When Renting and Buying are too Expensive

The Brown Sod McDreamy, a mere 6x your annual salary!

*HOA mandated sprinkler system not included

In 1963, with a median income of $6,200, you could have bought a home for about 3 times your annual income. In 2017, that ratio had increased to 5.2, with the median income being about $50,000 and the median cost of a house at $321,000. In two-thirds of America, the growth in the cost of housing is exceeding wage growth. I’ve included a cute little table below to show you the numbers, and you can see the sources below that. The reasons for this almost doubling in the cost of owning a home are numerous and complex. For example, since 1963, many families now have two instead of one incomes. But I doubt I could truly understand every aspect of the economic changes without a Ph.D. in the subject so instead, I’d like to focus on something useful, like what you can do if you just can’t afford to fork over 300 grand.

That Year’s Dollars Converted to 2017 Dollars Median Income Median House Price Median Income Median House Price Income:House Price 1963 $6,200 $18,000 $50,000 $144,000 2.9 2017 $61,000 $321,000 – – 5.3

1963 Incomes , 2017 Incomes , Home Sales ,

For one, you could rent. While data on median rental costs is hard to nail down as it varies considerably by location, you’re more than likely looking at monthly costs of over $1,000 for a one bedroom and utilities. Not bad if you’re making $25,000, it’s about half your family income if you’re single…before taxes.

But what if renting and buying are both stretching your budget too thin? You’ve probably heard of the more “eccentric” options out there. Things like a tiny house, which is, honestly, the route I’ve chosen. I begin construction on my tiny house this month and I expect I’ll really enjoy the process of building my own home. It’s a route that allows me exceptional customization, mobility, and affordability. Win-Win-Win. But I know tiny houses aren’t for everyone. Some might prefer a van, the freedom of the road and even lower costs, while others might cringe at the idea of tiny or micro living. And that’s totally fine, you should not have to hate your house, whether that’s because it makes you feel like Gulliver on his travels or because you work two and a half weeks, full time, just to fork it over to your Land-Rover-driving landlord.

So what should you do if you do not want to go tiny OR expensive? How could you get into a regular sized house at an affordable rate?

Housing co-ops might be one way.

Housing co-ops, or cooperatives, are both owned and lived in by their residents. Residents buy their share of the coop, which is usually a share in some form of a corporation. Unlike buying a house or land, you don’t own any real estate in a co-op, you just own your share of the company, which in turn owns the real estate. Owning a share grants you the right to occupy one unit of the co-op’s building.

The structure of a co-op can vary. Some allow you to acquire equity and sell your share at a market rate, many simply rent the units to members at cost-only prices. Most have boards of directors who run the co-ops and consist of residents elected by their neighbors. In smaller co-ops, it’s not unusual for every resident to be on the board and run the show.

As you might imagine, co-ops are typically cheaper than renting because there is no landlord profiting off the top of the income. Instead, costs come from maintenance, upgrades, taxes, and possibly a loan on the building.

There are some risks to living in a co-op. For example, if one of your neighbors suddenly cannot afford to pay their monthly fee, everyone else has to cover their share. One way to mitigate against that risk is to have strict residency requirements, as some co-ops do.

Another option I see is to charge a set monthly cost to members, and any profits at the end of the year are returned to residents. While you’d still have to cover your neighbor’s financial shortfall, you wouldn’t experience a fluctuation in monthly costs. Yet this leads to a sometimes lengthy application process for members. There’s also the issue of having to cooperate with your neighbors. If you’re not one to compromise or play well with others, you probably wouldn’t like living in a co-op.

Apparently, this housing model is popular from Wisconsin to New York, but in the west, perhaps they haven’t yet taken off because of historically cheap land. Maybe it’s time for the co-op model of housing to find its way to your town.

Here’s a simple example of what might be possible with the coop model of living. Let’s say you live in an apartment and you love it. You know most of your neighbors, you think the neighborhood is awesome, and you aren’t about to lose your lease due to costs but you certainly would welcome a cut in rent. You gather a band of your neighbors, all residents of the apartment, and you start a conversation. What if we all went together and bought the apartment building and rented it back to ourselves? You are fortunate because your neighbors also love the idea so you approach the co-op housing association and get the resources for starting your own.

You run the numbers on financing the apartment building and find that each renter would need to fork over $20,000 to make the down payment on a loan for the apartment. Yikes, that’s a lot, but you estimate the true cost of living in your apartments is actually $400 a month when you’re all currently paying $900 a month. And you figure out the financing options for getting a loan on that buy-in. This changes things, and now most everyone in the complex is on board. (This would be a feat to accomplish, I recognize that, but not impossible, as I’ll explain later).

Now you approach the landlord and a bank and you work out a deal, the bank loans you the money to buy the complex, the landlord agrees to sell it and voila, magic happens and you and your neighbors now live in a co-op. Those who paid the fat down payment are members, those who couldn’t afford it are non-members, all leases are carried over seamlessly, and members get a return of profit at the end of the year, something in the ballpark of $6,000 of the $10,800 they paid in rent over the year. Those you financed their $20,000 member buy-in will have a little less, let’s say $3,000. You and your neighbors quickly realize you will earn back your down payment in just 3 years and 4 months if they paid cash, and a little less than 7 years if they financed.

You still pay $400 a month to live in your unit, money that goes toward costs like taxes, paying on the property loan, maintenance, and upgrades. You meet with your fellow co-op members monthly or quarterly, and make decisions like what upgrades will be done and what requirements you’ll have for buying into the co-op. After all, the membership fee is actually equity in the company and is something that can be sold. When you get married and decide to buy your 3 bed, 2 bath ranch home in the suburbs, there’s a clause in your co-op allowing you to sell your share for a market rate, which at that time is about $25,000.

Or maybe all of the good fortunes in the above example don’t come your way, and you find yourself having to start a co-op and building a property from the ground up. That’s been done before. As have many variations on the model. It sounds difficult, maybe even impossible, but it’s not. If you need any further proof of concept, look no further than Co-op City in the Bronx, New York. 40,000 people call Co-op City home and it’s been in operation for 50 years. The community has seen its share of struggles, including corruption and poor construction, yet those stumbles serve as valuable lessons for new co-ops. If tens of thousands of people could make a “city within the city” work since 1968, perhaps you and your community could too.

Co-op City

If this sounds like housing you could get behind, and you could actually afford for that matter, the National Association of Housing Cooperatives provides resources, including a guide to starting your co-op.

May 16, 2019

by Torey

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