I've had a good, long run of renting. My money has been invested elsewhere, making good returns. I've missed out on many years of flat RE prices and negative carry.

But now, a unique opportunity has come up. I live in some high-end apt where the line basically never comes up for sale: over a decade since the sale of something comparable in the line. By kismet, the floor below me just came on the market. Should I buy it?

I'm not going to give actual prices for privacy, but rather scale everything to a $1M asking price. So $1M asking price, with $1K in monthly cc & tax. My rent is $2K a month. Even if I stay 7-10 years, maybe use Keith to save shave a couple of points off commissions, transaction costs will amortize to another $1K a month. Then there's the issue of upkeep, maybe renovations, etc.

What should I do? Buy it or keep renting? The LL re-screened the floors before I moved in and offered to re-paint the patterned beige walls into whatever color I wanted, but I chose white. My SubZero is nearly a decade old now, as is the kitchen renovation, which I suppose could use some updating. I don't think the lack of psychic ownership benefits have left a hole in my life, but I'm not sure: I'm not a psychic.

Serious responses only, please.

?!?! 2k rent vs 12k annual return on 1mil?

If you are renting a 2M apt for $4k (scaled as you have said), keep renting. Why would you even buy when the CC&taxes are $2k?

Most likely, your math is off. Just spit out the real numbers in approximation and save us the confusion.

Right now you're figuratively in debt for the value of the apartment, but paying only 2.4% for it. Sounds good to me.

When you do start to see the numbers work, you can swing around in less than a year. The place you want now won't be available then, but it can't be *that* unique.

The psychic benefits are tricky. You might not like your line so much if you were stuck with it for however long it takes to make the numbers work.

Nevrtheless, you would now have the opportunity to lock in a 30 year mortgage at probably the lowest interest rate you are going to see in your lifetime. So, if you can buy with a 30 year fixed (!) mortgage at 3% to 4% I would do so. People bought in New York when interest rates were far higher and if you do the math you will find that the interest rate far more influences your cost of ownership than the actual purchase price.

And that is before topics like the appreciation on which you lose out as a buyer and the fact that ownership lowers your taxes.

if you really are paying 2k a month to rent a million dollar apartment, i cant see how you would remotely consider buying it - even if you are making next to nothing on your money.

having said that, i find it hard to believe that the numbers are that polar in this market unless you are rent stabilized - in which case that reinforces my point.

Surely this is a joke? There has not been a single buy vs rent thread I can recall that inonada has not proclaimed the wisdom and benefit of eternal renting. Has he been misleading people all along and just justifying and rationalizing whatever position he finds himself? Or are there two inonadas?

Let's say it's $6K for a $3M apartment. A great deal, but the downside is that it will end, as good things do. Even then, lots of turnaround time.

The owner maybe paid some fraction of the $3M for the place, and is OK with the current return, is happy with inonada as a tenant, and has other fish to fry.

A sale downstairs may be a kick in the butt for the owner to sell or jack up the rent, but I'd bet the owner isn't following the building and won't even know.

Agree with Matsui...It's a fake question.

Do you love it? Can you comfortably afford it? Will it give a great amount of pleasure? Owning will give you some potential financial advantages, but what it does for my clients is provide them with a deep level of emotional satisfaction. They don't have all their eggs in one basket either, they have plenty liquid post close and a diversity of other investments. They don't want to move every year or two etc.

They get a great deal of satisfaction out of their home and creating it along the way, a sense of permanency as well.

Nada: You seem to view home ownership through the lens of empirical analysis. I wonder what your poison is? Watches? Sports cars? Yachts? Large amounts of fiat paper.(:

Some say you only live once and relatively speaking life is quite short. Do what makes you happy and be (somewhat) responsible about it.

Keith Burkhardt
TBG

You're pretty savy, nada. After reviewing all pros/cons, what does your gut say?

You did state that properties in your line come to market infrequently and that you love the line and could see living there for the future. How do we know your rent will remain the same? How do we know that you have an infinitely renewable lease? If I was the LL that kitchen would only experience repair work until you flew the coop.
I don't think it's such a bad time to consider a purchase. You can let the RE gods guide you. I'll bet you could figure the market value for the apartment to within 25K. Make your final offer 75K less than that and you got a little deal. If you think you can stay in your rental indefinitely then consider a beach or country home. Since we're friendly I'd prefer that you purchase a beach home so I have one more friend to mooch off in the summer.

actually now that I've taken the time to do some homework.
could be a psycho plunge, might as well consider the Penthouse.

