condo vs co-op vs rent

coops typically sell for less then condos and the closing costs are approx $5K not 4-5% sales price. as to why buy a coop or condo rather then renting, that horse has been beaten to death on this board.

If you can believe it, many people purchase co-ops with the actual intent of *living there* for many years!!! Moreover, many people prefer co-ops *because* they're not easy to rent out. Easy to rent out means there is no control over the sub-leasing tenants, and you'll find a mixture of frat boys, rock stars, and deadbeats. All these things, and more, make for an undesireable place to live for the people already there.

Finally, when you say you can "sell a condo at will", I think you're gravely mistaken.

Thanks for reply ab, I didn't realize the lower closing costs, good to know; however, still don't see the equivalency between owning a co-op and owning a condo. I can see how owning a property can be justified against renting it but co-op almost seems speculative investment like a stock. With a condo it seems like you actually have property that you can be flexible with selling/leasing with a coop, one might as well get an apartment and avoid all the risks. Sorry it might be a stupid question, I am sure I am missing something, so looking to get educated :)

Good post, Lucy! I would only add that there are many co-ops that have liberal subletting rules, New_to_RE, you just have to look for them or ask. You would be surprised. There's a whole range from "no subletting allowed, ever" to "unlimited subletting after 1 or 2 years of ownership".

What Isle_of_Lucy said. I bought a co-op *because* of the "leasing and other restrictions that come with it." I like that my neighbors all have a stake in the building.

5K closing??---condos waaay more expensive to close on than coop---google "mortgage recording tax"

unless you have little or no mtge

Excellent points, thank you. I think I just missed that point of view. So from the residential perspective, we are saying that people actually value the subletting limitation to the point where it justifies paying tens of thousands of dollars upfront and getting a loan for several years (to avoid living around renters)? Also with regards to condo vs co-op, with a co-op there one doesn't really own the property, it 'feels' like an extended lease + owning some arbitrarily set shares of a stock. Please feel free to correct my misunderstanding.

I would not buy a condo if I could avoid it. I do not like transcient tenants in the building in which I reside. I like the house rules that maintain an environment I want to come home to. I like that everyone in the building has a stake in making it a nice place to live. I like being able to choose (or at least the admissions committee in the coop being able to choose) who I have to "get into bed with financially" and that a pornographer with 3 orders of protection against him from former girlfriends and who has a criminal record cannot come to live in my building. I do not rent out my residence and thus would pay nothing for the ability to do so. Thus the premium for a condo is wasted money for me.

Just another point of view. Since people have different priorities, it is wonderful that there are rentals, and coops and condos and everyone can choose what best fits his or her needs. None is the right or wrong choice, per se.

"with a co-op .... one doesn't really own the property, it 'feels' like an extended lease + owning some arbitrarily set shares of a stock."

There is nothing arbirary, whatsoever, about the number of shares of stock you own. And although it may "feel" to you like an extended lease, it "feels" to me like I pocket the money when I sell it.

That's *if* I decide to sell it. I'm one of those people who intends to live in my co-op for many, many years. And based on the restrictions in my co-op's regulations, I know I won't be living in the same building as frat-boy-renters, nor deadbeats who flick lit cigarettes down the trash chute just to enjoy the fireworks at the "arbitrary stockholders" expense.

Once you have decided to buy, coop vs condo is simple.

If you want flexibility to rent your apartment (assuming you are comfortable with negative carry for renting it out), go for condo.

If want to live in it for a long time, why not get a 15-20% discount and live in a coop. Most coops will let you rent for 1-2 years max after you have lived in it for some time.

Also, condo taxes tend to be higher once they are not abated due to grand-fathered low tax base for coops.

Again thank you very much for all of the information, it's very useful. If I do decide to live in the apartment for a while without a possibility to sublet in order to recoup my investment costs, I may as well get a rental. Granted other renters may be unruly bunch but with high cost of rents in good parts of Manhattan, really awful tenants are doubtful (plus they can be evicted if they misbehave). It seems that the return on investment in buying shares of a building corporation is illusory. I also understand with co-op those shares are only allocated for a certain period of time and then have to go back to the corporation which makes it even more of a dubious investment. Would be happy to be convinced otherwise.

New-to-RE: I think you have some very misguided understandings of coop ownership and what a proprietary lease is (I can only imagine that is what you are trying to talk about in terms of "temporary allocation of shares"). Potential profits derived from a coop sale are hardly illusory. I haven't a clue as to what you mean. The value of my first coop quadrupled by the time I sold it and that money was quite real. You also have a somewhat odd notion that you can rent a condo for more than the carrying costs which is certainly not the norm across NYC at this time. Your assumptions and conclusions here are very odd--at least as you state them.

I agree with kylewest. New_to_RE, you should really spend some time learning more about co-ops. You will be pleasantly surprised, I'm sure. It is a different form of ownership, but it is still full ownership. Somewhere around 70% of all apartments in Manhattan are co-ops, and it is hardly a "dubious investment".

Kyle, I am a novice, sorry, may well have misguided notions. What I was trying to understand is the reason as to why there exists such a similarity in people's minds between owning a property like condo and a co-op. I believe this may be the main reason your investment has quadrupled. In the end if we see it for what it is, co-op is not a condo at all it's owning a certificate of shares for a very large amount of money but unlike a condo which does not actually give you the freedom to use the property as you wish and puts limitations on ownership. Thus the rise in price of co-ops makes no sense to me and that's exactly why I am soliciting views as to what feeds into this increase.

Hi New,

I own one co-op and one condo, and I can argue for the virtues of each.

