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Potential first-time apt buyer looking for some insight on whether to buy now or continue to rent.
My current situation: Single, late 20s professional, stable 6-year midtown-based career, 100K current income that's been steadily advancing each year. Have been able to bank 70K and put 30K in my 401(K) over the past 6 years by living below my means, particularly in the housing dept. Now ready to lose the roommates and get a nicer place of my own.
Apts/neighborhoods: Looking to either buy or rent a 1 BR in Williamsburg/East Williamsburg or Greenpoint (other BK areas a possibility but prefer either of those). Budget would be under 500K (lower depending on CCs) to buy or under $2200/2300 to rent. Either of these options would be a large chunk of my income now (40-50% of net income), but manageable, and hopefully become less of a burden if income keeps increasing.
Future plans: Generally plan to continue doing what I'm doing and stay in BK for at least the next 3-5 years. Long-term plan to escape the city for somewhere more rural, but for now, I plan on staying here for professional and social reasons. I do not see myself as being here past 6-7 years down the line, though.
My thinking: Interest rates are low, I've got a decent downpayment saved up, why not get myself a nicer place and start building equity now? I'm fairly sure I will be in NYC for 3+ years, which is the amount of time the NYT "rent vs buy" calculator tells me I need to own for before it pays off financially. If something changed and it came down to it, I could manage renting it out until unloading it became a viable option.
What would you do in my situation? Does the potential equity built justify the risk? Or should I just resign myself to being a renter, bite the bullet on a broker fee and rent a nice place and hope the landlord doesn't gouge me on rent increases? Then throw my savings in a variety of investments.
A couple things that stuck out to me:
1) I'm very curious to see what you put in the NY Times calculator to get a breakeven of 3 years.
2) There is no way you can get a 500k place with only 70k in downpayment. And if it's a coop, even less likely.
3) At 100k income per year, 500k is out of your price range. I think you should be looking sub $400k.
4)If you do not see yourself being here past 6 years, I would think twice. Home prices don't necessarily seem tobe ready to rebound strongly. That added to the fact that there are a lot of fees, taxes, and costs to buying means you could very well not break even.
Williamsburg is already quite expensive, and things there are not necessarily a "good" deal. Be very careful about new construction as many building have tax abatements that phase in and the monthly carry costs will SKYROCKET.
About those buy to rent calculators:
Those using them tend to over state their deductions and fail to consider variability of appreciation, rental increases, the annoyance of moving and the on average difference between rental vs buying stock
Wait a minute, Riversider, you are saying that if you designed a calculator, you'd have it have input for annoyances?
Would it be binary? Annoying / Not Annoying
Or perhaps not be so black and white, maybe involve a log scale?
With 70k in the bank, how much of that do you expect to use as down payment? How much for closing costs? How much to buy furniture and other items for the home? How much will be left for emergency fund?
Now is the time to buy.
Buy now, or be priced out forever.
There hasn't been a better time to buy than now; interest rates are at a historic low.
"I do not see myself as being here past 6-7 years down the line, though."
This pretty much seals it for me - rent! Unless you harbor dreams of being a long-distance NYC landlord, I just don't see how you'd want to risk a purchase for such a short-term hold, especially once you consider the transaction costs. $2,300 should net you a decent 1BR in Williamsburg (maybe not the best building, but something around Bedford, which is where I'm assuming you want to be).
PS - mutt-tomboy's advice is always stellar. Pay attention.
Saiyar1 is correct that Williamsburg is expensive and nearby Bushwick is benefiting as a result. Bushwick is at the start of its revival and any property near an L train stop I think will do well in the long run. Check out our 1100 sf Triumph listing at 1265 Decatur for $289K.
Triumph Property Group
Rent. Based on what you tell us, you can't afford to buy.
Price / rent ratios are simply out-of-whack in NYC given demand from other asset-rich buyers. With that income or even area-adjusted income 20% lower, you could own in Chicago or Dallas or Atlanta. Not here.
if you can't put down 20% and pay all closing costs and be left with 1 yr of mortgage/maintenance/live expenses, YOU SHOULD NOT BE BUYING.
After all these years, you are still the W'burg shill.
'tomboy, you're very confused.
Stay classy! I see yikes gives you a run for your money!
Playing some devil's advocate here - I honestly don't understand why everyone is so opposed to the idea of keeping a condo as an investment property after you move out of it.
Just calculate the return on your down-payment, assuming you're using the property as a rental, and see if the return is better than what you're making with your $70k right now (which I assume is very close to nothing). My gut is that your return will be in the mid single digits or even low double digits, which is pretty damn good in this investing environment. And it may increase if rents increase (and, to less of an extent, as your principal payments increase) more than your taxes and common fees increase. Appreciation of the property itself, if there is any, would just be icing on the cake.
Of course you should make realistic allowances for upkeep of the unit and costs associated w/ tenant turnover. But if it's a nice unit in a prime location a broker should be able to rent it out for you fairly easily, and you shouldn't have to eat a month in rent every time you need a new tenant.
