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PAGE ONE Economics

®

On the Move:
Renting Basics
Kris Bertelsen, Ph.D., Senior Economic Education Specialist

GLOSSARY
Budget: An itemized summary of probable
income and expenses for a given period.
A budget is a plan for managing income,
spending, and saving during a given
period of time.
Contract: An exchange, promise, or
agreement between two parties that is
enforceable by law. For example, a car
buyer agrees to pay the amount financed
at an agreed-upon interest rate for the
length of the contract.
Credit report: A loan and bill payment history
kept by a credit bureau and used by
financial institutions and other potential
creditors to determine the likelihood that
a future debt will be repaid.
Lease: A contract that states the terms and
conditions a landlord and a tenant agree
to regarding rental property, including
payment terms, the responsibilities of
both parties, and consequences if terms
and conditions are not met, to ensure that
both parties of the lease are protected.
Recession: A period of declining real income
and rising unemployment; significant
decline in general economic activity
extending over a period of time.
Security deposit: Money paid by a tenant
to a landlord that the landlord holds during
the occupancy and may use to pay for any
damage or unpaid rent when the lease
ends or must otherwise return to the
tenant. State laws dictate how soon it
must be repaid after the lease ends.

February 2018	

“I remember the first pangs of stress arriving at the end of school. Once
I graduated I had to get a full-time job, worry about health insurance,
saving money, paying rent—things I’d never thought about before.”
—Ezra Koenig, American singer, songwriter, radio personality, and lead vocalist and
guitarist of Vampire Weekend

Graduation—from high school, vocational or technical school, or college—is an important milestone. Just as Ezra Koenig once expressed, it
marks a life transition. You have to take care of things you likely never
thought about before. Obviously, having an income is a priority for most
people, followed closely by a home of their own. Some people consider
getting their “own place” a rite of passage into adulthood. Moving into
adulthood and living on your own can be both a little scary and exciting.
Freedom comes with personal and financial responsibility, and finding a
new place to live is a huge step for most young people.

Financial Planning
Before you even begin looking for a place to rent, it is important to have
your monthly budget in order. You’ll need to know how much you can
realistically spend on housing. In order to know for sure, you’ll have to
remember you will have other expenses besides your rent. Some of these
expenses include food and household items, transportation, and perhaps
utilities (electricity, water, etc.). You will also need to be able to pay the
“start-up” costs of renting: It is common for renters to have to pay the first
and last month’s rent up front and also provide a security deposit (discussed
below). And don’t forget, you will also likely want to purchase some furniture and others items for your new home.
Landlords often use a formula to determine whether a potential renter
has sufficient income to pay the rent. One particular formula evaluates
whether the potential renter’s annual income is 40 times the monthly rent.
For example, to afford a $500 monthly rent payment, a landlord might
expect the renter to have at least a $20,000 annual income. An option to
consider to help make rent more affordable is to find a roommate to share
the costs. But remember—a roommate will also share your space.
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The PACED Decisionmaking Model
Because there are many options to consider when choosing a place to live, it is helpful to use a PACED decisionmaking grid to narrow down
your choices and make a decision. The “P” in PACED stands for problem, for example, finding an apartment. The “A” stands for alternatives—
the choices you have. Here those would be the potential places you could live. The “C” stands for criteria. These are the features that are
important to you that will help you evaluate your options. The “E” stands for evaluate. You evaluate each of your alternatives according to
the criteria you’ve chosen. And finally, the “D” stands for decide. You decide which alternative is the best option.
In the case of an apartment search, the grid can be used in different ways. Say you are trying to decide where you want to live. There are
benefits to living downtown, or in mid-town, or in the suburbs. How can you decide? Here’s how you might use the grid.

Close to work

People my age

Nightlife

Close to major
highways

Close to public
transportation

Rental
expenses

Downtown loft

+

+

+

+

+

−

Central West End apartment

−

+

+

+

+

−

South County apartment

−

−

−

+

−

+

West County apartment

−

−

−

+

+

−

Alternatives

Criteria

You can evaluate your alternatives according to your criteria simply by placing a “+” (plus) sign when the alternative meets the criterion
and a “–” (minus) sign when it does not. In this case, a downtown loft would be the best choice, provided you could afford it or could find
a roommate to share the rent. Of course, if you worked in the Central West End or don’t need public transportation, you might come to a
different decision. Let’s say you’ve decided on an area, and you’ve found several places that appeal to you and that you can afford. Here’s
how you might use the grid to evaluate which apartment best meets the criteria important to you.
Updated
kitchen

Pool

Workout
room

Utilities
paid

Accepts pets

Secure
parking

1208 Park Ave., Apt. 504

+

–

+

–

+

+

500 S. Main, Suite 6

+

+

−

+

+

+

256 Market, Apt. 5

+

−

−

+

−

+

Alternatives

Criteria

Based on this example, if the grid included all of the criteria important to you, 500 S. Main, Suite 6 would be the best choice.

