Cheaper to own than to rent?

Congrats, you found $200/ft in a $900/ft market... Where in the Bronx do you live?

Oh yeah, what 1700 square foot place goes for $2700 a month? Bedford-Stuyvesant?

He MUST mean 700 square feet, for the record.

No plans on 168th -- just a general comment. And I'm currently in Lower Manhattan. And yes, 1700 square feet (OK, actually it's more like 1686). For the record.

He's in Alphabet City somewhere (and plans to retire there). Let's move on, folks. Nothing to see here.

JuiceMan: THANK YOU! Your post just proved my point.

NOWHERE in that document is the "mortgage tax benefit" or any other tax benefit cited. It's not there. It does say, however, regarding rents and carrying costs:

"The cost should be the same whether the household rents or owns."

"If the household chooses to own, the cost is the sum of mortgage interest payment and
the implicit costs of forgone interest income and depreciation."

"if this was a US based paper it would also exclude the tax benefit."

Yes it would (Hong Kong has no income tax) which would be offset by the foregoing income (opportunity cost) just exactly as I said. See above.

So - include the one, include the other. Exclude the one, exclude the other.

And the reason that you don't deduct the principal payment as an expense is that principal is not an expense. You can deduct depreciation, however (of the building, not of the land).

This thread has 4 or 5 people that just love to go to any lengths to falsely manipulate facts and analyses to justify their decision to rent for the last 10+ years. Sad.

LICC - whereas you need go to no great lengths at all to demonstrate what a buffoon you are.

LICC, think of the personal hell you're in: because you made the singular worst financial decision of your life by buying an apartment in LIC at the top of the market, you are condemned to spend the rest of your life on Streeteasy trying to convince yourself you didn't screw up.

But, alas, there are so very many people here to remind you of reality.

That is your hell.

Well, LICC, your BFF JuiceMan published a link to an article that he said proved his point, which squarely and plainly proves mine. Include the mortgage tax deduction and you need to include the opportunity cost; the former amortizes over time; the latter accretes. And therefore they offset each other. That doesn't even include the significant transaction costs involved in owning real estate.

So, for those of you who claim that real estate isn't 50% to 100% overpriced, if you don't like my way of doing it, use JuiceMan's, which plainly says that "The cost should be the same whether the household rents or owns."

If they aren't the same, one or the other is overpriced.

Which one, and by how much?

(Funny how the blowhards haven't been able to post even ONE LINK to a property that disproves what I said, and ironically post links to articles that confirm what I said!)

Not to mention a chart of the ratio over time that shows 2005 as a never before seen high, at the levels we currently trade at.

There's a lot to read here and I'm impatient so here's my contribution and scenario.

A 50% down purchase allows me to save 2000/mth over my rental. We have a long time horizon and absolutely hate renting.

Assume a $1M purchase with 50% down and $1000 common charges. We have a 4.5% rate quote which will put our total monthly payments at roughly $3500. We would be cash flow positive if we were to rent this apartment.

If I was to put the minimum 20% down my monthly number would be $5000 and affordability on one salary becomes a stretch, so does renting to a third party.

Yes, I am risking capital. Please spare me the lecture that I could do better in the market..

And by the way, I'm not considering any tax benefit here. See, nice and simple, and a little surprise at the end of the year.

What are you earning on your $500k? A very low figure, that's the point. Also paying $1mm is a lot for an apartment that you are saying can't command $5000/month in the rental market. Its not clear how you save $2000 a month by paying $3500 for something you cant rent out for $5000. No one is saying you need to be in the stock market...that is just arguing vs. something no one is saying.

The cost to own must incorporate the tax benefit or else you are living in fantasy land.
steve, you just can't understand how opportunity costs work. If you want to consider the intangible opportunity cost, then you have to also incorporate the potential long term price appreciation. It makes no sense otherwise.

The problem is when you buy at these levels, the long term price appreciation is pretty shitty...and the near term depreciation is pretty profound. Enjoy it.

You refuse to look at a graph that clearly shows price to rent ratios are higher than at any time in the last 25 years...and you call it equilibrium.

Rhino, that article and graph were from two and a half years ago. The author said that 25% of the increase in the ratio is attributable to lower interest rates, and rates are even lower now than they were then. He also said a price decline of 20% would bring the ratio to the historical norm. Did you even read the article that you think supports your position? Given the price decline since 2006 prices and the lower rates of today, you basically contradicted your own argument.