Anyway, do those calculations to see if it makes sense for you to keep it as a rental property in the (fairly likely) chance you won't want to sell it when you're done with Brooklyn. Balance that against the risk, and the fact that you'll have your entire life savings tied up in an illiquid asset - that's a very big deal. Liquid savings are important, for emergencies and in case you decide you want to buy somewhere else when you move (and your condo hasn't appreciated enough for it to be worth selling at that time - closing costs are a bitch).
A nice, but modest return on a modest amount of money might not be worth tying up your money like that. But I don't think it's necessarily that stupid.
Crescent, once in awhile one can find rent/buy ratios that make sense. It should never be the only criteria for buying, but it does happen.
NYCT, I'd say that you should save like mad for the next year or so and then get ready to buy. Closing costs might eat up half your savings, leaving you with very little to put down.
Stop putting money into the 401k this year and view your first home purchase as your "retirement" contribution. (You need a roof over your head when you're retired, so rather than risk your money in the stock market, why not buy an apartment with the view toward holding onto it until you're old?)
Your salary is obviously very high, and since you're living with roommates your expenses are probably pretty low. Could you save $50k this year if you tried? Could you do that two years in a row?
If you put things off for two years, you'd have $170k in the bank and a $100k income, which is a fine position to be in. You'd have no problem at all getting a conventional mortgage on a $400-500k apartment. Then you could stay in Brooklyn as long as you like, pay it down easily, and rent it out for a profit if you chose to move somewhere cheaper.
>>Triple_Zero: "Stop putting money into the 401k this year and view your first home purchase as your "retirement" contribution. (You need a roof over your head when you're retired, so rather than risk your money in the stock market, why not buy an apartment with the view toward holding onto it until you're old?)"
I strongly disagree with the above.
1. At 100K/yr, NYCT is at the 28% marginal tax rate. For every $1 he stops putting into 401K, he only keeps $0.72. In case of a real emergency (lost job, no income, and used up other cash reserves), raiding the 401k at 10% penalty would allow one to keep $0.90 instead of $0.72 on the dollar. For other emergencies where one is still employed, borrowing from the 401k (usually up to 50%) is an option.
2. 401k money does not have to go into the stock market. You can put it into bonds or money market if you like, and just take advantage of the tax benefits.
3. One should contribute at least enough to take full advantage of any company matching (free money). For some, that is an instant 50-100% gain.
4. As for the home being a retirement plan, keep in mind that NYCT is a late 20's single person looking to buy a 1BR apt.
>>"Could you save $50k this year if you tried?"
At 100K income, I would like to see the math for that.
I have always focused on the intangible benefits of owning a home versus paying rent. I have been around this mortgage industry long enough (23 years) to see the results experienced by real people in terms of the intangibles. You have to ask yourself the question of Buy vs. Rent based on your personal experiences with Landlords and paying rent. I don't believe in treating buying a home in the same way as investing money in a 401k; I say "Hooey!" to all those naysayers who think the decision to buy a home is a cold calculation of ROI. And you can chase yourself in circles doing all the crazy calculations necessary to get to a factual calculation to decide one way or the other.
I had an "argument" on the old NYTimes.com Housing forums with Ron Lieber after he wrote an article some years ago saying it was better to rent than buy. His reasoning was terrible and played more into the emotional moment of the meltdown than to any satisfactory reason for renting. Lo and behold 2, maybe 3 years later, he changed his tune and suddenly buying a home made a whole lotta sense.
You mention landlords "gouging" you on rent. Seems like you're halfway there to making the decision to buy. You also mention "building equity." I think this is an admirable fringe benefit of owning a home, but one that should be considered in a longer term than 6 years.
Have you consulted with your Tax Professional? If the interest on a mortgage (and property taxes on the apartment) is tax deductible against your income, this should be factored into your considerations of buying.
Someone posted that you would not qualify for $500,000 with $100,000 of income. Actually you'd be pretty close to qualifying depending on property taxes and maintenance and mortgage insurance. I did a quick calculation using the full 500k, $600 monthly maintenance, $300 monthly property taxes and FHA mortgage insurance and I came up with Debt-To-Income Ratio of 47% which is allowable with good credit and solid income/assets on an FHA loan for an FHA approved condo---FHA doesn't do Co-Ops.
With FHA financing for an FHA Approved Condo purchase you'd only need a minimum of 3.5% down payment, so you're $70,000 would go a long way to helping you qualify. Conventional financing with PMI is rarely available on loan amounts above $417,000 (it's the PMI companies that won't insure above that loan amount, not the Lenders who don't want to lend). Co-Op loans require minimum 10% down for financing, but, as someone rightly pointed out, many Co-Ops have their own minimum down requirements.
For closing costs you should expect to pay a total of 3.5-4% of the purchase price in closing fees for a NO Points loan. That's all in, including your attorney and other miscellaneous costs not usually included on a Good Faith Estimate. If you purchase a newly-constructed development your closing costs go up to 5.5-6% because you'll pay the Builder's closing costs, too (transfer tax, stamps, etc.).
