Cheap studios for rent: here's why you should consider buying instead
Are you thinking about renting a studio or apartment? Maybe you should think again. While affordable rental accommodation does provide some advantages, more often than not, there are better ways to spend your money. The rise of the condo market in key North American cities has opened up a number of opportunities in recent years, with affordable and well-specced condos offering significant financial and lifestyle advantages over rentals.
The condo lifestyle may not be perfect for everyone, but it's certainly worth considering. Rather than wasting dead money on rent each and every month, you could be contributing to your financial future and having a lot of fun along the way. Modern condos are often located in desirable inner-city locations and come equipped with more amenities than ever before. From gyms and pools through to business centers, buying a condo is about buying into a community and a way of life.
Let's highlight the rental problem and take a look at the benefits of a condo purchase to see if this lifestyle is right for you.
The problem with renting
Renting a cheap apartment or studio is a rite of passage for every young person, but you don’t have to do it forever. An increasing number of Americans and Canadians are deciding to save funds and buy a condo instead. There are lots of problems associated with renting, from high prices and housing insecurity through to disadvantages associated with lifestyle and location.
The financial disadvantages of renting are significant, with rental costs going up all the time and tenants unable to build equity for their future. While rental costs were subdued in the US and Canada following the financial crisis, household formation accelerated as the economy healed and the housing market was left behind. With fewer rental properties and more potential tenants, prices have gone up considerably.
According to figures from the Joint Center for Housing Studies at Harvard University, there is currently a deficit of roughly 2.6 million affordable housing units in the US. According to a comparable analysis by Freddie Mac, the overall shortfall is about 2.5 million housing units. Due to less supply on the ground, rents have been rising considerably over the last few years, by 3.6% in the last 12 months alone according to The Labor Department’s CPI.
The situation across the border in Canada is even worse, with affordable rental accommodation getting harder to find in key Canadian markets. According to the 2019 rental market predictions from Rentals.ca, national rents are expected to rise 6% over 2019, with Toronto up a massive 11%, Ottawa up 9%, and Vancouver up 7%. While many Canadians are finding it difficult breaking into the housing market, paying unsustainable rent month after month is proving just as hard.
While getting into the property market for the first time can be tough, flexible lending options and relatively low prices are helping many.
Along with high prices and housing insecurity, the rental lifestyle is also compromised in many ways. With the market experiencing increased housing demand, people often have to move away from their family, friends, and local neighborhoods in order to find affordable accommodation. Even when rents are affordable, the quality of the accommodation is often mediocre, and there are no amenities or community assets for tenants to enjoy.
Benefits of buying a condo
If you're one of the millions of people struggling with high rents and housing insecurity, buying an affordable condo can be a viable alternative. While not everyone has the ability to save a deposit for a condo, there are an increasing number of financial options available. Both conventional and non-conventional home loans are available for condos, with non-conventional loans easier to access for many first-time buyers because they require a much smaller deposit.
There are many benefits associated with a condo purchase, with property owners able to build equity for their future, enjoy secure housing, and take advantage of the condo lifestyle.
Rental money is often referred to as dead money, because once you spend it, it's gone for good. Rather than helping your landlord to pay their mortgage, a condo purchase helps you to build equity for the future of your family. While condos don't normally appreciate as much as detached family homes, this is largely dependent on location, price, and construction quality. If you buy a condo at the right time in a growing market, you can benefit from significant gains.
Whether you're a young couple or a growing family, there's nothing more important than financial and housing security. While rental accommodation can be affordable and allow for a greater degree of freedom, it is often insecure. Rather than changing your lease every 6-12 months or dealing with fickle and unscrupulous landlords, a condo purchase gives the control back to you. When you buy a condo, you can live in it for as long as you wish, and rent it out to generate a regular source of income.
Affordable studios and apartments are rarely located in desirable neighborhoods. While there are some exceptions to this rule, there will always be location compromises in bustling real estate markets such as San Francisco, Toronto, or Vancouver. When you purchase a condo, you're much more likely to live closer to the action. While you always have to pay to live in a trendy neighborhood, young people who buy condos have a much better chance of living in the inner-city than if they rented a studio or bought a detached dwelling.
The lifestyle factor
Buying a condo is about much more than purchasing an apartment, it's about buying into a lifestyle. Modern condo buildings often feature great amenities, desirable locations, and a like-minded community of residents. While you rarely hear about tenants getting together with their neighbors for a party or workout session, this is common in many condo buildings. When purchasing a condo, it's important to think about a community that caters to the needs of your demographic.
