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Buy vs. Rent Dilemma
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I am looking to move into a 2-bedroom from a 1 bed currently, and am weighing the decision of buying a condo vs. renting on the UWS/Riverside BLVD and would like some advice from any experts out there. The rentals I am looking at range between $5.5k - $6k per month.

The condos we are looking at are in the $1.3-$1.4 mil. range. For simple math, if we were to put down $350k (~25%), our mortgage payments would be about $4.4k a month with a 10/1 ARM, common charges and insurance are about $1.3k and taxes are $1.2k, bringing total monthly outlay to ~$6.9k. With the tax deduction on interest and taxes, I believe I will recoup about $1.2k a month, bringing my all in expense to $5.7k per month. I’m also assuming closing costs are around $40k.

My dilemma is that I am confident that we will live in the city for at least another 3 years, which would equate to about $200k in rent payments. However, after 3 years, our living situation is more uncertain. Because we are looking at Condos, if we decide to move in three years, I believe we could hold onto the property (I have enough liquidity that I won’t be forced to sell when we leave Manhattan) and could rent it for probably $5.7k per month on the low end, covering my all in expense per month which seems like it could make sense (I understand that there will be gaps in the rent/other expenses as a landlord, so the math might not work properly, but I’m also not factoring in rent increases, etc).

So, with these numbers, and the thought already in mind that we will likely be leaving the city in 3-4 years, does buying seem to make sense financially or should we rent and shell out over $65k a year? I just hate the thought spending at least a couple hundred dollars on rent even though I understand the transaction costs to buying are also quite high and there are other considerations. Thoughts would be greatly appreciated!

take your transaction costs and double them to make them realistic and then look at the numbers again. your mansion and mortgage taxes will be just about $40K. you then have to add title insurance, attorney fees, origination fees, etc. typically, you count 4-5% of purchase price. so it's $52K and up.

second is the montly mortgage payments. you really think you can get 3.5% or less on a non-conforming mortgage? i would expect 4.25-4.5% and that equates to $4900 per month.

now that your outlay is $7400 per month for a place that you can rent for $5700 per month, is it worth buying?

Is your decision based purely on money or are there other factors to consider? If purely financial then there are a lot of assumptions here, but in general I would not see a place to live in NY as being a decision based on finances as neither is likely to save (or make) significant money.

Use this calculator to try out different scenarios:

http://www.nytimes.com/interactive/business/buy-rent-calculator.html

My bias: I'm a real estate agent, and I own on the UWS. (And I'm happy to help if you don't have an agent; one of my jobs is to keep clients from making mistakes).

That said, I think you need to consider WHY you would be leaving the city in three years. If it's a factor that's *not* going to drive your cohort ("career advancement would require that we move to D.C.") then your assumption that you can extrapolate current trends in the rental and sales markets is a fairly good one.

If it's a factor that *is* going to drive your cohort ("our kids, and all of our friends' kids, will be hitting an age where we might want to get them into suburban sports programs") then you have to think about how the demand curves for sales and rentals are going to process that information. My guess is a common factor like that would possibly depress the sales market more than the rental market, and it would be a factor that would count against buying.

ali r.
DG Neary Realty
ali [at] dgneary [dot] com

Watch out for AMT as well.

ab_11218, the mortgage is a 10/1 Jumbo ARM at 3.7%. I'm assuming a purchase price of $1.3 mil, $350k down, and a $950k mortgage (could be missing something, not sure). On the closing costs, I'm not adding them into my monthlies, but I'm assuming at 1% mansion tax ($13k), 2% mortgage tax on the loan ($19k), and another $10k for attorney fees and title insurance (maybe I'm too conservative here?) = $40k. I could also put more money down to make the buy/rent ratio equal out.