While I have a lot of respect for someone who says to buy ONLY when you can "put down 20% and pay all closing costs and be left with 1 yr of mortgage/maintenance/live expenses..." I'm a bit more realistic as a New Yorker. Cost of living being what it is, and rents being what they are, it's danged difficult to aspire to that kind of savings. For the average New Yorker in your Income range it could take an awfully long time to save up that kind of money. And for that kind of upfront investment you'd BETTER be staying in the home a LONG time!
I hope this information helps you along the road to your final decision. Best of luck to you!
PowerHouse Solutions, Inc.
185 Great Neck Rd, Suite 240
Great Neck NY 11021
Licensed Mortgage Banker – NYS Dept. of Financial Services
So in summation of Trevor's long post -- RENT! It's the only sensible option for you.
trevor, stop shilling for unqualified buyers. you want this kid to be left with $20 in his pocket after closing... that's just moronic. your housing expenses should be at 25-30% of gross if you want to have a life in your 20s. if you want to live for the apartment, please listen to trevor and buy buy buy.
In my post above regarding 401k, I should have wrote he keeps $0.72 / $0.90 before fica/state/local taxes.
As for trevor's post, I agree with alan's summary.
>>Trevor: "And for that kind of upfront investment you'd BETTER be staying in the home a LONG time!"
Since OP expects to stay 3-5 years, trevor is clearly saying OP should rent.
Trevor, the intangibles of ownership is fine if you can afford it. Peronsally, I love the fact that I own my own condo, and can't stand the thought of throwing my money away in rent. However, the OP cannot afford to own anything decent in BK unless he/she wants to live in Brownsville.
youre young---rent as cheaply as you can---avoid spend 20 a day at starbucks and other pitfalls---save like a mofo, start compounding your money
and, even if you were already rich, which you are anything but, it would be folly to buy NYC real estate (or any US real estate) if you don't intend to keep it for at least 7-10 years
@Sunday - Well, I'm assuming that using a 401k to save isn't as important to him as buying property is, since he's only put $30k into it compared to $70k in ordinary savings. And he doesn't say anything about his company matching what he puts in. That would change things quite a bit since, as you say, it's an instant 100% return.
">>"Could you save $50k this year if you tried?"
At 100K income, I would like to see the math for that."
With multiple roommates I'm assuming that his rent is three figures. I know people his age who are living that way -- scraping by, but living -- on entry-level sub-$30k salaries. He makes $70k more than them, before tax, so if he banks all of that extra money, he's got close to another $50k per year.
It's unfortunate that late-20s people still have to live the post-college impoverished lifestyle, but doing it for a little while longer with his income will get him where he wants to go.
@Trevor - I have to disagree with you a little bit more. You want him to stretch his purchase price and monthly payments to the absolute maximum while at the same time recommending that he put very little down. These two things in combination could create a disaster if NYCT loses his ability to repay the loan.
Stretching DTI to 47% is fine if you've made a big down payment and are on the path to owning free and clear.
Stretching your down payment downward to just 3.5% is fine if your purchase price is small and your monthly obligations won't crush you.
But doing both at the same time?
Op seems to be quite absent given the myriad advice.
Appreciate the thoughts and advice. Since this topic accidentally got double-posted, I'm going to paste in my response from the other thread (which seems to have died).
People were asking about specific potential properties, and how I could possibly make the financials of this work. See:
As stated, I have 70K in the bank. I also have family gift and loans available of up to 30K or so. With this combination, I'd hoped to make a downpayment of up to 70K and cover closing costs, leaving a bit of money in savings, with the knowledge that I can borrow from my 401(K) in the event of a catastrophe.
With a downpayment like that, I'm hoping to keep my loan below 400K, meaning monthly payments of $!900/month or less, assuming the 4% rate I've been told I should be able to get with my credit. With the $2400/month limit I was setting, that leaves up to $500/month or so for CCs and taxes, and as OttawaNYC pointed out, taxes are abated (currently to $0-50ish/month) for the next 15-25 years on almost all newer condos in the areas I'm looking. I understand how these abatements disappear over time, but given the relatively short time of ownership I'm planning on, their disappearance should not be too much of an issue for me in the next 3-7 years.
As for RE prices in the area, I've been following numbers for a while now both neighborhood-wide and on specific units, looking at what people bought and then sold for, and even in the case of people who bought before the bust and sold after, almost no one took a hit in these neighborhoods--and most are coming out ahead, even after having owned for only 3 or 4 years.
I realize all of this is aggressive, so that's why I've asked the board for (constructive) criticism and thoughts. What I'm hoping to do is take a smart, manageable risk in leveraging my money now and also protect myself against rent hikes in neighborhoods that just keep getting more and more expensive. But it sounds like the consensus is that I'm putting myself at financial risk by not leaving enough savings post downpayment/closing costs.
As far as answers to other questions that have come up in this thread, current rent with 3 roommates is $1000/month, and company does match 401(K) contributions with 50% match up to 6% of salary.