Nada, I would only buy the overpriced high-end condo if I thought that there is a greater fool few years down the road (you know the buy vs rent for these ones). Or if condo was a small part of my net-worth and I absolutely had to live in that type of condo and did not want to move. Coops for buying and living are far better value. This coming from someone who thinks real estate in NYC will be growing 3-4% per year.

I think that Nada has been a serial renter and has always been vocal supporter of the "rent" side of the rent vs buy argument shows the seriousness of this question. What if we are talking about a truly unique property? I am financially illiterate (at least relative to many on this board) so I won't even try to comment on the financial implications and my impression of Nada is someone who wouldn't even consider something that would leave him without sufficient financial reserve/diversification so I would disregard that as an argument.
My question to Nada is are you ready to make the long term commitment? In order to make sense, this would have to be where you would want to live for at least 5-7, and probably 10 years. That brings up a lot of issues. Could there be mini-Nadas in the future? Would you want to raise them in the city at least in the beginning? Is the apartment big enough? Are the neighborhood schools good? Do you have any likelihood of having to leave New York? In which case how do you feel about being a landlord rather than a renter?
These aren't physic emotional feeling "ownership" questions but rather practical questions tied to the ownership commitment.
Just more food for thought.

Nada,

You have always seemed to have extremely strong opinions about the financial implications of the rent-vs-buy decision.

So let's not talk about that... let's talk about other aspects of the real estate decision, because buying is something of a long-term commitment.

Do you like your board and trust them to make decisions about your property? If you don't like them, can you bear the opportunity cost of serving on the board yourself? Is the line below you available because of a demographic change in the building, and is that change the beginning of a trend, and is that trend a wave you want to surf, or can at least live with? Is your building financeable (sp?), and will it be financeable in the future, or is the purchase so relatively cheap because in a couple of years the building will be cash buyers only? What kind of shape are the systems in your building in, and could you bear a really long construction project? What are the risks of your job being moved to another city? Have you ever hung out in your building during working hours, and are you okay with that vibe in case you ever have to participate in it?

I could go on (and for my clients, I do) but I think this will give you enough to chew on in terms of what the risks are of moving over to the less-liquid side of the housing equation.

ali r.
DG Neary Realty

Everybody, thank you for the responses. The numbers & listing are real. The question of rent vs. buy on it were tongue-in-cheek, my request for serious responses only a nod to the various posts we've had recently requesting no levity in posts. Despite my unclear intentions, I enjoyed reading everyone's viewpoints.

For me personally:

1. Rent for $24K.
2. Buy for $12K monthlies, $12K transaction costs.
3. A carry of $0 on $1M, before upkeep & reno, is this a joke?
4. On $1M, I'd put $48K cost-of-capital (cash, borrow, or whatever mix in between). So even if my rent doubles tomorrow (good for $24K) AND prices/rents increase at 2.4% a year (good for another $24K), I'm still behind on buying because of upkeep & eventual renovation.
5. I'm willing to bet that rich a-holes will continue renting to me at rent-control rates and that NYC RE will continue flat for a long time. Even if I'm wrong to the tune of 2X rent and 2.4% annual appreciation, I'm still ahead.
6. Each year I'm right, I'm up an amount that is 2X my annual rent.
6. Now that's an easy trade.

To show inonada is not all about numbers, let me switch to psychic:

1. Variety is the spice of life.
2. Inonada professes faithfulness to his wife.
3. Inonada does not profess faithfulness to a piece of RE.
4. There are lots of unique apts/homes.
5. More than enough to fill inonada's lifetime.

Huntersburg, when did inonada write that (assuming that it was him)?

It's a pretty big assumption to think that index funds will continue to return a whopping 8% per year. If we have some down-trending or sideways years, such as 1929-1954 (that's how long it took for the '20s highs to come back) or 1966-1982 (sideways market, and inflation ravaged your money all the while), RE starts looking a lot better.

Is the 8% in post-inflation terms? 8% wouldn't have done much for you during the double-digit-inflation 1970s, whereas owning RE through that period would have carried you along very nicely.