Matsui, the decision isn't purely based on money, but I'm just trying to gauge if I should even be looking at buying if I only plan to live in the place myself for 3-4 years (I would be willing to rent it out after that point), but I'm weighing all these numbers versus what could be $200k-$300k easy in rent over that time period.

buying, i am getting a 30 yr conforming now and it's 4.25% (credit score around 800), so your 3.7% is a wet dream.

The spread between 30yr jumbos and ARMs is very high right now. I also have a 790 credit score, can get a jumbo 30yr at 4.5% (or slighlty above), but 10/1 jumbos at good pricing are around 3&5/8. Also heard (not an expert) that jumbo to conforming spreads are pretty tight right now. I could put more money down to get to that 4.25% conforming (which I was also quoted) but the delta doesn't seem enough for the additional investment.

I've run the calculator buy vs. rent equations (and I really like the NYT version) and with what I believe are relatively conservative assumptions, the output is generally that the scale point toward buying generally between 5-6 years. However, the real basis behind my question is that if I move out of the city in 3-4 years and decide to rent the condo out for the forseeable future or until the market is much stronger instead of selling it after those 3-4 years, how does that change the point at which the equation makes sense financially, or whether it even makes sense at all? Appreciate all the comments/thoughts.

Buying - Don't assume the $1.3 million as the buying price. Once you have accepted in your head that $1.4 million is "acceptable" you start seeing all sorts of $1.4 million apartments you would rather have then $1.3 million dollar ones. Not just that, but "peeking" at those $1.5 million apartments, because they might accept a $1.4 million bid, happens and you start thinking you might stretch to that amount.

It may be that what you start craving in the $1.5 million range doesn't get any you any more rent than the the $1.3 million, but it does get you a higher mortgage.

Next consideration - do you really want to be a landlord? Having a condo isn't BOTH having something that pays for its own overhead and a place one can stay in 2 weeks a year when on vacation.

If you don't want to be a landlord (phone calls from the tenant at 3am on 4th of July weekend when the A/C breaks during a heatwave? Renovating every 10 years to compensate for wear and tear? looking for new tenants every year or two if you are seeking top market rents?) and you don't think you will be staying more than 3 years why not just rent and enjoy your new worry free lifestyle? The price is the same or less.

Assuming it rents for $5500/mo with $2500 in maint and taxes, that's only a 2.7% annual return if you purchase all cash for $1.3 mil. Seems like too much of a hassle for that kind of return.

AvUWS, nailed it again re: price creeps, i.e., looking at $1.3M then #1.4M seems that much nicer and then before you know it you're in the $1.5M range. It happens more often than not and only way to combat that problem is to stick to the plan, i.e., hard stop at $1.3M.

Re: renting, others have mentioned how difficult it's being landlord. Then there is always a chance you get a bad tenant despite being in a good 'hood. And if you have never been a landlord, good luck! Considering the added cost of broker fee and some building requiring board approval and move-in and move-out fee, although all are paid by the tenant, many tenant will shy away from these "extra" fees that went finally add to the cost greatly increase the monthly rent from 5.5K-6.6K to possibly 6K-7K. These fees, especially the broker fee, are completely ridiculous at 15% when rents are upwards of $5K. Yes, I can understand broker fee at 15% when rent is $1.5K-$2.5K but $5.5K ? Is the broker providing you a different level of service at $5.5K than at $2K ? Exactly!

What about rent compression ? No one talks about the possibility that rent is way to high at this point! I believe there is a mini-rent bubble. I have also looked at 2BRs for rent and they are way out of whack with reality.

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Apt23-

So someone needs to assume that you can return 5% on their money after tax with relatively little risk or volatility? Have people forgotten that 2008 did not only affect the real estate market? At the same time in the real estate market you should assume a forced sale scenario which would incur significant transaction costs and a depressed price due to higher interest rates, taxes, and possibly lower rents. Would those same rising interest rates and taxes have no effect on an equity or fixed income portfolio?

Let's look at an actual condo rent vs. buy comp in your target hood of Riverside Blvd matching your criteria.