Rhino, so if you bought today, you don't think prices will be higher in 10-15 years? Do you think rents will be higher than they are today?

Rhino86 - Gee whiz, and I thought I made it clear. So you don't understand how this works for me? I'm pissing 5500 a month down the drain today. I can buy for 3500/mth with 500K down and keep another 500k in the bank, market, treasuries, bonds etc etc.. You know, diversified portfolio. And yes, renting a 1M place for 5k would not be a slam dunk today.

"The cost to own must incorporate the tax benefit or else you are living in fantasy land."

I said fine - as long as you include the opportunity cost. Just like JuiceMan's formula says. Find an apartment, use the formula, and come back to me.

"steve, you just can't understand how opportunity costs work."

I don't? I quoted how it worked directly from JuiceMan's article.

"If you want to consider the intangible opportunity cost, then you have to also incorporate the potential long term price appreciation."

What is the intangible opportunity cost?

"It makes no sense otherwise."

If you use other formulas that include the "potential long-term price appreciation," you will see that when people think prices are going to fall, NO ONE will buy. Property prices, you may have noticed, do go down, and quite precipitously, and tend to stay down for long periods of time. Last boom in NYC - 14 year bust cycle.

So go ahead, LICC - the challenge remains: find an apartment that's not 50% to 100% overpriced based on JuiceMan's article that it should cost the same to own as to rent. If you want to include the tax benefit, go ahead - IF you include the opportunity cost as defined in JuiceMan's article.

You can't do it. You lose!

You seek rhino, when shown the facts - as presented by his BFF JuiceMan - LICC limits himself to saying things like this: "This thread has 4 or 5 people that just love to go to any lengths to falsely manipulate facts and analyses to justify their decision to rent for the last 10+ years. Sad." (After, of course, he said he was "civil.")

Yet he can't come up with ONE SINGLE EXAMPLE of an apartment that is not vastly overpriced using the published academic formulas. He can if he uses only the benefit part, but he refuses to look at the cost side.

Use the cap rate. Use JuiceMan's formula. Use (the equivalent) one that I started the thread out with - finding an apartment that you could rent out to an unrelated third party and break even. Use the imputed rent formula here:

http://real.wharton.upenn.edu/~sinai/papers/Housing-Bubble-Himmelberg-Mayer-Sinai-wp-09-07-2005.pdf

Use the historical rent to price ratio of 12x annual rent for New York. Use PITI, use 40x monthly rent in income. Use any REAL formula, and you come up with the EXACT same answer.

Which is why LICC is stuck where he is. 215 comments on this thread so far, and not a single example from JuiceMan or LICC to prove their "theory."

Rhino, "Also bear in mind, mobs don't need to crunch numbers to reach the right conclusion."

Good point. The mob mentality was buy no matter what. It's changing now. People's perceptions of money have changed for all income classes. People are scared off by big debt. The gent's comment about retirement is not to be pooh-poohed. A single person with no kids can realistically say, "I will live in a one-brm the rest of my life." Of course, ask that person when he's 55 whether he still plans to retire in Manhattan.

steve, the formula was simple - how much does it cost out of pocket to own v. to rent. I took the most random sample available - the first random listing on streeteasy's home page, and showed that you were wrong.
Your challenge is worthless. It bears nothing on the original discussion, that rents are not as out of line with prices as you assert, and you have shown absolutely nothing to dispute that. You can go play with your useless challenge and have all the fun with it you want, but it is still worthless.
When Rhino is looking at an article over two years old and proclaiming it as showing the current situation, and then calling others buffoon when he can't even read the date of the article he is using to back up his claim, I don't think you can say I am uncivil for pointing out how you and he are using mistake-filled analyses.

LICC, what is the difference if the article is dated, if it shows that price to rent ratios have been making new 25 year highs since 2004? You make me laugh. Sure I know it is dated...but it doesn't matter because it clearly shows the average price to rent ratio is roughly at 2001 levels. Enjoy the fringe.

I don't really see why people are arguing. It is clear that RE was a bubble investment from, probably 2003 to now.

The question stevejhx asked was whether it should be possible to find lots of for sale properties that one could rent out at a profit.