If you're truly thinking about putting down long-term roots, it makes the most sense to think of real estate as a consumable, to budget an amount of money that you're comfortable having illiquid, and then to buy into the best building you can afford, whether it's a co-op or condo.

If you're thinking of investing -- or needing to get out within five years -- then rent, or buy a condo.

Bear in mind, though, that while renting out a condo offers some financial flexibility, being a landlord eats into one's time. So that's really a tradeoff of lowering your economic risk by increasing the amount of potential tenant hassle you have to deal with.

ali r.
DG Neary Realty

Appreciate it Ali, I was thinking exactly along the same lines and was trying to justify in my mind purchasing a co-op as an investor/resident, as you can see I am having difficulty. If it is a consumable and I will be putting in a considerable amount of cash in it where is the basis for assuming that it will appreciate (as it has in the past)? Where does this appreciation come from, to the investor/resident it shouldn't be that appealing - you are locking in all the cash and are limited by all the regulations. Maybe there will be a revelation here that will dawn on me, really hope so.

"Thus the rise in price of co-ops makes no sense to me and that's exactly why I am soliciting views as to what feeds into this increase."

Co-op values increase (or decrease) for the same reasons that the value of any type of real estate increases or decreases: neighborhoods become more or less desirable, demand for housing rises or falls, credit becomes easier or more difficult to obtain, etc. You seem to be hung up on this idea that owning shares is somehow significantly less desirable than owning physical property, but for people who plan to live in the apartment that they own there is little practical difference.

New, I don't think you can assume that it will appreciate. Realize that on that basis, there are still a couple of populations which will want to buy co-ops:

1) people who have enough money to treat housing as a completely illiquid drain on resources. This is pretty much the market segment that chases $2 million + properties.

2) people who would rather own than rent because they think a) owning creates a forced savings mechanism and b) gets them better housing for their money than renting does. This is pretty much me and my husband, and most of our neighbors -- and it's pretty much the market segment chasing $500K - $2 million properties.

I realize that at 20% down, one can maybe find apartments to rent that are somewhat comparable to co-ops that one can buy; but at more than 20% down, that's simply not the case. So then it's a question of the opportunity cost of tying up the higher down payment.

ali r.

Leavingqueens, thank you, that's what I am trying to understand. Owning shares is not as desirable as owning property because, as I perhaps incorrectly understand it,
a. one only owns them for a set period of time (i.e. X number of years after which they revert back to corporation)
b. corporation imposes strict rules and regulations (i.e. rejecting a potential tenant, not allowing to sublet, requiring a percentage of people in the building to be owners, possibly expunging an owner if those rules are broken etc.) thus limiting the options for re-sale

There may be others I am not aware of (?), but just for the reasons above, it should in theory not appeal to the resident/investor as it becomes so much more akin to a rental apartment, one can just go and rent without any cash exposure. I am trying to understand why in practice it does, tell me what I am missing. It may be just that I am blind to something v obvious.

? The shares don't revert any more than my JNJ shares go back to Johnson & Johnson.

The "proprietary lease" can expire after a big chunk of years (mine expires in 2080) but those are rolled over as they start to ripen.

ali r.

Thanks ali, per my perusing a typical lease they do revert, maybe it's an oddity in this particular lease, although your statement about shares being rolled over as they start to ripen also should make one see a difference with the actual real estate ownership.
To your previous points,
1. Even if one considers it a drain on resources why would they want to tie up all of their resources on something with so many restrictions attached?
2. a) In the middle market with a fixed loan the appreciation should exceed the potential loss incurred between re-sale and interest payments for it to be a sound savings plan. With all of the restrictions I am missing why the co-ops will be treated like a regular real estate and would be appreciating. Granted I am proven wrong over the course of past decades, hence the original question. b) I have seen plenty of beautiful rentals in Manhattan in the middle market price range, perhaps you are referring to something else?

"as I perhaps incorrectly understand it"

I think that's the case:

a.) I've never heard of shares reverting to the corporation after a certain number of years.
b.) As many have stated above, the "strict rules and regulations" are considered a positive, not a negative, by many residents. They make for a pleasant living environment. I can't think of any rule in my co-op that has negatively impacted my lifestyle or kept me from doing the things I would normally do.

You keep referring to the "investor/resident" and that might be another source of your confusion. I think most people who buy (certainly all of my friends) consider themselves "residents," not "investor/residents." I bought my co-op because I wanted a nice place to live and doing the math saw that owning would make more financial sense over the length of time I planned to stay there. I happened to get lucky and bought at a good time in a neighborhood that was gaining popularity and it turned out to be a great investment, but that wasn't my intention going into it. My investments aren't in real estate.

Well, New, I do a weird little boutique business, and I have some clients who work in entertainment. So let's say those people buy a home in LA, maybe a weekend home somewhere -- but they come to New York every few years to work.

Should they buy a third home in New York? If their income flow is still strong, then it's a matter of whether they see something they like, really. These people often make enough money that spending a couple million to consume a third home isn't going to affect their retirement or their kids' inheritance all that much.

Point 2B, is a different point, and really is going to vary according to the submarket. I personally couldn't find a rental that was nicer than the cost of carry of my mortgage (we're in a Junior 4 in the West 90s). I do know that there are lots of people who can. Those people, IMHO, should rent.

And Point 2a), well, again, we're talking very fine submarkets here (which is part of what makes brokerage so fun). Let's look at the West Village -- very desirable neighborhood from the standpoint of quality of life, peace and quiet, retail. There just aren't enough condos in the area to meet all the demand; potential West Village-ites decide that co-ops are a "good enough" substitute good, and buy them, and they appreciate.