For rent is 45C in 200 RSB, 1325 sq ft, 2BR, 2.5BA, great light & views, in contract with a last ask of $5900 and an offer of a free month:

http://streeteasy.com/nyc/rental/847906-condo-200-riverside-boulevard-lincoln-square-new-york

Let's say you parlay that free month into the owner paying the fee, you negotiate a 3-year lease averaging $5900 a month, you're out $71K a year.

The direct sales comp is 40C, 5 floors below, that sold in May of last year for $1.75M with $1327 in taxes and $1219 in cc's:

http://streeteasy.com/nyc/sale/578698-condo-200-riverside-boulevard-lincoln-square-new-york

Let's say you put 25% down (which is incidentally what the buyer did as well) with a 3.7% ARM. That's a $437.5K downpayment and a $1312.5K loan. Your annual costs will be:

- $31K in cc's and property taxes. Property taxes won't be deductible under AMT.
- $36K in interest after tax deduction ($48.5K interest, $12.5K tax benefit on first $37K in interest)
- $4K in basic upkeep, insurance, etc.

So basically, you are looking at that same $71K a year, except we have not yet accounted for transaction costs:

- $25K NYC transfer tax (1.425%)
- $7K NYS transfer tax (0.4%)
- $88K broker fee (5%)
- $18K mansion tax (1%)
- $34K mortgage recording tax (1.925% of mortgage amount)
- $8K title insurance
- $6K misc closing costs (attorneys, fees, etc.)

That adds up to $186K and assumes no points paid.

So if you sell after 3 years, you'd need to have a 10% gain in price just to break even. I.e., a sale price of $1.94M. Pop it up to $2M (a 14% increase), and you are looking at a very modest 4.5% annual gain on your $437.5K downpayment. You'd need a $2.1M sale price (a 20% increase) to get to a return remotely commesurate with the risk you're taking on your downpayment -- 10.6% annually. That scenario requires prices to appreciate at around 4-5% beyond inflation for 3 years in a row, facing headwinds of rising interest rates (no more 3.7% 10/1 ARMs for the next buyer).

If prices remain flat, you will have essentially paid $11K in rent for a $6K apt. Or taken a 43% loss on your $437.5K downpayment. Your choice of interpretation.

What if you hang onto the condo for 7 more years to amortize the transaction costs?

In that case, you start picking up an annual negative carry. It'll be $12.5K for loss of interest deduction, plus $6K vacancy allocation. So $130K in negative carry over 7 years. The hole now becomes $315K.

Sell for $1.75M after 10 years, you've lost 72% of your downpayment after 10 years of trouble. Sell for $2.1M -- an inflationary 20% gain -- and you have a 0.7% annual gain for your troubles and risk taken. You'd have to sell for $2.75M -- 4.5% annual increases, double inflation -- just to get to a minimal risk-compensating return of 10% annually on your downpayment.

Is a $1M gain here possible? Doubtful IMO because it would imply an even wackier buy vs. rent comparison from the next buyer in 10 years just to stay constant -- a $9500 rent for an unrenovated 20-year-old apt with 3.7% 10/1 ARMs being available.

This may be a question for its own thread, but if the Supreme Court comes through for NY and strikes rent regulation, would that cause value of co-ops/condos to rise faster since the pool of buyers would expand so quickly?

Wow so in 10 years of owning it...3 living in it, and 7 years of renting it, rent never increased. There was a month of vacancy every year you rented it, and you paid a broker 88K for some reason. Oh, and you hired the most expensive real estate lawyer in the city for 6K.

Let's also ignore the $318K in loan amortization over those 10 years.

BuyingUWS

I am not trying to talk you into buying. I just think people like to stretch the case one way or another to make a point. If you are looking to sell in 3 years, it likely doesn't make sense to buy. No need to over think it. Transaction costs are too high with a 3 year holding period. 10 year holding period it likely makes sense unless you think you can do well in the equity or fixed income markets. Most don't, but think they will.

pier45 - An end to rent stabilization would create a few years of havoc, but ultimately it equates to a huge exodus of tenants in under-priced apartments either to smaller apartments or to outer boroughs. But it would also mean a huge drop in the current market rents of larger and more expensive apartments as the supply of rent stabilized apartments floods the market.