Nada,
I don't understand the calculations. Is the $12K transaction cost the closing cost? Would you pay all cash? Are you saying that if your rent doubled, it would take 20 years before it hit $1m?
What I think you're saying is that if you buy, you will have parked $1m in a non-income generating asset. I'd really appreciate it if you could clarify.

"... tell that to most of Brooklyn, Queens, the Bronx, and essentially all northern cities of any size at their core, and older streetcar suburbs north, south, east, west and in flyover country."

Then we're talking about neighborhoods and not RE-versus-stocks in general.

The national Case-Shiller index hovers right around 110, with a brief 10% spike in the late '70s, for the entire mid-'60s to early-'80s period of the stagnant stock market amid high inflation.

If you owned index funds, inflation took away your gains. If you kept your cash in a safe, Fed-sponsored inflation destroyed you. If you bought an apartment in 1966, you were protected over the next 15 years from the inflation that would have otherwise ruined you.

so you knew the answer to your question before you asked the question? Don't you ever go to the movies?

TZ, the post is originally from stevejhx I think.

Shiller has a great Excel spreadsheet showing US stock prices, dividends, earnings, inflation, etc. since 1871. Google "shiller data".

Since 1871, stocks (with dividends reinvested) have returned 8.9%, or 6.7% after inflation. Since 1945, 11.0%, or 6.9% after inflation. From the peak of the bubble in 1929 to present, 8.9% or 5.6% after inflation. From the bubble peak in 1929 to the re-achievement of that headline number in 1954 which you quote, 5.9% or 4.0% after inflation.

"so you knew the answer to your question before you asked the question? Don't you ever go to the movies?"

I rarely go to the movies, prefer to watch them lying down at home.

The intention of my post was not to ask a serious question about what I should do. Rather, I thought it an entertaining way to share some info from my silly corner of the RE world. I didn't think anyone would take the question seriously given the fact that the apt is essentially being lent to me for free. But I do appreciate the serious responses nevertheless because it gives the various perspectives people have.

So it wasn't really a question expecting serious answers, but the serious answers provided were ones I did not expect.

"What I think you're saying is that if you buy, you will have parked $1m in a non-income generating asset. I'd really appreciate it if you could clarify."

Dwell, that's exactly how I see it.

The rent on the place is $24K. The monthlies are $12K. But if you assume transaction costs of 9.6% -- $96K on a $1M purchase -- and amortize it over 8 years of living there, that eats up another $12K a year. I think you need to budget another $5K a year for upkeep & renovation ($150K after 30 years). So for the privilege of putting up or borrowing $1M of cash, I'd get the benefit of losing $5K a year.

I operate under the assumption that long-term, the market will correct w.r.t. losing 0.5% a year. But maybe I'm wrong. Maybe there's a magic pot of income that appears from Bloomberg's ass tomorrow and raises city-wide incomes to the point that would allow the owner to charge double for the rent. This additional $24K a year would translate the $5K annual loss into a $19K annual profit. Furthermore, future rent increases would allow for another $24K a year in capital appreciation on the asset. Even in this fairy-tale scenario, the return is $43K on $1M: barely enough to cover a 30-year rate on a jumbo mortgage, never mind the higher rate of return I'd want on a downpayment.

There's something eminently satisfying about tearing something apart and reconstructing it. Kind of like playing god in your own little village.

If it doesn't stress you our financially why not?

As much money I earn / spend / accumulate, I am not so detached from the value of money. I'd rather fund a real little village with the difference than play house.

>> If it doesn't stress you our financially why not?

Now that's a great idea. Anyone out there who does art, has the pull to put it somewhere prominent? A clear box, a refillable stack of dollar bills, a mini-incinerator, and a robotic arm that takes a bill each minute and burns it. Better yet, performance art with an actual person, the dollar bills, and a paper shredder. I'll fund it, we'll call it "If it doesn't stress you out financially, why not?"

Serious inquiries only, please.

you sound like someone under a great deal of stress and in that case I don't recommend ownership for you

Aww c'mon ieb. Don't be sore. I'll give you credit on the art installation.

"I can tell you right now that the while the art world might well smile upon an installation that shreds real dollar bills, it takes a dim view of the shredding of an actual person. "

Well I assure you that in Roman times, they would completely understand one that shreds humans. Dollar bills & fiat currency, not so much. An ulterior motive of the gold standardistas, if you ask me.