However, past performance no predictor of future performance .. I'm one of those agents who sells real estate as a consumable, and if my clients get price appreciation, great, that's icing.

ali r.
DG Neary Realty

In general: Condos are newer, smaller, uglier, and shoddily constructed. Co-ops are older, larger, and sturdier.

Also, since condos are newer construction, they are typically in worse locations, where you get more noise, fewer trees, more traffic.

Co-ops, being older, are typically on true residential streets with less noise and higher quality of life.

If it is more important to you to have high ceiling and full-sized windows, go with co-ops. If, on the other hand, you'd rather have recessed lighting and contempo styling, go for condos.

Some low- and middle-income co-ops restrict profits at resale, so as to keep themselves low- or middle-income. I think some of them work by buying back the shares and reselling them at a restricted price.

Maybe that's the kind of co-op whose proprietary lease you were looking at.

This is a pretty good run-down of the basics: http://www.barnesandnoble.com/w/new-york-co-op-bible-sylvia-shapiro/1101967497?ean=9780312340759&itm=1&usri=condo%2bbible%2bshapiro

The two forms are legally similar enough that they rarely diverge much in price.

There are legal differences, but they are immaterial for most real-life purposes. The only important difference is not legally required at all: in NYC most coops have strong regulations and most condos do not.

People who prefer strong building governance tend to buy coops. Accommodating them, most coops try to keep out speculators, investors, pied-a-terre buyers and assorted other undesireables.

People who prefer weaker rules, who plan to flip or rent out, or want to live with "undesireables," tend to buy condos. So most condos have quite loose rules.

People who don't care buy whichever is cheaper. Usually, this group is large enough to keep prices more or less in line. Occasionally, it's even big enough to generate strong rules in a condo or vice versa.

There is rarely any material price difference between comparable coops and condos. When coops look cheaper, it is usually just because the building has an underlying mortgage. (During the bubble, there were so many would-be flippers who only wanted condos that condo prices went up a bit faster, but during busts, more people want the safety of coops, so it balances out over time).

Your concern about share "reversion" is a misunderstanding. Talk to a RE lawyer if you need details. Coop tenants own the corporate landlord, so there is no one on the other side of the deal to exploit them. That's the point, and it is not very different from the idea behind a condo.

I want to thank you all for your thoughtful comments.
In summary

1. People think of coops and condos as basically equivalent despite the rules and regulations that come with coops. But because coops typically sell for less then condos, with lower taxes and closing costs, people like to buy coops. However when coops look cheaper, it is usually just because the building has an underlying mortgage.
2. Many people prefer co-ops *because* they're not easy to rent out "I like that my neighbors all have a stake in the building." People are willing to put down 100K+ and pay interest on the loan for privilege of living with others who are subjected to filtering by the coop board as opposed to having no cash risk exposure and live with renters
3. People think that because you can't rent a condo for less than the carrying costs which, it justifies the massive cash outlays that come with purchasing a co-op
4. As "70% of buildings are coops", people are either forced to purchase them or consider it a wise idea. There just aren't enough condos in the area to meet all the demand; so people decide that co-ops are a "good enough" substitute, and buy them, assuming they appreciate.
5. People think of real estate as a consumable, so budget an amount of money that they're comfortable having illiquid, and then buy into the best building they can afford, whether it's a co-op or condo.
6. People would rather own a co-op than rent because they think owning a co-op creates a forced savings mechanism
7. Unlike rentals, Co-op tenants own the corporate landlord (?)

I am still not convinced by the way :) but hey if people continue thinking it, it may be a good idea

Uh, Financeguy, there are definitely very material differences in prices between similar co-ops and condos where mortgages and carrying costs do not explain the discrepancy.

Take 2 Horatio (coop) where this large, south facing 1-bedroom with views sold for $999.5k with monthlies of $1,260.
http://streeteasy.com/nyc/sale/557653-coop-2-6horatio-street-west-village-new-york

Now check out some 1-bedrooms at neighboring 299 West 12th or 302 West 12th, which are both condos where comparable units with similar carrying costs routinely sell for 30-40% premiums due to the condo factor.

http://streeteasy.com/nyc/sale/495406-condo-299-west-12th-street-west-village-new-york
http://streeteasy.com/nyc/sale/541860-condo-302-west-12th-street-west-village-new-york

Nice summary. If this shows up as aggregated journalism anywhere, be sure to quote me.

ali

That was purely for my amusement ali. Cheers.

Buster, Yes, during the bubble, there were so many would-be flippers who only wanted condos that condo prices went up a bit faster. And when banks see their main protection as rising prices -- borrowers in trouble will just sell and everyone will be happy -- they prefer to finance condos, which are easier for borrowers to unload quickly.

So condos seem to have gone up more in the bubble, even adjusting for the underlying mortgages, different taxes and different conditions. But during busts, more people want the safety of coops, so it balances out over time.

In any event, price discrepencies are unlikely to be stable, since the cost to develop condos and coops is basically identical. Developers will happily switch new construction/conversion to whichever form the market prices higher. And there are plenty of buyers who will shift to whichever is cheaper. So, when one form gets more expensive than the other, the higher prices induce both higher supply and lower demand.

New: Re "2 ... as opposed to having no cash risk exposure"

When rent stabilization solved the tenure problem, most people preferred to leave the risk to diversified landlords, who are in a much better position to bear it than even upper middle income families.

If properly designed RS were extended to expensive apts, condos would primarily serve risk seekers. Coops would primarily serve people who want more control over their neighbors than landlords are likely to give them. Those would be very small groups indeed, as you can see by looking at any city with a well-designed rent regulation system (e.g., Basle).