In a city with incomes high relative to the rest of the country, it is normal that the interest deductibility plays a large factor in the equilibrium price. Also, coops have barriers to rental. The question probably isn't the right one.

The more serious question is why people would pay about the same rent/sale AFTER TAX. That's crazy. 10% down, all-interest, etc, drove prices insanely high. I'm currently paying much less per month (about 40%) to own than to rent, BUT I paid large transaction costs, have locked up a lot of capital, am holding an illiquid asset, etc.

Reality: a 17th fl 400sf coop studio that I bought in 2000 (sold 2003) cost $125K on 9th St btw 4th and 3rd Aves (by Astor Pl). It sold in 2006 for triple that. That shows that market timing has been very important lately.

Does anyone know when was the inflection point in terms of breaking even on owning and renting out an apartment in the city? (I'm taking a wild guess, maybe 2003?) Also, what was the unlevered return back in.. say 1990 '95 '00?

I'd guess 1999 or 2000. I definitely could have rented for less than I paid when I bought in 2000. And it pissed me off, too, but I hadn't yet had my "rentals are a viable way of living" moment yet.

steve, as usual you are interpreting the formula as you prefer, not as it is. Net cost to the owner should be compared to rent, it says it in the paper (and every paper you have posted on this site). NET cost steve. It is the only way it works.

Rhino, I did read your chart. What it tells me is prices have increased disproportionally to rents. We have all agreed on that. What does it tell you about equilibrium?

steve, Rhino, or anyone else, post something that says specifically that the tax benefit or principal should not be included when you compare ownership costs to rent. If you find something, I will read it and happily retract. Until then, this is a circular exercise. I don't care how many capital letters or !!!!!! steve uses, he hasn't provided any evidence for his claims.

"In a city with incomes high relative to the rest of the country, it is normal that the interest deductibility plays a large factor in the equilibrium price. Also, coops have barriers to rental. The question probably isn't the right one."

HarlemNWCP, I have said this many times and agree 100%. I have to work today but maybe you can teach steve something. He thinks that formulas meant for Albany can be used in Manhattan. He also doesn't understand how you can have a different equilibrium depending on the income of a person who owns the apartment. Good luck.

Iwanttoown, I have a friend who bought a walk up studio in 1996 for like $65k. She rented it for like $1100 and the maintenance was around $450. So the unlevered return was around 12%.

"The more serious question is why people would pay about the same rent/sale AFTER TAX." These guys have answered you...Answers include 'I just hate renting' or 'emotional blah blah' or 'over the long long term rents rise and property appreciates'.

The key here they miss is if tax benefits simply get you exactly to rental cost, its not great timing. Its very poor timing.

"Rhino, I did read your chart. What it tells me is prices have increased disproportionally to rents. We have all agreed on that. What does it tell you about equilibrium?"

I think if you look at a 20 year chart from 1982 to 2002, and then you literally go OFF THE FUCKING CHART, then you can rest assured that you are not in equilibrium. GET IT?

Generally people would agree OFF THE CHART not equal to EQUILIBRIUM.

Rhino, I think you hit it on the head: the sale/rent to the individual occupant should be about the entire deductibility advantage; if it is a tighter spread sell; if it is a wider spread buy.

JuiceMan, you're hilarious. You post a link to a formula and then you deny that the formula says what it does.

SOME formulas include the tax benefit; some don't. I posted one that does. Here's one that doesn't:

http://www.cnbc.com/id/25625777

Here's another one:

http://money.cnn.com/magazines/fortune/price_rent_ratios/

Here's another one:

http://www.bearmarketinvestments.com/house-prices-real-prices-price-to-rent-and-price-to-income

You want me to keep on going, or are you ready to recant?

The fact is, you can compare prices to rents with the benefit included or without. If you knew the first thing about economics you would understand why: look up "discounting." Nonetheless, if you do want to SPECIFICALLY include all the factors that go into the ratio, you need to count the debits and the credits, not just the credits, which is what you do by ignoring your own post: include the tax benefit if you will, but then include the opportunity cost as your own formula does.

JuiceMan, you haven't recanted yet! Do I need to find you more formulas?

Steve, simple question for you:

If you have 10k of nyc muni's (triple tax-free), would you put them into your IRA, or hold them in a regular non-qualified account?

