Many Philly residents are lighting money on fire by renting.
For most middle-class areas in America, buying a home is a financial tradeoff between long-term benefits and higher short-term payments. Houses in the suburbs are priced such that a monthly mortgage payment is significantly higher than rent. On the other hand, homeowners get the benefit of tax writeoffs, long-term appreciation and control over their residence. Also, their mortgage payment stays fixed while rents go up over time.
But for many of Philly’s residents, buying a home should be a financial no-brainer! A nice 3-bedroom house in West Philly or Germantown rents for around $850/mo. The purchase price for that same house is around $95,000 which, at current interest rates, would result in a mortgage payment of around $440/mo!
So why in the world are so many people renting? I’ll give you four choices, see if you can pick the most common reason:
- They like making their landlord rich
- They don’t make enough income at their day job to buy
- They aren’t able to save up enough money to buy
- They have bad credit
If you picked choice #1, sorry wrong planet. If you picked not enough income, that’s typically not the case. Most Philadelphians who have a steady job make more than enough to buy a home similar in quality to the one they are renting. If you picked savings, that’s usually not it either. It’s true, many people don’t keep much savings. But if they can save the $2500 necessary to move into a rental, they can save the $3325 for an FHA down payment, and it’s not hard to get a seller to pay for the closing costs in this market.
Which leaves us with choice #4, bad credit. We’ve run hundreds of credit reports for applicants seeking to rent or buy, and we see the same mistakes over and over. Lack of positive tradelines and lots of small collections, often for less than $200, which will damage the person’s credit for years to come.
Today your credit score is more important than ever. Subprime mortgages have disappeared making it almost impossible to buy a home with a score under 620. Even employers are using credit scores to screen applicants. So why are are so many people wrecking their credit for a few hundred dollars in unpaid bills?
In my experience, it all comes down to a lack of understanding of credit, and more broadly a lack of financial education. Most Philadelphians don’t pay attention to their credit score until they decide they want to buy a house. But collection accounts can take 7 years to age off, so by that time it may be too late. Most Philadelphians also don’t make a habit of saving money, and therefore when a negative financial event hits them they’re stuck deciding which bills to not pay.
I firmly believe that basic financial literacy, including credit scoring, should be taught in every high school. As a company we can’t do much to make that happen, but at BREP we do what we can by offering free credit repair coaching to all our tenants. We even offer free coaching to people who aren’t customers. Just call us and make an appointment!
One last thing. YO PARENTS, do your kids a favor. Teach them the importance of paying their bills on time and saving money. Get them in the habit of pulling their free credit report once per year from https://www.annualcreditreport.com/. If they’re responsible enough, help them get a credit card with a low limit and get them in the habit of charging a small amount and paying it in full each month. For optimal credit, you want at least three positive tradelines (recurring bills) with a history that stretches back several years.