"People would rather own a co-op than rent because they think owning a co-op creates a forced savings mechanism"

Taking out a loan to overpay for housing is a strange way to save. If you want to save, you probably should consider saving. In a savings bank.

Well, given that these sales occurred in mid-2011, it seems as though the price discrepancies have remained pretty stable even as the rest of the market dropped 25%.

Pricing still reflects the bubble in many ways.

Indeed, this thread has several illustrations of bubble thinking still alive and kicking. New, for example, accepts that coops are priced too high relative to renting -- yet, if I'm reading him/her correctly, thinks that the speculative potential of condos might justify investing in a unit with negative cash flow.

Financeguy, thanks for this. However, I think you misunderstood; I am not accepting it at all, I was actually trying to understand why people think so and so listed these items per feedback from this thread. To me it does appear like the massive cash outlays would not justify buying a co-op as opposed to renting. I would be happy to be convinced otherwise still. I also agree with the your statement wrt savings plan. But I solicited views from the members on here and listed them in as representative of what the public thinks and understands to be the rationale for purchasing a co-op.

Sorry New. Forgive my snappishness ... I'm just in one of those holiday tizzies.

@financeguy -- it depends on what you think the economic climate is. If you expect any kind of long-term inflation, borrowing money and then paying it back is not a bad way to save at all.

ali r.
DG Neary Realty

Ah, I did misunderstand. I thought we were debating coops v. condos, not the merits of NYC RE as an investment.

The mark of a good investment is that it offers solid expected returns if held to maturity: the expected returns come from the investment (i.e., rents).

In contrast, a good speculation is something that you think you can sell to someone else for more than you paid -- the returns will come from your buyer, not the investment. In a bubble, prices are set by speculators who expect to sell to other speculators who will sell to other speculators, with only the loosest connection to the underlying returns from the investment itself (i.e., rent or implicit rent).

NYC RE pricing is far above investment values based on current rents.

You buy in NY today because you believe that rents are about to rise significantly (investment), because you expect to be able to sell before prices return to fundamentals (bubble) or because you want long term tenure assurance that is hard to negotiate in our poorly functioning rental market (consumption).

>The mark of a good investment is that

>In contrast, a good speculation is something that

And when you go to the bank to deposit your proceeds, do they ask if it was from speculation or investment?

Ali, I wouldn't call betting that you can predict future inflation better than the mortgage markets "saving." That's what we usually call "speculating."

"Saving" is when you spend less than you earn and put the difference aside -- not when you borrow to spend more than you earn and plan to pay it back later.

Aside from the meaning of the words, if what you want to do is to bet that you are better at predicting inflation than the markets, surely there are ways to do that without tying your bet to a large, undiversified, investment in a depreciating asset currently selling at a bubble price.

>Aside from the meaning of the words, if what you want to do is to bet that you are better at predicting inflation than the markets, surely there are ways to do that without tying your bet to a large, undiversified, investment in a depreciating asset currently selling at a bubble price.

Which is it - the markets are perfect and good at predicting inflation, OR the markets are irrational and are currently in a bubble situation?

By the way, no standard economic model suggests that a period of high unemployment, low demand, consumer and financial "deleveraging," and governmental austerity measures, will result in inflation. Nor is there any empirical evidence of incipient wage-price increases. Nor is there any viable political movement attempting to create inflation, useful as it might be in getting people back to work.

So it's hard to see why the markets would be wrong on this one.

>So it's hard to see why the markets would be wrong on this one.

So the market is correct in its assumption on no price inflation, but is incorrect in the base level of prices which are too high because the market didn't work in the past?

So basically, sometimes the market is right, sometimes it isn't. Great, now what do we do?

>>>>nor is there any viable political movement attempting to create inflation, useful as it might be in getting people back to work....

what is the Fed trying to do?

Brooks2, DO NOT QUESTION THE ALL RATIONAL, ALL KNOWING, ALWAYS CORRECT (except when not correct or does not fit into the financeguy model, in which case ignore it, it is just an illusion) FINANCEGUY.

Financeguy, that was quite good. Whether it's a bubble or consumption ("you want long term tenure assurance that is hard to negotiate in our poorly functioning rental market (consumption)."), all I wanted to see was what the people think were the drivers for the co-ops to be appreciating so much over time (along with condos really). I think you are stating this appreciation is not supported if we just compare rents with the cash required to buy a place. However, as odd as it is, co-ops have appreciated for decades. So the reasons 1-6 in the summary try to address it, I suppose one could call it a bubble or consumption mentality then. Fundamentally, i.e. from investment perspective, then you don't see any reason why co-ops should have appreciated that much over time if I hear you right and people have been living the bubble / consumptions mentality for decades.

>Fundamentally, i.e. from investment perspective, then you don't see any reason why co-ops should have appreciated that much over time if I hear you right

Except that they have appreciated in value, so maybe financeguy's model is a bit too narrow?

huntersburg, what do you reckon the reasons for co-ops appreciating are? Have we captured them in the summary (i.e. reasons 1-6)? or is there something more fundamental in your view?

Manhattan quality of life has improved significantly in the past 15-20 years, improving all real estate. Manhattan incomes have improved as well on average.
People prefer the rules of co-ops in so much as they apply to their fellow residents.
Co-ops represent the historical stock of ownership in Manhattan and are well-located. Condos are more recent and more often had to be built in less desireable areas.
Co-op sponsors never flooded the market. In fact, rent regs helped to support this.

Huntersburg, we captured the preference rules as reason 2 above, this indeed seems to be something that people value according to this board. Does it really justify spending hundreds of thousands of dollars as opposed to renting a place with no rules? maybe so if taken in conjunction with all other reasons listed (?).
All these reasons still seem speculative perhaps with exception of the reason 4, where we state that 70% of buildings are coops so we may effectively be crowding out rentals.