Why, printer, would anyone put a tax-fee investment in a tax-free account?

so then you are saying that tax treatment of the interest has an impact on whether the investment has merit?

steve, been down this road before. If you are going to post a bunch of high level index based formulas that are used to illustrate the overall price to rent issue, you will never answer the question. None of these approaches could possibly include a tax benefit because it would be an IMPOSSIBLE !!!!! calculation at a MACRO level!!!!!!!

steve, I know you like to play with these formulas but they don't work. Just answer this, how should an individual owner in Manhattan measure the total cost per month / year for an apartment that they live in? What does it cost out of pocket? Whatever that cost is, should be compared to rent. This is SIMPLE!!!SIMPLE!!!SIMPLE!!!!

for a moment, let's pretend the tax benefits didn't exist. An apt is still worth more to an owner-occupier than it is to an investor (and I'm not talking emotional benefits, customization, etc.)

Why? A prudent investor would assume, let's say, that the apt is rented for only 11 months of the year. Then there are the management costs - i think management companies charge 10-20% of the rent (though I don't really know for sure), and of course there is the regular painting, etc. that needs to be done upon tenant turnover, and some equivalent that a bank has for 'reserve against bad debt, etc." - especially in NYC with its strong pro-tenant laws. And of course the occasional tenant who trashes the place beyond the security deposit.

When I own and occupy the place, there is continuous tenancy, I don't have to manage the property, I don't have to reserve for non-paying tenants, and I don't worry about trashing my own place. All that would easily add up to a 20-30% premium I could pay for owner-occupying vs. landlord rental, and still end up in the same place cash flow wise.

Its just a matter of fact that certain assets are worth more in certain pockets than in others. Like muni-bonds - if owned in my IRA, I can accept a lower yield than if in a non-qualified account, b/c for the identical risk I end up with an equivilent (or greater) return.

printer: Steve, simple question for you:

If you have 10k of nyc muni's (triple tax-free), would you put them into your IRA, or hold them in a regular non-qualified account?

stevejhx: Why, printer, would anyone put a tax-fee investment in a tax-free account?

printer: so then you are saying that tax treatment of the interest has an impact on whether the investment has merit?

Very clever, printer! Let's see how Steve gets himself out of this one. 3 pages of quotes and data from Google?

So JuiceMan, let's see:

1) You post a formula that you claim proves your point, when it actually proves my point.
2) You ask me to show you formulas that don't include the "tax benefit," which I do, then you change the question.
3) You say you'll recant if I can show you formulas that don't include the tax benefit, then you don't.
4) You show a formula, ask for formulas, then say formulas don't work.

The point seems to be that the only formula that works is the one you've made up in your mind.

SIMPLE!!!! SIMPLE!!!! SIMPLE!!!!

So here's the thing, JuiceMan: if you are going to use a formula that implicitly takes all variables into account, then you can't then use that same formula (or ratio) and explicitly take certain variables into account. You can't take a formula that explicitly takes all variables into account, then exclude the ones you don't like.

"how should an individual owner in Manhattan measure the total cost per month / year for an apartment that they live in?"

I'll quote the paper you quoted: "The cost should be the same whether the household rents or owns. If the household chooses to own, the cost is the sum of mortgage interest payment and the implicit costs of forgone interest income and depreciation."

And I'll let you take the interest costs net of taxes. But not only for the first year - rather, throughout the life of the mortgage, as the benefits of the tax deduction amortize, while the implicit costs of foregone interest accrete.

Yet JuiceMan says: "What does it cost out of pocket? Whatever that cost is, should be compared to rent."

So you want to ignore the effect of plopping down a huge down payment and all the transaction costs, because it will give you the answer you want. But you can't ignore that.

If you want to change the example and come up with the cap rate, I'll even agree to that - it gets rid of the financing portion, as rhino so correctly states above.

printer - I have no idea what you're talking about.

It comes down to a bunch of assumptions

fill these in and we can actually get some answers

RENT ASSUMPTIONS
Monthly Rent Payments
Inflation Rate per year
Alternative Investment Interest Rate
Holding Period

BUY ASSUMPTIONS
Home Purhcase Price
Mortage Interest Rate
Down Payment Percentage
Appreciate Percentage
Closing Costs
Selling Costs
Marginal Tax Rate
Holding Period
Mortgage Term
Property Taxes
Maintenance

Fill this in and we would get a real answer --

hvd_free, thanks. Now I see what printer was trying (laboriously) to get to.