Other things it would mean: A huge boom in apartment and lobby renovations. Not expensive ones but certainly cosmetic and utilitarian ones, as landlords spend at least a few $ to fix up their inventory to rent it out.

How do 2BR/2BA rentals do when compared to a flood of classic 6's at $4000? (currently $5000 to 6000 on the UWS)?

I read that in most of the U.S. buying beats renting, except San Francisco, Hawaii, and Manhattan. (In the rest of NYC, buying beats renting.)

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"Wow so in 10 years of owning it...3 living in it, and 7 years of renting it, rent never increased."

jhochle, like many people who say inconsequential words without any numbers. But let me address your ignorance in detail.

My average rent assumption was $5900 for vs cc/taxes of $2600. Assuming that spread of $3300 grows by $100 each year, that's $700 a month in the 7th year. Averages out to $4200, times 7 years, becomes $30K.

Now does $30K amount to a whole lot of beans when we're talking about 10-year returns on $437.5K? No, it's a delta of 0.66% annually. Is it meaningful in the context of selling at $1.75M vs. $2.1M vs. $2.75M? Hell no, it's a delta of 0.17% in annual appreciation. But here you are, making noise about it.

But that's not all.

I did the 7% of sell-side transaction costs using a $1.75M sale price. If the sale price were $2.1M (the make-no-money-on-downpayment scenario), the costs would be $25K higher wiping out the $30K more or less entirely.

So try actually doing some analysis before your ill-informed proclamations.

"There was a month of vacancy every year you rented it"

This is $42K over the 7 years. Cut it in half if you like, it's a $21K difference. Cut it by 3, it's $28K. Again, mice nuts compared to the sums in question.

"and you paid a broker 88K for some reason"

Yeah, believe it or not, brokers like to get paid for selling your apt. They often will discount 6% down to 5% on a $1.75M apt. Plug that into a calculator, you'll see $87.5K pop out the other side.

" Oh, and you hired the most expensive real estate lawyer in the city for 6K."

If you read my words, I said "$6K misc closing costs (attorneys, fees, etc.)". Buy and sell side. Here's Corcoran estimate of all transaction costs:

http://www.corcoran.com/guides/index.aspx?page=ClosingCosts

They've got $3500 on the buy side $2500 on the sell side, that's $6000. But don't take my word for it, take out your own calculator.

The building fees are higher for Trump, BTW. And there's a good chunk more if 3.7% requires points, I don't know.

"Let's also ignore the $318K in loan amortization over those 10 years."

Use your brain. I only listed the $48.5K annually in interest, minus the $12.5K in tax benefit, as a cost. I did not include any principal paid as a cost.

If you like, we can do the full amortization to account for $436K paid in interest and $289K paid in principal over 10 years. Then we can account for the cost of capital on $289K at 3.7%. You wanna know where we end up? Exactly at just the $48.5K cost. Or add that $289K to the $437.5K downpayment as equity. Do it month-by-month, go crazy in Excel. Calculate your ROI based on the different scenarios, get back to me. You won't end up with anything appreciably different.

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We're making the same evaluation - very similar time horizon and budget as you, BuyinUWS. The link for the rental at 200 Riverside that inonada (who usually has very helpful points) lists does not look like a proper 2 bedroom. Unfortunately, at the $5500 price range, we have not seen proper 2 bedroom apts. After adding the broker's fees (listing agent; we were looking for rentals on our own), the price for rental units were approaching $6K. (And keep in mind that true rental units may be more expensive than e.g. co-op rentals that have a 2 year limit. E.g., West River House has a convertible 2 for $5600 or a true 2 for $7700!)

