Apartment Basics

It's time to move to a place of your own—an exciting transition but also a big financial commitment. Most people rent an apartment before they can afford to own a home. To help you make an informed decision, here are four things to do before you sign a rental or lease agreement:

1. Physically visit the actual unit you will occupy (not a model unit).

2. Consider what you really need in an apartment.

3. Know what you can afford.

4. Know if it's a lease or a rental agreement.

Know Your Money

Housing is usually your biggest expense. For most people, more money goes to pay for housing than anything else. If you get too much house, you will be house rich but cash poor. It's important to live within your means—know what you can afford so you will have money for everything else you need.

Most of the time, you'll sign a lease agreement between you (the tenant) and the landlord or owner. This agreement gives you the right to occupy your new apartment for as long as the lease is in effect—called the lease term—in exchange for the periodic payments known as rent. A key feature of a lease is a fixed term for tenancy, such as six months or a year; when the time is up, both parties can agree to go their separate ways or renew the lease for another fixed term. The fact that you pay your rent month to month doesn't mean you're automatically off the hook for the remaining payments of the term if you decide to move out early.

By contrast, a rental agreement is usually for a short term (such as one month) and automatically renews unless the landlord or tenant decides to end it, which is referred to as terminating the agreement. Although this arrangement appears to offer greater flexibility, it may come at a higher price. So before signing anything, be sure you understand the terms of the agreement, evaluate the pros and cons, and determine which option is best for you.

Rent: How Much Can I Afford?

It's easy to fall in love with an expensive apartment and, before you know it, you become house rich but cash poor. Housing is usually your biggest expense, so keeping your rent low will mean you have more money at hand for everything from weekend activities to an emergency car repair. Remember, you don't own it, so it doesn't have to be something you'll love forever. When your lease term is about to expire, find another apartment if a rent increase puts your rent above 28 percent of your income.

Know Your Money

When combined, housing expenses should not exceed 36 percent of what you earn. For rent, spend no more than 28 percent of what you earn. Then add your utilities, renter's insurance, and parking privileges.

One way to have a nicer apartment and lower your rent is to find a roommate. A two-bedroom apartment always costs less than two one-bedroom rentals. It's difficult to share your living space with a new person, however, so you'll need to find someone who's easy to get along with, has similar housekeeping habits, and is on the same sleeping schedule. Put the lease agreement in the name of all occupants—meaning your roommates sign the lease with you. That way, you're not stuck with the rent if they can't afford to pay their portion.

Know the rental prices for comparable units in the area before you make a decision. Figure in start-up costs like the following, which can easily add up to as much as three months' rent:

• application fee

• security deposit (one month's rent)

• utility deposits (electricity, gas, cable, phone)

• parking spaces

Don't put these charges on your credit card—you don't want to start out your new life with interest payments.

Visit the Apartment

Showroom models are nice, but you need to visit the actual unit you will be renting so you can visualize your space and ensure that all mechanical systems are operating properly. While there, make sure to do the following checks:

1. Measure the space and make sure your belongings will fit. Include doorways (will your sofa make it through?), closet space, and any shared bathrooms.

2. Locate all cable jacks and electrical outlets.

3. Test the plumbing by turning on faucets (any leaks? hot water?), flushing toilets (turn off properly?), and running the shower (brown water? ample hot water?).

4. Turn on the lights, air-conditioner, heater, and hot-water heater. You may have to arrange for turning on the utilities yourself.

5. Test security, such as doorbells, double front-door locks, windows that close tight and lock, and working fire and carbon-monoxide detectors. How will the landlord respond if a fire alarm goes off or a break-in occurs? Are common hallways and parking lots well lit?

6. Evaluate the neighborhood for noise or smells.

7. Test for Wi-Fi availability and cell phone reception. Watch out for dead zones.

Read the Agreement Thoroughly

Make sure you understand all the terms of your lease or rental agreement before you sign. Afterward, it's usually too late to make a change. Penalties for breaking a lease and a need for cosigners are among the provisions that can cause you trouble.