Yet I've already answered it. You wouldn't put a tax free investment in a tax-deferred account that you would subsequently have to pay taxes on, upon withdrawal. That's not even remotely similar to what we're discussing here.

The question should be, when is it advantageous to accept the lower interest rate on tax-exempt bonds? The answer is when your interest income would be higher after tax.

IRA's have nothing to do with it.

It's still not a valid question, however: the question should be, in JuiceMan's tortured example, how to treat the foregone income that can be used to offset rent?

That's the part that JuiceMan doesn't want to talk about, because it doesn't give him the answer he wants.

This isn't about what economists believe or what we beleive. The fact of the matter is that the only time buyers 'pay' for tax benefits with a higher purchase price is during now widely recognized bubble periods. These include 2004-2008 and the late 1980s...The latter has been proven as a poor time to buy and the former is process of same. There really is nothing more on this to say. Sure, it is in some sense logical for a buyer to appreciate his tax breaks...but when you make that stretch to put yourself in an apartment purchase, the market has gone down. What debate can there be? Prices went down 40% from late 80s peaks before recovering. You can say 'I am a long term buyer' but who in their right mind would deliberatedly buy poorly? You prove you don't understand the history.

Steve - you FINALLY agree that one needs to take taxes into account when looking at the cost of owning vs. renting? I thought this day would never come!

You said:
"The question should be, when is it advantageous to accept the lower interest rate on tax-exempt bonds? The answer is when your interest income would be higher after tax"

Which is the equivalent of saying,
"The question should be, when is it advantageous to accept a higher gross cost on owning vs. renting? The answer is when your out-of-pocket costs would be less after tax"

I don't know if this changes the subject of the thread, steve, but you asked whether one could buy an apartment and then rent it for a profit at all. I'm quite sure you could, but not in Manhattan, and probably not in most neighborhoods, for that matter. I did give you an example of a studio that sold in a building I know of. I could look it up in ACRIS for you, if you want.

The reason I mention this is that I don't think prices in these non-Manhattan neighborhoods are immune to huge declines just because their carrying costs are closer to rents. In times like these, as prices decline in more desirable locations, especially on Manhattan Island, people who otherwise might have settled for LIC or Rego Park or Prospect Heights spring for something smaller in the City. How does that affect, if at all, your challenge? I don't think I could find **many** somewhat profitable examples for you, but some do exist.

I prove it, Rhino?

I've already stated that the "tax benefits" are illusory as they are offset by increased prices. That's why rents do indeed equal owners' carrying costs, and why my initial post is correct. Explicitly or implicitly take any of these factors into account, in the long-term markets will be in equilibrium.

The only ones who truly benefited from the tax benefits (as with the only ones who truly benefited with lower interest rates) are the ones who took advantage of buying before the effect could spread throughout the system. Thereafter, prices rose to the point where rent equals owners' carrying costs. That is also why regardless of how you calculate it, the answer always comes out the same: the market constraint for rents and owners' carrying costs are PITI, and (in NYC) 40x monthly rent in incomes. For owner-occupied residential real estate, prices will rise and fall depending on interest rates, tax benefits, etc., until the cost is the same in the long-term.

But even Econ 101 is beyond JuiceMan and LICC, who insist on looking only at the elements that will give them the answers they want.

There are some multi-family townhouses in 10024/25 that are now asking prices at which one would "break even" whether as a partial occupant or investor.

No the 'prove it' was to Juice and LICC. What they prove is the bubble mentality - that tax benefits are actually benefits when you pay a high enough price that you cancel them - is still alive and well. During most periods, they are an actual perk, because prices are low enough relative to rents to make the gross charges equal or less than rent. No one denies the tax deduction... What I deny is that anyone paid for them before 2004...and guess what we're at 2004 price levels and falling. [cue LOL from Juice]. Yes, people are having trouble selling at their 2004 in many instances. Steve, I would take your argument even further. Apartments should be prices to throw a little cash off with a 70% mortgage, not just = rent.

wait - so now Steve you are claiming that you have always said that fair value is when rents are equal after-tax cost of owning?

not trying to prove anything here. i think there's a large amount of room for further decline, and i don't feel any desire to jump in now. but i can see how something like this apartment below might be compelling to a young couple. and the rent/buy numbers aren't too bad (although I think rents will continue to decline also).

http://www.streeteasy.com/nyc/sale/386498-coop-533-east-84th-street-yorkville-new-york

"so now Steve you are claiming that you have always said that fair value is when rents are equal after-tax cost of owning?"