It's also a quality of life issue and not simply about numbers. We are finding the quality of apartments that we'd buy to be nicer than the rental options. Financially, the money we'd put in the down payment wouldn't be working for us in any other serious interest-earning way - so it's not like we'd be losing an investment opportunity if we put it toward an apartment. We're not expecting to make a killing. We're OK w/breaking even, even losing a tiny bit. With the apartments we're considering to buy, we're confident that we'll have a lovely home for the next 2-4 years, which won't ruin us financially.

Wow some interesting little side notes going on here.
As your amigo, not broker I would tell you what I tell my own clients, I would not purchase with such a short time frame to hold. Unless you just have so much money you don't care and simply want the place that you want and will worry about selling when the time comes.

Even though I see home ownership as a very personally satisfying emotional event, you have to be responsible about the financial components as well.

Owning one property and renting it out is way to much risk for my appetite in this tenant friendly city we live in. Most sublets go fine, I did rentals for years...but get one bad situation and oh boy.

Keith Burkhardt
The Burkhardt Group

clsm,

The problem for you is that if prices decline by 4 percent, which I'd consider pretty tiny, you'd lose half of a 20 percent down payment. That could put you in trouble if you're planning to move on. You have to have more than a little risk tolerance to do what you're considering.

"The link for the rental at 200 Riverside that inonada (who usually has very helpful points) lists does not look like a proper 2 bedroom. "

How do I refute thee? Let me count the ways:

1) I am inonada, my word is proof enough.

2) The listing clearly states 1325 sq ft and 2.5 bathrooms. In a city where people call 900 sq ft apts with enough walls and 1 bathroom a 2BR, I think that counts as a "proper" 2BR. Don't get me wrong, I like my 2BRs to weigh in at 2000 sq ft just as much as the next guy, but 1325 sq ft is good enough to be "proper" to me.

3) The sales listing of 40C five floors below is the same line, same 1325 sq ft, same 2 bedrooms / 2.5 bathrooms, sold for $1.75M with this seemingly "proper" 2 bedroom floorplan that includes a 16x13 master, a 12x12 2nd bedroom, 2 en-suite bathrooms, a guest half-bath, an 18.5x12.5 living room, a 11.5x11 dining room, and a somewhat-larger-than-galley kitchen. What more would you have:

http://img.streeteasy.com/nyc/attachment/show/504221-200-riverside-boulevard-new_york.jpg

4) The 2009 rental listing of that 45C apt shows the same floorplan:

http://streeteasy.com/nyc/rental/509335-condo-200-riverside-boulevard-lincoln-square-new-york

The problem with rent vs buy is it's very assumptions driven, but less so in the short term. Three years is way too short to make this work given the realities of where prices , rents and transaction costs are. It's ridiculous to buy, unless you are planning on staying for considerably longer than three years.

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At a more modest scale, I have been confronted like BuyingUWS to the dilemma between buying or renting... I spent too many evenings mulling over what to do. Every time, I use a Buy vs. Rent Calculator and enter my data, the answer is "you should rent instead of buying". By the way, I allow myself to highly recommend this one: http://michaelbluejay.com/house/rentvsbuy.html. I think it is the best one. But, I am not a specialist...
My rent is low: $1080 and my modest one bedroom decent. I saw an apartment that I really like in a new development (410,000), 14 years tax abatement, maintenance $480 in Astoria. I can put 20% for the down payment. I will borrow $330,000 for 15 years at 3,5 or 4.25 if I opt for 30 years. If I buy, I plan to stay in the new place at least 10 years. I am 51 years old and my salary is a little above $100,000. My job is secure after 20 years in the same company. Since my rent is low I can save good money and I have a good retirement plan. I will without any doubt save more money by renting because of the cost of the mortgage, tax, maintenance, and interest. Finally, those calculators are not so useful because they ask the user to guesstimate future appreciation and that's the most crucial data in the whole calculation,
On the site that I have mentioned above, the mastermind wrote: "Appreciation matters because it can make the difference between whether it's better to buy a home or continue renting. And even small changes in the appreciation rate can change the long-term value of buying considerably. A $235k home becomes worth $485k at 3% appreciation after 30 years, but it becomes worth a whopping $649k at 4% appreciation. One percentage point makes quite a difference!” If I know that I can expect a good 3% appreciation, I would buy. But I am not so sure it will be the case. It does not make any sense to buy a condo for $410,000 if you will sell it only 450 ten years later. Or maybe, I am missing something...I think I am not going to buy and continue renting. Any experience or thought would be truly appreciated.

