Rent or Buy the Same Unit

"this sponsor apartment has easy board Approval!" sponsor owned says it all..talk about people in denial. no doubt a $5 K home depot kitchen upgrade and they figure they're off to the races.

That works out to 30 X the asking net rent (less annual maintenance) or a 3.3% sort of net yield on the transaction.

It's going to take a long time before rational pricing returns. Alas.

The Milan (120 W. 23rd)
http://www.streeteasy.com/nyc/building/120-west-23-street-new_york

Per Craigslist, they're trying to rent the lower-floor renovated two bed-two bath units.

For rent: $4250/$4350 with free month
For sale: $965,000 (supposedly reduced from 1.3 million)

By the way, anyone know what's going on with this building? Seems like nothing has been sold and the upper floors are going to stay rentals? I got a shady vibe from the place when I went to visit awhile back. Unfinished apartments, multiple different stories about what's going on, etc. The rental seems like an OK deal if there's not a catch. It would be hard to find the same type of finishes elsewhere in a rental.

I raised this subject for the first time over a year ago - and it was poo-pooed. WHAT ABOUT THE TAX BENEFIT?!

Okay, the simplest way to see if a property is overpriced is if you can buy it and rent it out and break even from the get-go. Break even means deduct everything except the mortgage principal (taxes, maintenance, etc.) using a standard 30-year fixed rate mortgage.

Judged like that - which is a reasonable method considering that your option instead of buying is renting, and you wouldn't want to buy an apartment to rent it out to yourself if you can't make money renting it out at that price to an unrelated third party - property prices in Manhattan have to fall at least 50% from today's already reduced levels.

It will take time, but it will also happen. Else inventories will rise far above today's 3-year supply.

You were poo-pooed by different ppl Steve.
They still may not agree with you about tax benefit.
The ppl that happened to have posted probably agree with you on all points. Not a hard concept for a man of your intelligence to grasp surely?

No, you assume, as many wall street analysts do, that maintenence, taxes, and insurance exactly offset tax deductions, and use asking price over asking rent to determine price/rent, exactly as TOP did. 22X is nothing. I posted some last month that were 30-40X.

ok jason, that's great. please post them. that's the purpose of the thread.
steve, no need to puff yourself up. if you posted about it a year ago, congratulations. do you want a prize? it's helpful to see the data, so i'm inviting people to post examples.

"They still may not agree with you about tax benefit."

I'm not discussing the mortgage tax deduction, divvie. I'm discussing buying an apartment and trying to rent it out at market rates to break even.

Can't be done. Not even close.

My BROADER point was that no matter which way you look at property prices, they are 2x higher than they should be, and therefore have to fall by half. It's not that one way of looking at property prices demonstrate that; ALL ways do.

What I further said (about tax benefits) is that they are offset by the opportunity cost, and if you count one, you have to count t'other. Seems reasonable to me - except it gives LICComment = tech_guy gas, because it doesn't give them the answer they want.

Good idea for a thread.

http://www.streeteasy.com/nyc/sale/211328-coop-236-west-26th-street-chelsea-new-york

For sale at 1.65m. For rent at $5,500

http://www.streeteasy.com/nyc/rental/492948-condo-88-greenwich-st-financial-district-new-york

The ad claims the owner's cost are $8000 a month, its for rent for $5k. Pretty cut and dried (and given what these units sold for, I doubt the ad is lying.)

veneto, unit 2002, about $13.5 monthly with 20% down, $7500 to rent.

Atelier, 42A, $11k to buy, $6500 (and they won't come close to that) to rent.

the mbr is 12 by 12?

stevejhx...
(1) if every transaction resulted in positive cash flow for the landlord then everyone and their mother would be doing it. That's not how it works. You anticipate(risk) higher rental payments in the near future as your major exp(mtg) stays fixed.

(2) but to offset that and common sense says....the principle paydown s/b included. Why would you not include it? Every mtg payment your loan balance decreases. And the best part is the accelerating effect of increasing principle payments. However, if you include the principle and your still net negative then that's a flag.

"I raised this subject for the first time over a year ago - and it was poo-pooed. WHAT ABOUT THE TAX BENEFIT?!"

I used your quote Steve.

Anyway, my point is that you sound as if ppl are only just now coming round to your supremely prescient POV that you were posting, gasp, over a year ago. Furthermore, it appears that you think you have won that argument conclusively because someone else has posted something similar.

All I am saying is that the ppl with different views have simply not yet posted so what is the point of the "I raised this subject for the first time over a year ago" post?

