How to Save for a House When Renting an Apartment

Posted on: 19 January 2015

Most people need to rent an apartment because they can't afford the downpayment on a house, or because they will only be living in an area for a short period of time and they need a less permanent solution than a mortgage. However, owning a house or another permanent property is a better investment for your finances. With so much of your money going to rent, how can you save enough money for a down payment on something more substantial?

Set Your Budget

You may not have the funds to go out house hunting yet, but you can get an idea of what kind of house you can afford, so that you know how much money you'll need to earn monthly to pay the mortgage, and how much you'll need for a minimum down payment. Financial experts advise spending no more that around 28% of your monthly income on housing expenses. However, if your other expense areas are low (no student loans, low car payments etc.) you could probably afford a little bit more. 

Therefore, you can calculate what your monthly mortgage payment ought to be by multiplying your monthly income by 0.28. When looking for a house in your area, keep your monthly payment in mind, You can run potential mortgages through a calculator to see what your monthly costs will be. This will give you a ballpark range of saving for a downpayment. You can usually get a loan for just 5% down, but you'll need to pay for mortgage insurance with a payment so low. It's usually best to wait until you have 20% of the total listing price in order to get better financing. 

Start Saving Now

When saving for a down payment, remember that the bigger your downpayment is, the smaller your monthly payments will be. Even though you may be impatient to have a house, waiting a few extra years could mean a couple hundred dollars off your monthly payment when you do take the plunge. 

That being said, you'll never have the down payment if you don't start putting money away. First, take a look at your budget. Ask yourself:

  • Are you living in an apartment that takes up more than 1/3 of your income? If so, it might be time to downsize to something smaller so that you can pocket an extra one of two hundred dollars a month. Even if you go for place that rents for $100 less than where you are renting now, that's $1200 a year toward your down payment.
  • Are you saving 10%? The best way to build up money for a downpayment is to put away money every time you get paid. If you can't afford 10% percent, start with 5%. Or, if you would rather, just give yourself a fixed dollar amount, like putting away $20 each week. 
  • Are your savings making interest? Check the rates at your bank and make sure that you have your money in an account that will generate a little surplus for you.
  • Sublet or share? If you have an extra room, even if you are a couple living together, consider renting it out for a hundred dollars a month. There is always someone willing to share for cheap rent. If you keep making the full rental payment, and simply put their check toward savings, you'll add thousands to you down payment savings in just a few years. 

If you feel up to a little bit of risk, you can also check out condos or apartments for rent in your area that have rent to own options. In these cases, down payments are smaller, and your rent goes toward a larger downpayment as you write the checks. When ownership changes hands, you'll have a good place with a payment you can afford.