If this has been answered somewhere else I apologize, but how are you able to rent a $1mm apartment for 2k/mo? I would ride that out as long as could. In my experience, rent on that kind of apartment would be about 4k depending on amenities. Sounds like a great situation though.

$1M illiquid depreciating asset, $2K rent, $1K to monthlies, $1K to transaction costs, $500 to upkeep/reno. $1M cash investment to lose $6K a year, no bubble here, economy & Russian billionaires will save us.

Hey huntersburg, do you got a big pile of money? Who knows, maybe granny the cosmetics mogul felt sorry and left the runt of the family a few nickels. If by some chance, please go buy a spectacular property for investment. I'll get itchy soon enough for a new place.

Thanks for clarifying, nada.

So, are you basically against owning a residence (no matter the purchase price) because it locks up cash in a non-income generating asset? Or, would you consider buying a less expensive place, even though that too would lock up some capital?

I don't know if I agree that Manhattan RE values will greatly decline in the near future; I think that depends on the purchase price. However, I do think that RE tax & maintenance will climb, making ownership more expensive. I also agree that transaction costs are very expensive & thereby inflate purchase costs.

Dwell, yes agree that cost of ownership will increase but for other reasons.

China it seems is like Japan in the 80s & 90s only much bigger. Look what happened then, the Japanese with all the money came here and bought real estate.

Now with the Chinese economy unable to sustain it's growth rate much like Japan experienced it will cause several things to take place. One is that cost of goods manufactured in China will go down further thereby driving consumer spending here a good thing for our economy and wealthy Chinese will intensify their movement of wealth to US in things like nyc real estate. Just my take on it.

And as far as curating nyc real estate I thought that front porch's job?

Dwell, I am not against purchasing RE per se, it all depends on price vs income produced by the home. In my little corner of the world, the numbers are beyond silly. Even if my rent were 33% higher (maybe I have a special ability to find low rents) and I could negotiate the price down 20% (maybe it's listed higher than market), it'd still be silly.

FWIW, I don't expect Manhattan RE to drop. The fundamentals suck, and the most likely way out IMO is an extended period of going nowhere on price. I've been saying this ever since I showed up here on SE, putting my money in other assets. NYC RE has been a sucker's asset. Down 1.7% annualized since Oct 2008. Even those that bought 3 years ago in the much-vaunted lows of 2009 have only tracked inflation. All this over a period that saw mortgage rates drop from 7% to 4%. Meanwhile, bonds up 50%. Stocks up 75%.

"Even those that bought 3 years ago in the much-vaunted lows of 2009 have only tracked inflation."

I think they've done a bit better than that. Based on the SE condo index, for example, the gain is about 10% after adjusting for inflation - if I'm reading the index methodology correctly:
http://docs.streeteasy.com/research/SECMI_Methodology.pdf
(See "Inflation" under "Considerations".)

The gain is nothing to write home about, but it's a gain. Anyway, I don't think this discrepancy dilutes your larger point.

Well there certaily are a lot of intelligent people here.

My premise is that in 5-10 years from now asset purchases made during this period including real estate will probably look really good. We must be 40-60% through whatever it is that we're going through. I'm all loaded up in high end real estate and even got a large position in S @ $4.20 thanks to 67. We all end in the same place and the only thing that seperates us is how you get there so why not do it in style.

BTW I do business in asia every day and I can say that they have hit the panic button. In my industry I buy market share and then use it to drive what I pay and right now the Chinese are going after each others throats.

With regard to mortgage rates dropping over the past three years, I don't think that matters much. A 2009 buyer may have benefited from lower rates - either by refinancing or via resets on an ARM.

Agreed with all the above that this is contrived question intended to make an absurd point. I'm sure he is just waiting for responses that don't completely rule out buy to jump on the pro-buy argument. Ionada is no doubt very smart, but not everyone on this board is incapable of doing basic math.

Ionada has proved conclusively that buying for 41x annual rent does not make financial sense. Congratulations. What a frigging genius.

Now do the math please for 12-15x and the argument isn't quite as simple.

West81st: "Based on the SE condo index, for example, the gain is about 10% after adjusting for inflation - if I'm reading the index methodology correctly."