The best way to find examples is to do a search for sales listings with "rent" in the description. Many units include a line at the end of the description that says "also available for rent." I'll post some when I have time.

cc, for which unit? i don't see a floor plan for atelier, i can't imagine why none of the 1042sf 2/2s wouldn't be proud of their room dimension. the veneto mbr is a "spacious" 14x12, and someone the plan calls it 1339 sf. greenwich club doesn't list.

260 West End Avenue
$3,200 to rent, $619K to buy

http://www.streeteasy.com/nyc/sale/346386-coop-260-west-end-avenue-lincoln-square-new-york

i was waiting for this thread. here are 2 in the lionshead.

lionshead 10d $1.2 to buy or 5k to rent

http://www.streeteasy.com/nyc/sale/390710-condo-121-west-19th-street-chelsea-new-york

Down Payment $239,000
Mortgage Amount $956,000
Mortgage Payment $5,428
Total Monthly Payment $7,299

also, 2b is available to to buy for $1.5 or rent for 7200
http://www.streeteasy.com/nyc/sale/377184-condo-121-west-19th-street-chelsea-new-york

total monthly charges at that price are 9200.
i assumed a 5.5% mortgage rate with 20% down, which is probably too generous, but still doesn't matter much.

Cielo, 8A, $11.5k/$7k.

I'm assuming for all jumbos that can't easily be cashed down to conforming 20% down and 7% mortgage rate, fyi.

This is kind of fun.

Mortgage and other costs of owning do not need to equal rent for the price to make sense - for the 2 reasons that SteveF mentions.

Mortgage can be a little higher than rent, and it's still a perfectly good deal.

22x rent, however, is a red flag - the unit is overpriced. I think 15x rent is a good target.

I'm trying to follow the thread about the tax deductions, but I'm getting lost. What tax benefit is being discussed when you invest in real estate and rent it out?

Are we talking about your net monthly loss in the investment, or are we talking about the carrying costs, sans paydown of mortgage principal? Or something else entirely?

http://img.streeteasy.com/nyc/image/97/3206797.gif

42a

steveF...while I agree you need to include the principle paydown in the overall calculation, you must also take into consideration that in the rent scenario, the money you are not using towards principle paydown can be reinvested somewhere else. Do you get a better return today in the market or in real estate (with zero diversity)

cc, wow. only one foot smaller than the Veneto, however.

You know, another good thread might be developments that epitomize the folly of the bubble.

how about 8 month fdic insured cds at 1.8% interest + the very real benefit of getting back your principal at the end. we're also not counting the fairly considerable in and out transaction costs involved in a purchase, particularly an expensive condo.

301 East 79th Street #4A

1,150,000 to own with 1,500 maintenance = 7,043 (with 20% down at 6%)

or 4,800 to rent

Link, 25B, $10.4k/$6450.

108 E 82nd 6B (in bad shape)

$1.78m to sell, $8300 per month (no tax deductions) assuming their required 45% down but $10,500 (no tax deductions) on a 25% down theoretical.

$9000 to rent

http://www.streeteasy.com/nyc/sale/393226-coop-108-east-82nd-st-upper-east-side-new-york
http://www.streeteasy.com/nyc/rental/477518-coop-108-east-82nd-st-upper-east-side-new-york

steveF:

"(1) if every transaction resulted in positive cash flow for the landlord then everyone and their mother would be doing it."

Not true.

"You anticipate(risk) higher rental payments in the near future as your major exp(mtg) stays fixed."

Not necessarily true, either. Rents fall sometimes, and apartments lay unrented, and tenants trash the place. All things that need to be factored into the rent.

"(2) but to offset that and common sense says....the principle paydown s/b included."

First, it's "principal," and second, I was talking about the tax deductibility of owning a rental property. Principal paydown cannot be deducted as an expense.

"Why would you not include it?"

For the reason I state above.

"However, if you include the principle and your still net negative then that's a flag."

Since you can't include the "principal" for tax purposes, if you can't break even in the first year then the property is overpriced, because if you were to buy it you would be locking in negative cash flow UNLESS you were lucky enough with your guess that you'll be able to find someone willing to pay increased rent.

Not always possible.

reality is both (buy price and rental price) are absurd for a near-estate condition apartment

This one has a hot tub!!! I think the developer is renting it. Maybe you can rent to own!

Gramercy Starck, PH4D $17k/$11.5k.

Last one for the day. I realized I should add the asking price.

Avery, 16C, $1.995m/$11,848k/$7000k.

7k,obviously.

I don't see why everyone is so horrified by these price/rent ratios. If an owner is not going to use the apartment that he was dumb enough to buy in 08 for $2mm and now costing him $12mm to carry, what would he do?