Wait, let's take a step back here. BuyingUWS says that he can find comps in the 19x price/rent range. Imonada decided to choose a comp at a 24x price/rent and based his analysis off that.

However, a quick search confirms that one can find real-world comps in the 19x range:

http://streeteasy.com/nyc/sale/640809-condo-241-west-97th-street-upper-west-side-new-york
http://streeteasy.com/nyc/rental/818703-rental-241-west-97th-street-upper-west-side-new-york

Asking price $1,599,000 and current rental price at $7,000 per month, or a 19x price/rent ratio.

If you ran the analysis off of this particular example, or the ones that BuyingUWS says he has found, then the buy vs. rent analysis is more balanced.

I have in my head 18-20x price/rent ratio as a ballpark of the breakeven point. If you are planning on staying less than 5 years, you need a lower price/rent ratio to justify spreading transact costs over a short period of time. If you are going to stay longer, you can stretch a little. 24x is always going to be hard to justify. But clearly there are buying opportunities out there at lower ratios.

inonada,

oop! looked at the wrong link somehow. Yes, the Trump apt you listed was a true 2 bedroom. However, is that a true rental? A condo, right? Can't the owner return from his 2 years in London and kick us out? That's what's happening to us, and we don't want to deal with that insecurity again.

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That condo was up for rent in 2009 as well, clsm. Possibly before too. Lots of investor condos in the city. It's pretty straightforward to determine a LL's longer-term intentions at the time of renting. I personally ask for a 3-year lease, but that aside you can often tell by circumstances what's gonna happen. Nothing guaranteed, of course.

I'd guess you rented from a person who had been living there and had moved to London for work? Not the sign of an owner looking to rent indefinitely. On the other hand, if the place has been held for 6 years and rented the entire time, then probably the owner has an indefinite timeframe.

So sure, there are uncertainties in life. But you make choices that best deal with them.

BuyingUWS - take Inonada's math and analysis, plug in a 19x Price/Rent ratio instead of 25x and buying comes out breakeven/ahead if you plan on holding 8 years or more.

So the real question is whether true apples-to-apples comps exist at 19x or if his 25x comp is the best you'll get. The example I offered a couple days ago suggests that 19x comps do in fact exist so if you are seeing them out there, my advice is to ask yourself 1) Do I really plan on holding for at least 8 years and 2) are these 19x comps really apples to apples or am I trying to blind myself into justifying them.

Ino, I need a 'rent is cheaper than to buy' fix. find me an example please. I've been shut out of 2 rentals I was willling to pay asked for. And i am talking about w67 type of cash, not brooks.

If you move out of a condo and rent it it's harder to make any money because you lose the primary residence exemption/exclusion/advantage/whatever they call it. Without doing calculations, 3/4 years doesn't seem worth buying. Where do you think you'll be in 3/4 years? Why wait?

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ino please draw me a picture. This is Brooksie's picture: i am renting a studio in bushwick for 500/month, if I wanted to buy in manhattan i would have to pay 300k for the same type of apt which would cost me $1500/month. So renting is much cheaper and NYC RE must go down by 50% at least to account for this difference. In addition, I can invest the downpayment money into apple stock which should double in another year if what Ino is saying is right (past performance predicts future). is this right brooks?

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i can't vouch for details but analysis seems to be spot on no?

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