Finding a Place
Once you have figured out what you can afford, it’s time
to start looking at rental options. Things you’ll want to
consider are the location, amenities or services offered,
and other aspects you find important. For example, apartment complexes often have pools, workout facilities,
family gathering spaces, and other features. Some places
include cable television and internet access or paid utilities. You’ll want to carefully weigh all of your options
before making a choice. A helpful tool for that is the
PACED decisionmaking model (see the boxed insert),
which helps you think through and rate your options.
An online search of “apartments for rent” for a specific
area will likely direct you to websites with listings of
available apartments. Other good places to look are

newspapers, either in print or online, and local real estate
guides. Free copies of real estate guides are often found
in grocery store lobbies and outside other various retail
locations. “For rent” signs are often posted on or in front
of available apartments, so driving around the areas
you might like to live in might help you find some good
options. And it will give you a feel for what you like or
don’t like about a neighborhood.

Renting Basics
When you rent an apartment, you will be required to
sign a document called a lease, which is a legal contract.
A lease states the terms and conditions the landlord and
the tenant agree to regarding the rental property. When
you sign a lease, you are making a legally binding agreement. Your responsibilities, and those of your landlord,

PAGE ONE Economics®
are among the terms and conditions outlined in the
lease. For example, almost all landlords will require you
to pay a security deposit and the first- and last-month’s
rent. The amounts are specified in the lease, as well as
how a security deposit might be used. For example, if
you cause any damage to the property—say you paint
the walls without permission—you could be held responsible for repair costs and a portion (or all) of your security
deposit could be withheld to pay for it. The lease will
also likely state how you are required to take care of the
property and when to notify the manager or landlord of
any maintenance issues.
How long you agree to rent the apartment and the landlord agrees to rent it to you—if you follow the terms of
the lease—will be stated in the lease. Most rentals are
for at least a year. If you decide not to stay for the
agreed-upon rental period, and “break the lease” as it is
often called, your landlord could legally make you pay
the remaining rent. Exactly what you would have to pay
would be spelled out in the lease.
Other rules and responsibilities will also likely be specified
in the lease, such as whether personal property insurance must be carried, how many and what kinds of pets
may be kept on the property, and procedures for moving
in and out of the property. A lease may also specify that
if ordinances and laws are broken on the premises, you
could face eviction.
Some leases may include disclosures or addendums. A
disclosure is information about the property that might
affect the tenant. For example, lead-based paint is illegal
and no longer used. It can be harmful, especially to
young children, so the landlord would have to tell you—
disclose—if there had been lead paint on the walls or
woodwork. An addendum is an addition to the lease that
specifies additional rules or agreements. For example, if
the landlord lets you have a dog or cat, there may be
rules listed in a pet addendum. Some places allow pets
for an additional fee or a higher monthly rent payment.

Will the Landlord Choose You?
There are two primary ways landlords evaluate applicants: credit and criminal background checks. To apply
for a lease, you will have to give the landlord your permission to check your background and provide your
Social Security number, perhaps your driver’s license

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Figure 1
Change in Spending on Rental Housing, 1999 to 2016

SOURCE: FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/
series/DTENRX1A020NBEA, accessed December 15, 2017.

number, and other information such as your previous
addresses and names you might be known as. The landlord will also review your credit report to see if you pay
your bills on time, how much debt you currently have,
if you defaulted on (didn’t pay back) debt, or if you have
any foreclosures or bankruptcies in your past. These negative events don’t necessarily or automatically mean a
landlord won’t rent to you, but you will have to explain
why they occurred. A criminal record can prevent you
from being eligible to rent. In fact, committing some
crimes can have a lasting negative effect on your ability
to rent or even live in certain properties.

The Rental Market
More and more people are renting for a variety of reasons.
In fact, the percentage of households renting a home
increased from 31.2 percent of households in 2006 to
36.6 percent in 2016, nearing the 1965 record of 37 percent.1 When increasing numbers of people are looking
for rental property, the price of rent may increase.
Figure 1 shows the change in spending on rental housing
from 1999 to 2016, which has increased fairly steadily
since 2004. While there are likely a number of reasons for
the increase, more people choosing to rent is a possibility.
In addition, as more people seek rentals, it increases the
demand for more rental units; this could play a role in
higher rent prices and more household income spent
on rental housing.
When there is a shortage of rental housing, the market
is likely to respond by building additional units. Figure 2

PAGE ONE Economics®
Figure 2
Construction of Housing with at Least Two Rental Units

SOURCE: FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/
series/HOUST#0, accessed December 15, 2017.

shows new construction of housing built with at least two
rental units. Although the number of new housing units
built dipped strongly before the 2007-09 recession, it
has continued to increase since. Peoples’ choices and
incomes affect market outcomes.

Help for Those Who Need It
The U.S. Department of Housing and Urban Development
(HUD) provides financial assistance and sometimes rental
properties for people who meet certain income-eligibility
requirements. These programs are administered by local
Public Housing Agency (PHA) offices. Housing administered by the PHA is commonly called “Section 8 Housing,”
named after the federal statute language. Just as private
landlords may run background checks on their potential
tenants, the PHA runs similar checks and requires those
who receive public assistant to meet certain requirements.
In fact, the PHA has the legal right to deny assistance to
those convicted of certain types of criminal offenses.2
Remember, wise financial and personal decisions help
prevent negative consequences.