Would he sell it for $1mm and take a $1mm loss?
Or would he rent it out for $6k/month and wait for the market to turn? The annual net carry cost is $72k, and if he can afford it he has 14 years for the market to return to 08 level before he loses the same $1mm (without even considering time value).

So this insane 27.7 price/rent ratio is basically the owner's way of saying he will not take a huge long term loss, but will take small short term losses and wait it out.

i think it is more amusement than horror.

of course, your thesis begins and ends with the theory that prices will go up given enough time. the problem is that there is no reason for prices to go up faster than general inflation plus it is far from clear how much more than are going to go down before they level off.

as others have noted, its kind of like waiting for the NASDAQ to reach 10,000 again. looks like a long wait indeed.

So CC, if you were this owner, what would you do?

cut my losses.

Hey, you are much too smart to be in these owner's shoes. Hope you have a way to convince them to cut their losses so we can all take advantage of them.

"there is no reason for prices to go up faster than general inflation"

rents are 100% correlated to real incomes, which are collapsing, especially in Manhattan.

"if you were this owner, what would you do?"

Not have bought an illiquid asset for a short-term flip, and not have bought an overpriced asset, not to have bought expecting never-ending 25% increases in property prices, and not have bought based on variable income like bonuses.

Oh. I didn't buy. Sorry. Just a bitter renter here.

hope you're kidding because i think that's part of the approach that got a lot of these people into deals that make no sense. when you walk around the city and see the tremendous amount of new construction, there should have been a warning signal...so much of it is absudly priced relative to its location. there really is a difference between riverside blvd and riverside drive. there really is a difference between east of lexington and west of lexington. i've looked at some of the new condos for rent and find their lack of size hilarious---yes, some have big views but a 12 by 12 master bedroom? for $2 million? it was crazy when things were booming---now, i don't know the right adjective.

Steve, we all know you are smartest guy on SE. How would you convince these owners to take their losses and move on?

time and more deals going through at real prices.

Aw, we are gonna just wait while they wait.

"rents are 100% correlated to real incomes, which are collapsing, especially in Manhattan."

Over like 30 year periods or longer. Surely you know that this has not been true in most of the people on this board's adult lifetimes.

Steve you are still the smartest person on SE but here is a Stats lesson for you. Correlation tells you direction of change but not size of change. 100% correlation can mean a lot of things. If rents go up 10% everytime income goes up 1%, and rents go down 1% everytime income goes down 10%, these two are still 100% correlated.

yeah, and what he said. But I knew what you meant...which is that over VERY long periods real estate prices go up at the same percentage as nominal GDP per capita growth. So they are both highly correlated AND in fact the same.

Nominal GDP, yes that makes sense. He said "real income" though. Is rent related to CPI or not? Boy I am so confused. Please don't tell me Steve was wrong.

justincase - Thanks for presenting the counterview! Sounds "smart" to me. ;)

239 CPW #4C, for sale for $1.8, to rent for 8k.
18-19x.
No one appears to be biting

look at the history of this poor place. first they tried to sell it toether with the upstairs neighbor...then by itself...now almost $1 million less than where they started. cpw without a park view is worse than amsterdam. always feel like a poor relation. oh well. don't think they'll get 8 K for the rental either.

I never thought the question here was whether someone should rent out their apartment or sell, it's should you rent or buy. so justincase, i'm not necessarily surprised that someone would rent at a loss. that just makes me even less likely to buy his neighbors comparable apartment (or his actual apartment, which is what this thread was so happily documenting before we got into another details of the rent/buy argument, things revert to mean, people, that's all). How about we just agree that 40% is kind of a high premium to own given the risk factors?

you are correct.

We have reached out to a few brokers about renting apartments that are listed as *both* for sale and for rent. Our logic is that many of these privately owned apartments have nicer kitchens/ bathrooms than similarly-priced rental stock.

With only one exception, the listing broker has told us the seller really doesn't want to rent the apartment and has declined to show us the apartment. Once we were told that the seller decided to drop the asking price (of the sale) instead of rent it out and another time that the seller only wanted to rent to prospective buyers. The other few times, brokers have just written us back and told us the apartment is no longer being offered for rent.

100 Riverside Blvd

for sale at $2.35M (almost 2K/sq ft.)
for rent at $7500

http://www.corcoran.com/property/listing.aspx?Region=NYC&ListingID=1337490
http://www.corcoran.com/property/listing.aspx?Region=NYC&ListingID=1423007

saw this place almost 3 months ago...incredible views but tiny space. wouldn't give you more than $4,500 a month...owner supposedly didn't care about money but that was 3 months ago...have a feeling she may be caring right around now.