Breaking Your Lease

Tenants often have good reasons for wanting to end a lease early. If you must break your lease, find out how you can avoid (or minimize) a penalty from your landlord. Some good reasons to discuss are:

• marriage

• called to military duty

• change of job locations

• apartment becomes uninhabitable through no fault of your own (such as crime or natural disaster)

• landlord does not live up to his or her obligations (building repair and maintenance) or invades your privacy (no intervention when neighbors constantly disturb you)

If possible, get any understanding you come to included in the lease, so a change of personnel or memory doesn't undo your agreement down the road.

Cosigners

Landlords may not sign a lease with you if they think you can't pay the rent (for example, if you have no reliable employment or insufficient income at the time of the lease-signing). The landlord may request that you provide someone—a relative or friend—who can cosign the lease as a guarantor. This means if you fail to pay the rent, the cosigner is liable for the amount unpaid even though he or she doesn't live there.

Know Your Money

Until you have ample income to meet your needs, do not cosign a lease for someone else. You do not know the financial maturity of your friend, and you do not want to be burdened with additional payments for a bad situation when your income is limited.

Other Considerations

A lease or rental agreement is a legally binding contract with defined responsibilities. Make sure the lease spells out the details of any of the following that apply:

• your right to use site amenities (such as gym, pool, covered parking)

• proper handling of bedbugs or lead paint before you move in

• whether the agreement is with a broker or the landlord

• money required when you sign the agreement

• return of security deposit

• late payment fees

• pet ownership

• landlord-provided utilities

• interior painting

• what to do when something breaks or needs repair

• subletting rights (roommates)

• penalties for moving out before your lease term is complete

• musical instrument restrictions

Avoid lease terms that automatically renew the agreement for long periods of time (three months or more) or require a ninety-day notice of intent to move out.

There is no guarantee that you and your landlord will agree on things, so give the landlord as much notice as possible (months versus weeks) and keep good records of what you believe justifies your actions, just in case you need to fight a penalty in court. In most cases, you should be okay if you've been a good tenant and the landlord can quickly get another tenant in your apartment.

Renters Insurance

Remember that insurance is about your protection against unforeseeable circumstances. Even if you think, "That can't happen to me," paying for a policy might someday make the difference between an empty apartment and a shopping spree to replace your items. There are many misconceptions about renters insurance, and they can cost you. Consider the following reasons people fail to insure themselves.

"My Landlord Has Me Covered"

In most cases, a landlord's insurance covers only structural damages to the building, and many policies don't cover damage caused by a tenant. If you leave the tub running and it turns your floor into cardboard and dribbles downstairs, damaging your neighbor's couch, you may be liable for the whole drippy mess. If your building burns down, your landlord's insurance will cover repairs but will not replace your personal possessions.

"It's Too Expensive"

Standard coverage includes personal property (for example, up to $40,000), reasonable deductibles (say, $500 per incident), medical coverage for others on the premises, and more. With a higher rate, you can get replacement cost coverage, which means that the cost to replace personal items is based on today's cost rather than the older original purchase cost. Raising the deductible lowers your rates.

"I'm in a Great Building and Not Worried about Security"

Renters insurance extends beyond on-premises theft and hazards. If your suitcase is stolen while you're on vacation, or property is stolen from your car, or you hurt someone in your apartment, you will likely be covered.

"My Stuff Isn't Worth Much"

You'd be surprised at how quickly all your things add up. According to "Do I Need Renters Insurance?" on the State Farm website (https://www.statefarm.com/insurance/home-andproperty/renters/coverage-options), most people own more than $35,000 worth of property. List each item along with its year of purchase and what you think it would cost to replace today.

"All Insurance Costs the Same"

Insurance rates vary by state, company, and type. Be sure to ask an agent about customizing a policy with more options, and understand what is fully covered or subject to certain limitations. Personal property and natural hazards are particularly prone to limitations you might not expect.

Know Your Money

Get renters insurance. It's a bargain, with many policies under five dollars a month—and it covers your laptop!

Other Common Pitfalls to Avoid

Whether or not you're a first-time renter, avoiding the following common mistakes will help you make a smoother transition.

Failure to Set Housing Priorities

Know your needs versus your wants and stick to them. Which is more important: a gorgeous view or commuting distance? Having access to public transportation or an on-site gym?

