one- and two-bedroom apartments is now $986, based on Reis data. Before the recession, the average was just $930. And in some markets, it's far worse: In New York, rents are up 9% on average in the last five years; in San Jose, they're up 8%.
The market is only likely to get tighter. For the first time in memory, the federal government is actively encouraging people to rent, rather than buy. The Obama administration's recent housing proposal calls for a larger rental market and limits home ownership. Not that renting needed the endorsement: It's already attractive to anyone hesitant to commit to a home in an uncertain job market, those who can't qualify for a mortgage, and people waiting for a more stable housing market before buying. And some people just don't have a choice. Skyrocketing foreclosures have left thousands of former homeowners with no option but to rent, says Frank Nitschke, principal at Prudential Real Estate Investors Research. And with another five million homes expected to go into foreclosure over the next two years, according to RealtyTrac.com, that means more renters will soon enter the market and could drive rentals up even more.
The rise in demand almost certainly means higher rents, which are projected to rise by 3.4% by the end of the year, according to Reis, and fewer of the perks that became popular during the recession, like two or three months' free rent for anyone willing to sign a one-year lease. While shopping around, new renters should look for landlords who are still willing to provide free months of rent a trend that has been declining during the past year, but is still more widely available than it was pre recession, says Ryan Severino, a senior economist at Reis. Existing renters might save money by renewing their lease sooner than later when rents are likely to be even higher, he says. Before signing a contract, look for wording that promises not to raise rents during the lease period. By end of year, rents could rise even further should inflation pick up.
But there are other costs, too, that can take a bigger bite than many renters expect: Insurance, storage fees and, in cities where housing costs have plummeted, opportunity costs. Suddenly, home-ownership doesn't quite sound so bad.
For former homeowners, renting often means living in a smaller space which means taking the 8-foot dining room table or the piano to storage. At Public Storage, among the largest U.S. storage companies, the popular 100-square foot unit about half the size of a one-car garage -- can cost up to $270 per month, depending on location. (The average price is around $150.) There's also a one-time fee of around $20 to sign up. The company's U.S. same-store revenues were up modestly in the third quarter compared to a year ago, and "there's no doubt, foreclosures have helped the industry," says Clemente Teng, the company's vice president of investor relations. To lock in the most affordable rental, look online: Companies often offer lower prices online than they will over the phone. And since prices can vary by location, check out the options a town or two over. Consumers shopping for a space now might want to consider locking in the price when home sales and moves pick up in the summer, storage prices tend to rise.
There's no reliable data, but anecdotal evidence suggests that more landlords are requiring tenants to sign up for renter's insurance, says Loretta Worters, a vice president at the Insurance Information Institute. They're concerned about getting sued if someone gets hurt on their property, and while the extra cost may seem unnecessary at first, it makes sense: A typical policy covers a tenant's possessions and pays for hotel stays and additional living expenses in the event a rental is destroyed or seriously damaged. Premiums usually range between $100 and $300 per year, according to State Farm, and vary based on location and amount of coverage. Some renters may want additional coverage, because most policies place a limit of up to $2,500 total on jewelry, fur, silverware, gold, art and rugs, whether they're destroyed or stolen. A supplemental policy, called a floater, costs on average $7.50 per $1,000 worth of jewelry, says Scott Simmonds, a Saco, Maine-based insurance consultant.
In some cities, the housing market has fallen so far, and the rental market has gotten so tight, that rent could cost significantly more than a mortgage on a comparable place. In Miami's Dade County, for example, a two-bedroom apartment costs $1,206 on average in rent; monthly mortgage and property tax payments on the same property, based at the median list price of $209,000, would cost $774, according to Movoto.com, which tracks sales and rental prices. Over five years, that's a savings of almost $26,000 not even including the tax break for mortgage interest. In Fairfax County, Va., the markets, and savings, could be similar. To determine whether owning is cheaper than renting in a specific neighborhood pull up equivalent for-sale listings online or speak with a realtor and use a rent-or-buy calculator to compare the monthly cost of renting and owning. And if the monthly savings are significant, there are other compelling reasons to buy, says John Mulville, a senior vice president at Real Estate Economics, which tracks residential real estate data: prices are low, as are mortgage rates.