Thursday, June 9, 2011

Budget Discussion -- Part 3 "Smart Housing"

It's been sometime since I last blogged on the topic of personal finance, namely how to budget your income accordingly. Following a general overview and on food consumption, I thought it would be helpful to review another significance drain on our wallets: housing. The term "housing" will be restricted to the rentals, since most young professionals are not financially there yet. This is a personal topic for me, as I've had troubles with this before, and the Washington D.C. housing market is one of the most expensive in the country.

When it comes to renting property, it is extremely important to analyze your own income first and foremost. I say this because we can be easily infatuated by desirable properties that are really outside of our ability. For example, we tend to forget about our needs when presented with luxuries such as roof-top swimming pool or a posh club room in some apartment complex. It's about not confusing "need" with "want": we need safety and quiet, but oftentimes want much more than that. Unfortunately, it is the "wants" that allow property owners to charge more -- and property seekers to pay more.

After the appropriate budget for housing is determined, it's time to start looking. Now things get interesting, because there is truly an amalgam of factors to keep in mind. All these factors can drastically impact the housing price paid:
  1. Roommates -- unless you absolutely must live alone, you should consider seeking roommates to try to find a place together. The obvious reason is that the difference between a 1 bedroom apartment and a 2 bedroom apartment is often marginal. For example, you can either pay $1000 for a 1 bedroom or split a $1300 2 bedroom apartment with someone else. The benefit? Saving $350 per month in rent. Having roommates is also beneficial for pooling resources, meeting new people, and enhancing safety. More to be discussed on this later.
  2. House or apartment -- this is a matter of personal preference. Although houses are generally associated with family life, they can be very cost-effective and yield other benefits. Houses are generally more flexible to add roommates, contain on-site laundry facilities, private parking on a driveway, less noise, and often come with a backyard for barbecue for the occasional shindig. That being said, apartments are normally better situated than houses, in addition to more community amenities (e.g. roof-top pool).
  3. Distance to work/school -- one should always consider this factor, since it can contain considerable unexpected costs. For example, living outside of walking distance means you'd have to drive or bike to work. Driving in particular could be troublesome if parking is difficult to find, or not free. You should also consider the commute time to get where you need to be. What's the point of living in a posh apartment if you are spending 2 hours each day commuting?
  4. Availability of public transportation -- going off the previous point, public transportation may not be used but should nonetheless be considered. Especially if something happens to your go-to mode of transportation. However, this comes with a downside: a positive correlation between some types of transportation available and price of housing. Case in point is metro rail.
  5. Utility costs -- in this day and age, one cannot do without internet service. Most properties do not include internet service in the rent, nor normal utilities like electricity and gas. This cost will depend on the energy efficiency of the property. A common cost for this category is $100 per month.
From a personal perspective, I feel that rent should be kept below 1/3 or even 1/4 of one's monthly income. Anything more feels excessive, to the point of being dangerous. Having a high rent can be dangerous in case your monthly income is reduced by whatever means (e.g. laid off). Housing is, generally speaking, one of the most inelastic/inflexible parts of your personal budget. One can chose to eat or drink less at will, but it is much harder to be "housed less". Just as one should never underestimate the importance of good sleep (read more here), one should not try to cut too many corners when it comes to housing.

Returning to the subject of roommates, the roommates you have can make or break a housing deal. It is that important. I remember that during freshman year in college, my roommate (randomly assigned) was an erratic sleeper due to his gaming addiction. As a result, I suffered countless sleep-deprived days because we shared a room together. But if you can find friends or a good random roommate --someone who will respect your privacy, need for quiet hours, and willing to clean and share certain items-- then that could make for a terrific living arrangement. Not only would you save on rent, but also have an on-hand person in case anything unexpected arises. From a personal perspective, I find that full-time students generally do not make good roommates --due to their erratic school hours and tendency to party on weekends (sometimes even on weeknights). But we ought not stereotype too much. Some students can be very good!

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