Legal Protection
Although people can be denied the right to rent for
legitimate reasons, such as poor credit, inadequate

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income, or certain criminal offenses, there are federal
laws to protect from discrimination. It is illegal for landlords to discriminate on the basis of a person’s race, color,
religion, sex, handicap, familial status, or national origin.3
According to the law, for example, it is illegal for a landlord to tell someone that a property is not for rent when
it actually is or refuse to rent to someone based on any
of those characteristics. If you are turned down for rental
housing, be sure to ask why. If there is a valid explanation, you may be able take action to repair the situation.
For example, you could improve a low credit score by
making payments on time or making arrangements to
pay past-due accounts. If you feel you have been discriminated against, you can file a complaint through
www.HUD.gov.

Conclusion
Getting your own place is a major step toward independence and adulthood. It is often considered a rite of passage, and living successfully on your own helps build
confidence. You can get started on a successful path
through careful preparation and effective planning.
Creating a realistic budget is important. Once you’ve
started your search for a new place to live, weighing
your options with important criteria will help you find
the best choice. And when you sign a lease, make sure
you clearly understand the terms so there aren’t any
financial surprises. Finally, if you maintain a good credit
record and make good personal choices, the transition
into adulthood will go far more smoothly. n

Notes
1

Cilluffo, Anthony; Gieger, Abigail and Fry, Richard. “More U.S. Households Are
Renting Than at Any Point in 50 Years.” Pew Research Center, July 19, 2017;
http://www.pewresearch.org/fact-tank/2017/07/19/more-u-s-households-arerenting-than-at-any-point-in-50-years/.
2

National Archives and Record Administration. “Code of Federal Regulations,
Title 24. Housing and Urban Development, Parts 700 to 1699.” April 1, 2017;
https://www.gpo.gov/fdsys/pkg/CFR-2017-title24-vol4/pdf/CFR-2017-title24vol4.pdf.
3

U.S. Department of Justice. “Fair Housing Act.” https://www.justice.gov/crt/fairhousing-act-2, accessed November 30, 2017.

Please visit our website and archives at http://research.stlouisfed.org/publications/page1-econ/ for more information and resources.
© 2018, Federal Reserve Bank of St. Louis. Views expressed do not necessarily reflect official positions of the Federal Reserve System.

PAGE ONE Economics®

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Name___________________________________ Period_______
Federal Reserve Bank of St. Louis Page One Economics ®:

“On the Move: Renting Basics”

After reading the article, select the best answer to each question.
1.	
	
	
	
	

Which of the following defines the terms and conditions of renting a property?
a.	Budget
b.	Lease
c.	 Credit report
d.	 Background check

2.	
	
	
	
	

What is the typical length of a lease?
a.	 3 months
b.	 6 months
c.	 9 months
d.	 12 months

3.	
	
	
	
	

What is the purpose of a security deposit?
a.	 To pay for damage you may cause to the property during your stay
b.	 To pay for changes to the security system due to your move
c.	 To pay for medical bills if someone is injured while visiting you
d.	 To give the landlord extra money in case you vacate the property

4.	
	
	
	
	

What does the saying “break the lease” mean?
a.	 To frequently get behind paying the rent
b.	 To have a pet live with you without permission
c.	 To damage the property
d.	 To move out before the lease ends

5.	
	
	
	
	

Which of the following is a common way landlords estimate if your income is sufficient to pay rent?
a.	 They multiply your biweekly income by 2 and subtract the rent amount.
b.	 They multiply your monthly income by 12 and make sure the rent amount is under 10 percent of the total.
c.	 They add up all your income, subtract your expenses, and see if there is enough to pay rent.
d.	 They check to see if your annual income is 40 times the monthly rent.

6.	
	
	
	
	

Which of the following is a potential drawback of having a roommate?
a.	 They share utility expenses.
b.	 They share the space.
c.	 They share responsibility for the lease.
d.	 They share the rent payment.

PAGE ONE Economics®

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Use the PACED decisionmaking grid below to answer questions 7 to 10.
Near
campus

Tennis
courts

Paid cable TV

Utilities
paid

Dogs allowed

Secure
parking

1208 Park Ave., Apt. 504

+

–

+

–

+

+

500 S. Main, Suite 6

+

+

−

+

+

+

256 Market, Apt. 5

+

−

−

+

–

+

Alternatives

Criteria

7.	 How many criteria are included?
	 a.	3
	 b.	4
	 c.	5
	 d.	6
8.	 How many alternatives are included?
	 a.	3
	 b.	4
	 c.	5
	 d.	6
9.	 Two of the properties have tennis courts.
	 a.	True
	 b.	False
10. Based on the information in the grid, which apartment is the best choice?
	

a.	 500 S. Main, Suite 6 because dogs are allowed and the other choices lack tennis courts

	

b.	 256 Market, Apt. 5 because the criteria it meets are important and valuable

	

c.	 1208 Park Ave., Apt. 504 because it is the only choice with paid cable television

	

d.	 500 S. Main, Suite 6 because although it does not meet all the criteria, it meets the most

6


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