I think you are misunderstanding the methodology. The methodology paper does not talk about inflation-adjustment at all, except in that section under "Variations of the StreetEasy CMI" stating "The StreetEasy CMI was manipulated a few additional ways for comparative analysis." They used to publish both non-inflation-adjusted and inflation-adjusted, but they stopped doing the latter.

Publishing only an inflation-adjusted index is extremely weird. However, the definitive evidence that the CMI index currently being published is not inflation-adjusted is the graph on page 7 comparing to Case-Shiller. On its description, it says "Since the CSI is not adjusted for inflation, we removed our
inflation adjustment so that we could compare 'like-to-like.'" You can note that the CMI shown there (scaled by 10 to undo the CSI-comparable re-scaling) is indexed to 1000 in Jan 2000, first breaks 2000 in late 2005, and double-peaks in late 2007 / early 2008 at 2200. That matches the currently-published data exactly. CPI was up 25% between Jan 2000 and Jan 2008, so the inflation-adjusted difference would have been 1.76x instead of 2.2x during that period for inflation-adjusted CMI.

In any case, I was basing my statement on July 2009 to July 2012 CMI vs. CPI. The former did 1833.08 => 1969.93, or 2.4% annualized. The latter did 215.351 => 229.104, or 2.1% annualized.

@Ino - "From the bubble peak in 1929 to the re-achievement of that headline number in 1954 which you quote, 5.9% or 4.0% after inflation."

I'm afraid I'm going to look monumentally foolish in some way by asking this, but: if an index (or a single stock) is at some level at Year A and, after going up or down or wherever, is at the exact same level at Year B, how can the annualized return over that period be anything other than zero?

Unless you presuppose continuous additional investment using dollar cost averaging, or try some flim-flammery with how averages work ("A $100 stock crashed to $50 in Year 1 and then doubled to $100 in Year 2. You had a -50% return followed by a 100% return. That's a 25% average annual return!"), how can you have a 5.9% return on an index that has the same value at the end as at the beginning?

I buy a fund that exactly mimics the Dow just before the crash in 1929. I hold onto it until 1954. It's trading at the same value it was at in 1929. I go to sell it. I have neither gained nor lost a penny.

What am I missing?

^ Maybe I'm missing the impact of dividends. But that seems like a lot of dividends to pay out.

West81st: "With regard to mortgage rates dropping over the past three years, I don't think that matters much. A 2009 buyer may have benefited from lower rates - either by refinancing or via resets on an ARM."

That's great. I'll be sure to let Bernanke know that all that West81st thinks that putting short rates at 0% and buying trillions in treasuries & mortgage debt gave absolutely no support to the housing market. Well, not in NYC at least. Because here in Manhattan, no one cares about 30yr jumbos that dropped from 7% in 2008 to 6% in 2009 to 4% in 2012. It's all Russian billionaires buying cash.

seaver69: "Now do the math please for 12-15x and the argument isn't quite as simple."

Oh I think that at 12x, the argument over the math becomes just as simple as at 41x, only in the other direction.

The argument with the owner downstairs on the price, on the other hand, not so simple. What's the most delicate way of placing an offer at 70% off from asking price?

Aside from making my head hurt with all the math, this thread made me feel both good about myself and bad about myself: It made me feel good because I got the joke immediately; it made me feel bad because it highlights the destructiveness of my real estate addiction (I'm "in" for that art installation by the way). Inonada, please give us real-estate addicts something to humanize you - like KeithB, I am dying to know what your poison is. Please tell us that you have a gambling problem; something, anything . . ..

TZ, yes it's the dividends.

For $100 invested at 1929, the average annual dividend through 1954 would have been $2.65. So if you just spent them, then 2.65% annually.

However, in a year like 1932 you would have received a $2.08 dividend payment and would be re-investing it at a time when the $100 price would have been down to (on average for the year) $22.14. As the price retraced itself back to $100 in 1954, that small $2.08 dividend would have become $9.40 w/o dividend reinvestment and a whopping $29.44 w/ dividend re-investment.

That reinvestment effect over 25 years (none as big as the 1932 one, of course) would have boosted the return from 2.65% to the 5.9% I quoted.

Thanks nada. I always like hearing your thoughts.

It may be worth it if your current LL will give you a reasonable buy-out (assuming you are Rent Stabilized).