Can you expand on "Co-op sponsors never flooded the market. In fact, rent regs helped to support this."

> this indeed seems to be something that people value according to this board. Does it really justify spending hundreds of thousands of dollars as opposed to renting a place with no rules?

You answered your own question.

>All these reasons still seem speculative perhaps with exception of the reason 4,
So you are saying that people living in co-ops, where they LIVE with their families, and where they have limited ability to rent them out, where they are careful about who they allow as neighbors, where they have rules that require downpayments in excess of bank requirements ... this is speculation?

Huntersburg, "So you are saying that people living in co-ops, where they LIVE with their families, and where they have limited ability to rent them out, where they are careful about who they allow as neighbors, where they have rules that require downpayments in excess of bank requirements ... this is speculation?"

It looks to me as a speculative investment, yes, but I may be wrong, hence this post :) It appears that way because, it's not evident as to why they put such premium on these conditions. After all, the premium is massive (i.e. you can rent a place for say 3000/month with no risk or get a loan for 700K effectively paying well over a 1.3mil for equivalent space, as just an example) and people still expect it to appreciate. And it undoubtedly has been appreciating so maybe the premium is justified, I don't know.

Where can you rent a $1.3 million apartment for $3000?

new-to-RE - you need to compare monthly costs of renting to owning. (You know you don't have to pay that $1.3m every month...)

Huntersburg, you misread, the equivalent co-op apartment could be be 800K but the total payments with interest can easily amount to 1.3mil unless you plan to file bankruptcy. We are not even considering payments for maintenance and necessary repairs that could add another 12K/year for 30 years (i.e. 300K or so). So the cash outlays are much larger than renting and the investment risk as well. Is it justified by all the reasons listed above? I seem to think you say yes.

>the equivalent co-op apartment could be be 800K but the total payments with interest can easily amount to 1.3mil

?

>We are not even considering payments for maintenance and necessary repairs that could add another 12K/year for 30 years (i.e. 300K or so).

This apartment that can rent for $3000 / month has $1000 / month in maintenance and necessary repairs?

>Is it justified by all the reasons listed above? I seem to think you say yes.

For whom? For me and my family? For you? For some theoretical human equivalent of a widget that goes into financeguy's rigid model?

Freebird, that's fundamental analysis, you are intelligent enough I assume to understand that I am not comparing annual to monthly. I think what you are saying is that people are looking at the carrying costs in comparison, which is what I believe we captured in the summary above (reason 3), as misguided as it seems to be. Am I right?

"After all, the premium is massive (i.e. you can rent a place for say 3000/month with no risk or get a loan for 700K effectively paying well over a 1.3mil for equivalent space, as just an example)"

"the equivalent co-op apartment could be be 800K but the total payments with interest can easily amount to 1.3mil unless you plan to file bankruptcy. We are not even considering payments for maintenance and necessary repairs"

But all of that is true for condos and private homes too. I still don't understand why you think co-op appreciation shouldn't work the same way as appreciation of any other type of real estate. When I was selling my co-op, it was clear from chatting with buyers that most of them were looking at both co-ops and condos -- their priority was a nice apartment in a nice building in a nice neighborhood; the details of the form of ownership (stock vs property) were not an issue. Some of them didn't even know the difference. Of the dozens of inquiries I got on the place only one was looking for an investment property and asked about subletting rules -- everyone else just wanted a place to live.

"So the cash outlays are much larger than renting"

Not necessarily, and again that can be true for any other type of real estate. When I bought my co-op, my monthly costs were just slightly above rents on comparable apartments in the neighborhood; by the time I left rents were significantly higher. Granted I was risking my down payment and neighborhood rents could've declined, but that would've been true no matter what type of real estate I'd bought.

Huntersburg,

"This apartment that can rent for $3000 / month has $1000 / month in maintenance and necessary repairs?" A one bedroom in midtown can easily pull that maintenance, that was just an example. The maintenance is still not that significant if you consider the actual cost of the loan (in addition to co-op closing cots, real estate broker fees to sell in the future, attorney fees, repairs etc.).

"For whom? For me and my family? For you? For some theoretical human equivalent of a widget that goes into financeguy's rigid model? " Again that's what this post is for, to solicit views of what justifies that value for different folks.

leaving queens, thanks for that,
to your first point - "But all of that is true for condos and private homes too. I still don't understand why you think co-op appreciation shouldn't work the same way as appreciation of any other type of real estate." Agree it's true for condos, but I perhaps misguidedly thought that with additional restrictions imposed by co-ops on their shareholders, it's much more egregiously demonstrated with co-ops.

to your second point - " "So the cash outlays are much larger than renting" Not necessarily, and again that can be true for any other type of real estate. When I bought my co-op, my monthly costs were just slightly above rents on comparable apartments in the neighborhood; by the time I left rents were significantly higher. Granted I was risking my down payment and neighborhood rents could've declined, but that would've been true no matter what type of real estate I'd bought."
Lets assume the rents rise, but so will the maintenance (after all doorman has to be paid, repairs to building needs to be made etc.). Also why would we be comparing monthly costs if, as I assume, you intend to pay off the full loan at the end of the term.

Confused. Is the question buying a coop vs renting or coop appreciation vs condo appreciation or just buying vs renting in general using coop as example?

Slightly revised list of "Why do people buy co-ops as opposed to renting (from a condo or other building) ?"