No. I'm saying that "fair value" is when you can purchase an apartment using standard financing and rent it out to an unrelated third party without losing money. That would allow you to deduct everything (property tax, maintenance, insurance, etc.) except mortgage principal payments.

If you want to deduct the "mortgage interest" from your taxes, then you have to deduct the opportunity cost of not investing the money elsewhere, from rent.

Read rhino's arguments - they are correct.

"This thread has 4 or 5 people that just love to go to any lengths to falsely manipulate facts and analyses to justify their decision to rent for the last 10+ years. Sad."

Completely unlike all those who tried to justify their purchase decisions over the last few years... except for the facts and analysis part...

This will all be academic when condo prices have to fall low enough to attract cash flow investors. Also note that Steve's fair value is the average, not the average trough.

steve and rhino are talking in circles, which is what they do when they know they are blatantly wrong. Now they seem to say that if prices are high, the tax benefit is cancelled out and you shouldn't take it into account when determining actual out-of-pocket costs of owning, but if price is low then the tax benefit are then actual benefits.

For steve - the person who insists that the opportunity costs of buying should be based on your entire purchase price rather than the down payment, and that the tax benefit should be measured by your effective tax rate rather than your marginal rate or blended marginal rate - to try to be giving Econ 101 lessons is laughable.

Once again you are correct, rhino.

LICC, what is your base argument here? You have decided a bubble practice is normal, when every piece of data shows you the relationship between buying and renting in Manhattan is way out of whack? Honestly what the fuck is your point? If you don't care that it is so, that is fine. But people who prefer to make sensible purchases do care.

but Steve, I just explained to you that renting out to a third party is a higher risk investment than renting it out to yourself, and therefore requires a higher return to compensate for that risk.
To say that fair value is for them to be equal is not correct - that's like saying that I should get the same yield on a US Treasury as on an identically structured bond from a lower rated issuer. Could it happen, yes - but that would be a result of inefficient, not efficient pricing.

LICC, your BFF JuiceMan posted a formula. Plug your numbers for your favorite apartment into the what JuiceMan claimed is the right way to do it, and get back to me.

In over 250 posts not one person who claims that real estate is not overpriced has been able to post a single example of an apartment you could buy and make money on by renting it to an unrelated third party.

NOT ONE EXAMPLE!

So LICC, I say fine, do it your way: use the down payment not the leveraged down payment (which is incorrect), and use the top marginal rate rather than the effective rate (which is also incorrect), just, when comparing rents to out-of-pocket owners' carrying costs (net of tax benefit), calculate the rent net of income not received from investing the down payment elsewhere, and amortize the transaction costs into the cost of ownership.

Sound fair? Or is something wrong with this, as well?

"I just explained to you that renting out to a third party is a higher risk investment than renting it out to yourself, and therefore requires a higher return to compensate for that risk."

Printer, you tire me. You do get a higher return on rental property because someone else is paying off your principal.

Do you have any more objections?

"Which is the equivalent of saying,"The question should be, when is it advantageous to accept a higher gross cost on owning vs. renting? The answer is when your out-of-pocket costs would be less after tax""

No it's not. Include the opportunity cost, and then you have the correct answer.

steve, no one cares about your example because, like I said before, it is worthless. You are comparing apples to oranges. It makes no sense for an equilibrium market to have home ownership costs to be less than the amount you can receive in rents on an equivalent investment property. You also have no intelligent response for printer's points, as usual. And if you want to deduct opportunity costs, you have to add back in price appreciation. You like to ignore the benefits and only account for costs, but that's not how things work in the real world.

steve also loses more and more credibility, and seems more and more like a lunatic, when he tries to defend his positions on the effective v. marginal tax rate and the full price opportunity cost. Whenever anyone might think that steve knows what he is talking about, bring up those topics and everyone can see that he doesn't.