The downside to condos
Like just about everything else in life, there's always a downside. The single biggest complaint about condos relates to condo fees. Along with paying off your mortgage each month, condo residents also need to pay monthly fees for the upkeep of communal building assets and amenities. There is a price to pay for the gym and swimming pool, and an even bigger price if you want to live in a building with staff. There is an upside to condo fees, however, with no lawns to mow, no roofs to fix, and no need to worry about surprise repair bills.
The other complaint many people have about condos relates to rules and regulations. Unlike a rented apartment or detached home, living in a condo means becoming a member of a community. There may be restrictions related to pet ownership, noise, and even whether or not you can dry your clothes on the balcony. While most of these rules are based on common sense, it's always a good idea to read the rules and meet the Homeowners Association (HOA) to see if you'll make a good fit.
Steps to buying a condo
If you're seriously considering saying goodbye to the rental market and becoming a homeowner, congratulations, you've made a clever choice. Buying a condo offers considerable advantages over renting a studio, giving you more room to grow as a person and a provider. Buying property is not always easy, however, in fact, it rarely is. There are lots of challenges to overcome along the way, a few sacrifices, and more paperwork than you can possibly imagine.
Let's take a look at the important issues you need to address before you can put one foot firmly on the property ladder.
Saving for a deposit
If you want to purchase a condo, there is no escaping the fact that you will need to save for a mortgage deposit. The days of no-deposit loans are well and truly behind us, with anywhere from 3.5-20% needed before lenders will take you seriously. This big difference is due to the many types of loans available, with conventional and non-conventional loans offering very different pros and cons. Most people need to live in rental accommodation while they save, although you may also be able to live with family.
Different types of loans
The type of loan you can access will have a huge impact on the deposit required, the interest rates available, and pretty much everything else. In the United States and Canada, home loans are either conventional or non-conventional.
Conventional loans meet standard lending criteria, and are often accompanied by lower interest rates. A conventional loan typically requires a 20% down payment and healthy credit score, which means it doesn't need to be insured by the government. While these loans generally have the best terms, not everyone has the luxury of a high credit score and a huge deposit.
Non-conventional loans include Federal Housing Administration (FHA) loans, those available from the Veterans Administration (VA), and those available from the Rural Development Services. These loans don't conform to normal guidelines, and are available with a 3.5-10% down payment with government insurance. Getting a FHA loan for a condo can be challenging, because the condo must be included on the FHA-approved condominium list.
In Canada, a very similar situation exists, with conventional loans available with a 20% deposit and non-conventional loans needing to be insured by the Canada Mortgage and Housing Corporation (CMHC). Once again, while non-conventional loans can be easier to obtain for new buyers, they typically come with higher interest rates.
The interest rates and interest rate structure of your home loan will have a huge effect on your finances for years to come. While everyone wants to get the lowest rate possible, non-conventional mortgages often need to balance a low down payment with a higher interest rate structure. Along with the rate itself, it's also important to be aware of the difference between variable and fixed interest rates.
Variable interest rates change according to wider economic conditions, which means you save money when rates go down and lose money when rates go up. Basically, you are getting flexibility and efficiency at the expense of security if rates go up in the future.
Fixed interest rates are set for a certain period, which provides security and easy budget management at the expense of flexibility and savings if rates go down in the future.
Before you start hunting for the perfect condo, you need to have a solid understanding of how much you can afford. Regardless of how careful you are with your budget and how conservative you think you're being, the only real way to check your mortgage limits is to get a loan pre-approval. While this is an informal and conditional process, reliable pre-approval is incredibly beneficial and available from many lenders.
Mortgage pre-approval is an agreement from a lender regarding an agreed loan amount and interest rate. A proper approval is carried out manually and requires documentation for income, employment, assets, and debts. Your credit history and score will be checked and a lengthy application form will need to be filled out. It's best to avoid on-the-spot and automated pre-approvals, which are less likely to be accurate and are often used as a sales tool.
Once you have a reliable pre-approval, you can start hunting for the perfect condo with realistic expectations of how much you can afford. There are lots of things to think about during this process, from the location and building quality through to price, amenities, and condo fees. While you don't need to be a real estate expert, it always pays to have a basic understanding of supply, demand, and other market forces.
If you feel like you're stuck on the rental merry-go-round, you're certainly not alone. While starting out in the property market can be challenging, condos are an ideal entry point for many young US and Canadian residents. With rents rising all the time and people looking for a way to secure their financial future and upgrade their quality of life, the condo lifestyle is a viable alternative for many. If you want to find out more about this amazing opportunity, have a look around and see if you can make your condo dream come true.