1. People think of coops and condos as basically equivalent despite the rules and regulations that come with coops. But because coops typically sell for less then condos, with lower taxes and closing costs, people like to buy coops. However when coops look cheaper, it is usually just because the building has an underlying mortgage.
2. Many people prefer co-ops *because* they're not easy to rent out "I like that my neighbors all have a stake in the building." People are willing to put down 100K+ and pay interest on the loan in addition to maintenance fees and repairs (ass opposed to monthly maintenance on a rental) for privilege of living with others who are subjected to filtering by the coop board as opposed to having no cash risk exposure and live with renters
3. People think that because you can't rent a condo/apartment for less than the monthly carrying costs of a co-op, it justifies the massive cash outlays that come with purchasing a co-op (much larger than a rental if considered in totality)
4. As "70% of buildings are coops", people are either forced to purchase them or consider it a wise idea. There just aren't enough condos in the area to meet all the demand; so people decide that co-ops are a "good enough" substitute, and buy them, assuming they appreciate.
5. People think of real estate as a consumable, so budget an amount of money that they're comfortable having illiquid, and then buy into the best building they can afford, whether it's a co-op or condo.
6. People would rather own a co-op than rent because they think owning a co-op creates a forced savings mechanism
7. Unlike rentals, Co-op tenants own the corporate landlord (?)
8. People assume that co-ops will appreciate based on past experience
9. People think that co-ops are well-located. Condos are more recent and more often had to be built in less desirable areas.
10. People associate status with owning a co-op (?)

I am still not convinced by the way :) but hey if people continue thinking it, it may be a good idea

bob, just answered it .. I think

Again, what is it that you are not convinced of? If it's better to buy a coop than renting, buy in general than renting or that coops and condos appreciate in the same ways?

bob "buy a co-op than renting"

That's a pretty good list except I disagree with the last sentence of #1. I think that co-ops are cheaper, pound for pound, than condos, by a factor that's usually around 15-20%.

I'm not sure that discount is due to the financial structure of a co-op .. I think some of it is that the market does indeed recognize that condo owners have a larger bundle of rights, and that the rights of privacy and subletting are worth money.

ali r.
DG Neary Realty

and there is no underlying mortgage.

You are asking a simple question of buying vs. renting. The coop vs. condo is just noise.

You buy because you believe your net costs in the long run will be lower and you want the security of owning something rather than "throwing money away" by renting and possibly having to move if the landlord decides not to renew your lease. If you don't plan to stay long term or the net cost of renting is lower, then you rent. You are manufacturing a whole bunch of crazy points that are really irrelevant.

"buy a co-op than renting"

But every argument you've provided against buying a co-op applies equally to buying a condo or private home (aside from more stringent rules in co-ops -- which everyone agrees aren't the negative that you think they should be -- and the myth that shares revert to the corporation after a certain number of years, which was a misconception on your part).

So why isn't your question "buy ANYTHING than renting"?

The numbers being bandied about are weird to me. In prime GV, for example a jr.-four on Fifth or just off Fifth sells for about $800,000-$1,100,000. Renting a comparably sized apartment in a building of the same quality costs about $4,500. The monthly cost of the owned apartment with change over 30 years only by the amount the maintenance is increased. The rent for such an apartment will surely change an enormous amount over the next 30 years (20 years ago rent for one of these units was more like $1500/mo). So figured into this whole calculus also has to be the fact that the cost of ownership remains relatively fixed while the cost of renting will likely increase substantially over the long run. There are a few other things to figure in that are less tangible--like the ability to customize and renovate an owned apartment--that have a less quantifiable value. All in all, this thread is banging around all over the place because the very premise that somehow a coop is illusory in someway in terms of ownership is kind of nutty.

leavingqueens, the reason why question of buying vs renting is specific to co-ops in this thread is because co-ops impose such restrictions on property ownership (unlike condos) that from the outside it seems to beg a question which could be put along the lines of "why, if I am paying all this cash to purchase property, would I subject myself to be under all these conditions for property that I supposedly own if instead I could just rent the same apartment with no significant cash outlays or capital risk or being tied down etc etc. that comes along with the purchase of a co-op?" Unlike a condo, that we can easily rent out and get some cash flows to compensate for the purchase cost, co-ops don;t give you that option.

monthlies and rent go up at the same rate, generally, over time--if rents climb "enormously", monthlies will too--and, in times like now, where the economy, employment and compensation are weak; and the city needs tax rev, they whack owners of real estate, and monthlies go up--owners have no choice but to pay up--rents don't go up at comparable rates, as LL's can only rent at prices the market will bear

and the ability to renovate and customize is a cost, not a benefit--renovations are up to date only for 7-10 years--buy a place, pay to renovate it, and 10 years later you have a place in need of a renovation that you may sell--you have consumed the significant cost of renovating at time of purchase--renters get that cost as a freebie

then of course there are the hideously expensive transaction costs attached to every reale estate transaction

i agree w/ finance guy that a financially sound coop or condo, all else equal, are fungible after consideration of underlying mortgage--

monthlies and rent go up at the same rate, generally, over time--if rents climb "enormously", monthlies will too--and, in times like now, where the economy, employment and compensation are weak; and the city needs tax rev, they whack owners of real estate, and monthlies go up--owners have no choice but to pay up--rents don't go up at comparable rates, as LL's can only rent at prices the market will bear

and the ability to renovate and customize is a cost, not a benefit--renovations are up to date only for 7-10 years--buy a place, pay to renovate it, and 10 years later you have a place in need of a renovation that you may sell--you have consumed the significant cost of renovating at time of purchase--renters get that cost as a freebie

then of course there are the hideously expensive transaction costs attached to every reale estate transaction

i agree w/ finance guy that a financially sound coop or condo, all else equal, are fungible after consideration of underlying mortgage--

