The Renter Savings Trap - Wait to Buy?

It can be really difficult for renters to save for a down payment. If saving up to buy a house is your plan it may have some challenges... and in some cases can be fatal to the home buying experience. Two key challenges: 1) as you save to buy a house your rent can increase, and 2) as you save to buy a house the house may increase in cost.

Let's look at the rent dilemma first:

While saving for a down payment - your interest rate on your checking or savings account is most likely close to 0%. You want to buy a house for $400,000 and you want at least 5% for the down payment, or $20,000. If you save $4,000 a year for your down payment... in 5 years you've saved $20,000, but while you were saving your $2,000 per month rent increases by 3.5% a year.

Based on a 3.5% rent inflation increase in year 2, your $2,000 a month rent will be $2,070 in year 2, $2,142 in year 3, $2,217 in year 4, and $2,295 in year 5. In year 2 you pay an extra $840 in rent, in year 3 you pay an extra $1,704, in year 4 you pay an extra $2,604 in rent, and in year 5 you pay an extra $3,540. Over the 5 years you were saving $20,000 for your house you have to pay an extra $8,688 in rent - you really need an extra $28,688 over 5 years to get to your $20,000 goal.

Americans are spending more and more of their income on housing each year. Owning a house is one way to fix the housing expense.

Let's look at the house dilemma:

While saving for a down payment - the house could be increasing in value. Imagine you want to buy something for $400,000 and it is going up in value by 3.5% a year - the same pace as rent was increasing due to inflation.

If the $400,000 house goes up in value 3.5% per year, in 5 years it will cost around $475,000. Here's the double dilemma. If the house now costs $475,000, the 5% down payment has grown from $20,000 (5% of the $400,000) to $23,750 (5% of the $475,000).

While you are saving to buy, your rent was going up at the same time the house price is likely going up. In essence, you'll need to save $23,750 for the down payment, while paying an extra $8,688 in rent, to buy a house that now costs $75,000 more than it did 5 years ago.

That's assuming the house only went up 3.5% per year in appreciation. Houses have gone up much faster and are likely to continue to increase in value if demand stays constant, and inventory can't keep up with demand.

TIP: It may seem unorthodox, but this is why so many people struggle to save to buy their first house. If you are able to, you are better off working with parents or others who can loan you the down payment to get your housing experience started. It may seem unorthodox, but gifts, inheritance advances, using a reverse mortgage from a grandparent, bridge loans, work advances, etc. Instead of grinding to save, get creative and getting your housing experience started earlier can be a big wealth creator. The housing market could crash and maybe you get a better deal, but you'll still need to be ready to jump at any opportunity when it arises.