No Damage and Repair Inspection

Make sure all damage is noted and repairs are done before you move in. On move-in day, go through the apartment with a pen and paper writing down any defect, no matter how small. Take a picture if you can, date and sign it, and send a copy to your landlord. You don't want to be held liable for preexisting damages.

Forgetting to Figure in the Cost of Basic Items

There are a lot of things you'll need at move-in time to make your place a home you are proud to live in. Make sure you budget for the basics when you set your rent budget:

• furniture—something to sit on, bed and bedding, dresser, lights

• kitchen—basic pans, storage containers, silverware, dishes

• cleaning materials—detergents, broom, dustpan, mop, vacuum cleaner

• bathroom—towels, shower curtain, toiletries

• toolkit—basic tools to hang pictures, assemble things, and install curtains

Discussion

1. What do you need to set up your own apartment? What do you already have?

2. Do you think you have enough stuff to make renters insurance worthwhile?

3. What would happen if you had a lease agreement and your roommate decided not to pay the rent when it's due?

4. What is the role of a cosigner? Should you be a cosigner for someone else?

Conclusion

Before you sign a lease or rental agreement, think about what you really need in your new home, and only make a financial commitment that you can afford. "Know your money" means to live within your means. You can do this by keeping your total housing costs under 36 percent of your income. Don't start out being house rich but cash poor. Your first apartment isn't going to be perfect; you can skip some things for now, and when you earn more income, you can move up to a better apartment.

See appendix 2, "Reference Material," for more information on renters' legal rights.

Auto-Insurance Basics

The good news is you finally got a car. The bad news is, now you have an auto-insurance bill to pay too! As you know, driving is not a right—it is a privilege. That's why you need a state driver's license and insurance coverage.

An auto-insurance policy is a contract between you and the insurance company. The company agrees to pay for specific car-related financial losses (specified under the policy terms and conditions) for as long as the policy is in effect in exchange for your periodic payments, called premiums. Insurance is usually required by the state you live in and is designed to help the insured vehicle owner pay for losses caused to others. Without this insurance, you risk having to pay the full cost of any harm you cause to others and replacing or repairing your car if it is damaged or stolen.

Know Your Money

To avoid serious future financial hardship, get the proper auto insurance, keep it in effect each year, and don't loan your car to high-risk drivers!

When a vehicle you own causes harm to others, you may be liable for their financial costs, including property damage, medical costs, and legal costs. These costs can easily exceed $100,000 or more, and this even applies when you've loaned your car to someone else who is the one who caused the damage. Without insurance, how will you pay for these obligations? You may have to sell your assets or sacrifice future job earnings.

Each state typically has a minimum level of auto-insurance coverage required by law for vehicle owners. The policy purchase price is directly tied to the risk you represent to the insurance company. In other words, the company determines the likelihood that they're going to have to pay for damages for which you are responsible. Insurance is expensive for young adults under age twenty-five because they cause a lot of damage. Higher risk equals higher policy premiums.

What coverage do you need? No one can predict that, but state law usually requires a minimum level of protection. Ask yourself, how will I pay for damages that exceed my policy limits? As with your apartment agreement, be sure you understand the terms of the insurance policy and evaluate any pros and cons before signing.

Loaning Your Vehicle

If you let your friend borrow your car and he or she crashes it, you will be financially responsible for damages he or she caused even though you weren't driving. You will need to file a claim with your insurance company to pay for the damages, and you will have to pay the deductible that applies. Your future insurance rates may also go up as a result of your claim. If your friend has no auto insurance (referred to as an uninsured motorist) and causes damage that exceeds your policy protection limits, the injured party can come after you for unpaid medical and property-damage costs not paid by your insurance company.

As a general rule, don't loan your vehicle, especially to high-risk drivers. If you loan your car and the borrower causes damage, then you (and your insurance carrier) will pay for the damages. Likewise, if you borrow someone else's vehicle and you cause damage, then that person (and their insurance carrier) will pay for the damages. Lastly, if someone causes damage with your car and you did not give him or her permission to use your car, then that will be handled as car theft.