monthlies and rent go up at the same rate, generally, over time--if rents climb "enormously", monthlies will too--and, in times like now, where the economy, employment and compensation are weak; and the city needs tax rev, they whack owners of real estate, and monthlies go up--owners have no choice but to pay up--rents don't go up at comparable rates, as LL's can only rent at prices the market will bear

and the ability to renovate and customize is a cost, not a benefit--renovations are up to date only for 7-10 years--buy a place, pay to renovate it, and 10 years later you have a place in need of a renovation that you may sell--you have consumed the significant cost of renovating at time of purchase--renters get that cost as a freebie

then of course there are the hideously expensive transaction costs attached to every reale estate transaction

i agree w/ finance guy that a financially sound coop or condo, all else equal, are fungible after consideration of underlying mortgage--

monthlies and rent go up at the same rate, generally, over time--if rents climb "enormously", monthlies will too--and, in times like now, where the economy, employment and compensation are weak; and the city needs tax rev, they whack owners of real estate, and monthlies go up--owners have no choice but to pay up--rents don't go up at comparable rates, as LL's can only rent at prices the market will bear

and the ability to renovate and customize is a cost, not a benefit--renovations are up to date only for 7-10 years--buy a place, pay to renovate it, and 10 years later you have a place in need of a renovation that you may sell--you have consumed the significant cost of renovating at time of purchase--renters get that cost as a freebie

then of course there are the hideously expensive transaction costs attached to every reale estate transaction

i agree w/ finance guy that a financially sound coop or condo, all else equal, are fungible after consideration of underlying mortgage--

wuttup with SE server?? sorry for the clog job--clicked once, it hung and then printed thrice--or quice

Kyle, let's try to be objective, I am on the fence about this myself so don't paint me in the corner :)

To your example, let's use your figures assuming the apartment is 1 mil and equivalent rent is 4500 as you said. Simplifying down to the bones, in v rudimentary terms if you rent this apartment for 30 years indeed the rent will go up but how can you assume the cost of ownership will be fixed? Maintenance will go up as well (may even go up more since it includes taxes and those are definitely going up considering the state NY is in). Therefore assume equivalent increase in both maintenance and rental fees. I am not even considering possible co-op assessments etc. as those could also influence the rental cost with the condo owner passing this cost down to the renter.

Thus at on the very basic level, we could hold the rental/maintenance cost constant to make the analysis simpler. Then over 30 years that 4500/mo becomes 1.62 mil. The loan you took out + the interest + let's assume for simplicity 250K down payment + maintenance (assume 1200/month) would total 2.18 mil.

The value of this property then hinges on its appreciation which is not guaranteed but seems to be the rule (hence the reason for the thread), so we can see if one can count on it not being illusory. Please feel free to refute my assumptions or arithmetic.

Wbottom, this may all be true, but co-ops did appreciate for decades. How do you explain it?

How do you get $2.18 mil? are you paying 6% interest?

"co-ops did appreciate for decades. How do you explain it?"

For the same reasons that condos, townhouses, and private homes appreciated.

If I'm reading you correctly, your argument is essentially that:

- Despite having the the perceived benefits of all other types of ownership, the tighter rules imposed by co-ops should be so unappealing to buyers that there shouldn't be much/any appreciation.

- For decades, the tighter rules mysteriously haven't bothered buyers that much, and in fact may have been found attractive by a lot of buyers, and so co-ops have appreciated along with other forms of real estate.

- At some point in the future a majority of buyers will come around to your way of thinking, stop behaving the way they have for decades, and co-op values will decrease relative to other forms of real estate.

Is that about right? Not trying to be snarky, just trying to wrap my head around it.

front_poch very basic math, I just ballparked it for a loan of 750K; what do you come up with? I also can add the lost appreciation on the 250k for 30 years which is another 250K. Thus the total cost would be: The loan you took out for 750K + the interest at 5% + 250K down payment + Interest on 250K + 430K maintenance (assume 1200/month) = would total about 2.4 mil. as opposed to 1.18 mil if you rent. You gain intangibles but you also have lost your ability to pick up and go quickly. So let's just stick to math.

leavingqueens, in a nutshell basically yes, but I am not convinced of either position. Per above reasons that we listed, it seems like the marketing works really well with co-ops and people won't come around to see the light for a very long time which would make it a good investment regardless of the fundamentals :) However I would rather be convinced on the fundamentals which might be there I just fail to see them :(

"Please feel free to refute my assumptions or arithmetic."

Just a couple of quick points:

"Therefore assume equivalent increase in both maintenance and rental fees." Even if you assume that (and in my case anyway it wasn't true -- rents increased faster than my maintenance) that doesn't equate to equivalent increases in total monthly costs. When I bought, my monthly costs were just about the same as rent, but it was divided between mortgage (60%) and maintenance (40%). So if both rents and maintenance increased, say, 4%, for the renter their monthly cost increased 4%, but mine only increased 1.6% (i.e. 40% of 4%).

Also -

"Then over 30 years that 4500/mo becomes 1.62 mil."

And at year 31, the renter still owes 4500/mo, whereas the owner's mortgage payment just went to 0.

Sorry front_porch, I made a typo, I meant 2.4 mil for co-op ownership vs. 1.6 for renting. Basically overpaying by a mil or so :)

leavingqueens, all true, but we are looking at the total cost for the whole term of 30 years, so assumption is and I think it;s reasonable, that rents went up 4% and maintenance went up 4% which is composed of taxes and mortgage of the building and does not include your mortgage). Again this is very basic and your monthly could go up higher due to add'l taxes and assessments but so can the rental costs, so better to assume these increases are equivalent. In grand scheme of things these are insignificant compared to your interest and lost appreciation on down-payment right?