Okay, this isn't the most egregious case at all, but just an example of how falling rents exacerbate the seller prices:

http://www.streeteasy.com/nyc/sale/210431-coop-345-east-56th-street-sutton-place-new-york
Total carrying costs: $4,009 a month to buy, versus exactly the same apartment for rent at $3,600:
http://www.streeteasy.com/nyc/rental/446712-coop-345-east-56th-street-sutton-place-new-york
It looks like the agents fuzzed out some of the pictures on the rental listing, perhaps to give the impression that it isn't the same unit. It looks like it is to me, though.

The $3,600 rent has been chopped from $3,800; the unit has apparently been on the market for over a year, going through multiple declines from $765,000. I don't love the area, but the layout is great and if I had the cash I'd go in and offer $500,000.

sorry, again: "exacerbate the pressure on." Apparently I can type faster than I can think.

And one more, then I have to actually do some work:
http://www.streeteasy.com/nyc/sale/219035-condo-100-west-39th-st-midtown-south-new-york
Also could be posted in the "most overpriced apartments" thread. $13,277 a month to buy, $10k a month to rent. And that rental price isn't exactly getting snapped up.
http://www.streeteasy.com/nyc/rental/471195-condo-100-west-39th-st-midtown-south-new-york

I predict multiple price chops for both listings.

$11,000/month to buy (assuming 20% down; 6.5% rate). $6200/month to rent.

http://www.streeteasy.com/nyc/sale/405566-condo-250-east-40th-st-murray-hill-new-york

$12,500/month to buy. $8250/month to rent.

http://www.streeteasy.com/nyc/sale/404942-condo-251-west-19th-st-chelsea-new-york

With your last two MBZ, you should add how much one could invest in A-grad munis or TIPs or whatever else with the not spent down payment.

but also since you don't count the tax savings, its best to usually just do mortgage versus rent, since common charges etc usually cancels out mortgage tax savings, roughly.

are you guys taking into account the downpayment too? What about real estate taxes?--makes it even a greater disparity

$6,750/mo to buy, $4,000/mo to rent

(assuming 20% (259K) down with 5.0% 30 year fixed)

http://www.streeteasy.com/nyc/sale/315660-coop-260-west-22nd-street-chelsea-new-york

http://www.streeteasy.com/nyc/sale/358587-condop-2373-broadway-upper-west-side-new-york

"Great Investment Opportunity. Own this North West Corner 2BR/2BA unit on 15th floor with huge terrace with income. Tenant paying $5900/mo. Rent until 11/30/2009."

Listed at $1.395, with >$3,000 maintenance:
Down Payment $348,750
Mortgage Amount$1,046,250
Mortgage Payment$6,273
Total Monthly Payment$9,391

If you put down 67%, your monthly costs will equal the rental price.

If you put down 100%, even if the lease can be renewed for the same price and the maintenance does not go up, the return on your $1.395 million is less than 2.4%.

So much for a great investment opportunity.

9 west 20th apt 10 - rent for 9k or buy for $2.2m.

pass on both, but renting seems about 30% cheaper at least.

http://www.streeteasy.com/nyc/sale/357044-condo-9-west-20th-street-flatiron-new-york

guess he changes his policy on never renting
http://www.danshamptons.com/content/hamptonstyle/aug_07_3/16.html

> 22X is nothing. I posted some last month that were 30-40X.

Agreed, 22x is nothing. I just saw a 30x in the same building... and the rental was 20% bigger!

20 w. 64th - saw it today. 40% difference in monthly after my 300K + closing fees.

buy
http://www.streeteasy.com/nyc/sale/442103-condo-20-west-64th-street-lincoln-square-new-york

or rent
http://www.streeteasy.com/nyc/rental/572450-condo-20-west-64th-street-lincoln-square-new-york

Here's another one:

http://www.streeteasy.com/nyc/sale/473038-coop-420-east-64th-street-lenox-hill-new-york

$999k to buy, $2153 maintenance(which comes out at $6,346 a month after 30% down).

$3800 to rent.

And another:

http://www.streeteasy.com/nyc/sale/471554-coop-7-east-78th-street-upper-east-side-new-york

$1.3 M to buy ($6,286 monthly after 30% down).

$4k a month to rent.

http://www.streeteasy.com/nyc/sale/416377-condo-52-east-end-avenue-yorkville-new-york

You can rent this unit for $3100 or buy for 699,999 how can they justify this asking price when two in the building went in the 500's range. I often wonder why sellers keep asking such an unrealistic price if their goal is really for the unit to sell and this one is not moving wouldnt it be in their intrest to list it at what the market is TODAY....