And at year 31, the renter still owes 4500/mo, whereas the owner's mortgage payment just went to 0. True, doesn't change the arithmetic of how much cash you overpaid. And if property value actually depreciated....

"monthlies and rent go up at the same rate, generally, over time--if rents climb "enormously", monthlies will too--and, in times like now, where the economy, employment and compensation are weak; and the city needs tax rev, they whack owners of real estate, and monthlies go up--owners have no choice but to pay up--rents don't go up at comparable rates, as LL's can only rent at prices the market will bear"

Explain "whack owners of real estate." If you're alluding to property tax rates, since Lehman imploded, they're up a whopping 30bp. Since '02, 84bp. If you call that whacking, you might be a tad oversensitive in the private parts.

leavingqueens, I know you won't be nitpicking, but of course I meant increase "4% annually" :)

What do you mean if the property value depreciated? Among the absurdities in your assumptions, you were never counting thay the owner owns property that can be sold. So now not only does the owner not get to include the value of the apartment in the terminal calculation, but there is a penalty for potential depreciation.
Why is this discussion here? Havent we seen rent / buy threads many times, but more often from people who aren't as idiotic, even if their ultimate conclusions are the same?

huntersburg, not sure why you are getting hysterical, I was just soliciting views, if you disagree with my assumptions no need be rude. You don't seem to be questioning my arithmetic, so if the cost of owning a coop exceeds that of renting the only way to balance it out is to assume appreciation or some other value. The reasons for value we came up with so far were listed above (1-10), if they are convincing to you, great.
Why can't co-op depreciate? why should it always appreciate? There is nothing absurd about posing these questions, it's critical for a prospective buyer especially considering that as a co-op owner he is supposed to be a long-term resident so will have to be stuck with that unit for a while due to the by-laws.

Often peoplke come on to streeteasy and pretend to be stupid, so congratulations on being the real thing. How very refreshing.
So 1.6 to rent, 2.4 to buy and at the end of 30 years you own the place that originally cost 1MM and in the intervening 30 years has either appreciated, stayed the same, or depreciated.

Which means - i know i have to help with the arithmetic in this simplified example - that in some hybrid of present value and future value, 2.4 million of ownership is reduced by selling this place that was originally 1million 30 years ago, so the buyer has 200k of cushion for transaction costs and your assumption of depreciation.

New, math:

$750K over 30 years is going to accrue to $1.45 million, according to the nice people at HSH.

Throw in $432K worth of maintenance, and your cost on the co-op is a shade under $1.9.

ali

so New_to_RE is a broker that only brokers rentals?

is he really new to RE?

taulk among yourselves.

http://www.hulu.com/watch/4118/saturday-night-live-coffee-talk

>is he really new to RE?

He's an idiot who doesn't know basic things, like the owner still owns the apartment after 30 years, or the co-op shares don't go "poof" after some period of time.

New, Why do you say co-ops have appreciated for "decades"? Coops prices track the rest of NYC real estate quite closely -- high in the 1920s followed by a long slow decline through the depression, the subsidy of the suburbs in the 50s and the urban removal program of the '60s, some recovery and another decline in the 70s with white flight, a bubble and collapse in the late 80s and early 90s. But over all, and despite the traumas of the City, roughly tracking inflation (as real estate usually does), until the current bubble began in the late 90s.

If you invest in Manhattan now -- condo or coop -- you are paying far more than the cost of creating new supply (and far more than the big investors are paying, and far more than the value of the same unit as a rental). If you expect to make money, you must be betting that capitalist markets won't work -- that even though it would be profitable, NYC real estate developers won't find any way to increase supply to meet the demand.

But if you think that capitalism can't manage the minimal task of building at cost to meet demand -- basic Adam Smith -- why would you want to invest in the world center of capitalism? If you have such little regard for the power of markets, wouldn't it make more sense to invest in someplace that specializes in extracting value by governmental transfer payments, like Wasilla, or subsidized looting of future generations' natural resources, like Houston?

As has been said, you are basically asking a buy vs rent question. Then it can be broken down to buy a coop vs buy a condo. At that point, there are pros and cons for each.

brook i'm not a broker or anything of the sort, but I do appreciate the implicit compliment :)

Front_porch, many thanks for that, so with the new math under same assumptions (of equivalent coop maintenance and rental cost increases at 4% annually of a unit that costs 1Mil with maintenance/taxes of 1200/mo compared with equivalent rental costing 4500/mo), very rough back of the envelope calculations:

Cost of the rental after 30 years: 4500*30*12 = 1.62 mil

Cost of equivalent co-op after 30 years: 250K (deposit) + ~400K (missed 2-3% interest on deposit of 250K for 30 years) + 1.45mil (i.e. 750K loan plus interest) + 432K (maintenance & taxes)- 196K interest deduction (assume marginal tax bracket of 28%) - 60K (additional tax rebate assuming taxes are 50% of the monthly) = 2.28 mil

Thus with the purchase of the coop we paid about 650K more than if we rented. So we would be justified in purchasing if the unit stayed the same/appreciated or didn't depreciate more than 35%.

Assuming unit will appreciate or stay the same we should be fine but if it drops >35% we are not(?)

finance_guy, thanks for that, as I said I am just learning this, clearly not an expert by any stretch. Can you look over my second grade arithmetic, did I miss anything substantial? Is 35% drop really likely after 30 years?

bob, the reason I am looking at co-ops vs rentals is because with the co-op I am assuming that I would not be able to sublease the unit which would complicate the analysis. Plus I am still unsure about the seeming equivalency between owning a co-op and a condo.