LICC are you retarded? You are the arbiter of the real world? Your idea of equilibrium has never been equilibrium until the last three years of the biggest real estate bubble in history.

You are right, add back appreciation to all the purchases made under your logic from 2005 to 2007. Its a negative number shithead.

LICC, you are funny: "It makes no sense for an equilibrium market to have home ownership costs to be less than the amount you can receive in rents on an equivalent investment property."

I never said that. I said they should be the same, and so does the paper that your BFF JuiceMan quoted. It is, in fact, a basic principle of economics: if the output value of two similar goods is the same, they should cost the same.

And though you're wrong, I've ceded for the purposes of this argument the marginal tax rate and opportunity cost. Do it your way. You can even use the "price appreciation" on real estate, if you use the moving averages cited in the smartmoney.com link I posted above, for both real estate and stocks.

So - I've given you EVERYTHING you want. Now, come back to us all with a property that works.

"You also have no intelligent response for printer's points, as usual."

It's hard to have an intelligent response to stupid question, but I did answer printer: I said that investment real estate has a higher return than owner-occupied real estate, because someone else pays off the principal.

K?

OK, i pulled up the taxes for 2007 (2008 won't work, for reasons i won't give). Out of a monthly payment of $2900, $2500 goes toward real estate taxes and mortgage interest. $2500x12=$30k. Each of those dollars lie in the top marginal tax bracket. I don't know what top marginal rate is/was, maybe 33%? That would be $9900. Our AMT was $11,983. I suspect that the real estate taxes are what pushed us into the AMT (going forward state and local income taxes are more likely in NY to do it on their own, I would think).

"It makes no sense for an equilibrium market to have home ownership costs to be less than the amount you can receive in rents on an equivalent investment property. "

You can say that as much as you want, but it happens all the time. In fact, it happens for years on end in NYC.

The interesting question that stevejhx raises is: how can rentals make money if buying is so expensive?

I expect the answer is the same as what's happening with new developments: corporate sources of capital are necessary to lower the cost of financing sufficiently to make rentals cashflow positive. New developments are bulkselling: 1) at a steep discount that they will not offer to purchasers of individual units; 2) with deep capital reserves to borrow cheaply.

So, buying a single unit as an investor will probably never make much sense.

"You can say that as much as you want, but it happens all the time. In fact, it happens for years on end in NYC."

Its actually the norm. Its actually equilibrium! Owning is a risk. Not everyone one has the down payment, those who do should be rewarded.

> The interesting question that stevejhx raises is: how can rentals make money if buying is so
> expensive?

Who said they are?

nyc10022: fair question, and I imagine there are some in trouble now with falling rents.

But why would anyone have built a rental building in recent years? Some were built and this shows that rental property is not normally a losing proposition.

But for the individual investor, it could well be, generally. That was my speculation.

Harlem, they started off building them because money was really cheap and demographics were pointing to future demand. Mostly the buildings that went up with the original intent of becoming rentals were built on land parcels that had been owned by a developer for some time.

I'm still waiting on the properties, LICC & JuiceMan....

They don't think its the way to look at it, even though history demonstrates that it is.

Historically owners' carrying costs = market rents = 12x annual rent. The reason is because the constraints are the same: 30% PITI, 40x monthly rent in income = 12x annual rent (varies, depending on interest rates & other factors).

You can't get financing taking the mortgage interest deduction into account. But to humor these people I've conceded for argument's sake to everything they want.

And still they can't come up with a single example.

Every apartment is an example with 100% down. It boils down to risk. Apparently 2% cap rates are appropriate to some people. 12x rent on my rental is a 5.5% cap rate, taking a guess at what the maintenance would be.

Which indicates that properties are 50% overpriced.

My example gives you the typical situation facing a buyer: rent, or take out a 30-year 80/20 mortgage.

I gave them what they wanted: calculate the owners' carrying costs net of tax benefits IF they calculate rent net of what would be earned on stocks (as risky as owner-occupied residential real estate) in an amount equal to the 20% down.

The further out in time you go the more advantageous renting is, as rents increase with wages, but stocks increase at the rate of corporate profits.

Why are you guys wasting brain cells on JM and LIC?

steve, I just did the same random test - I clicked on the first unit listed on the streeteasy homepage under featured listings and looked at the building.

Here you go: http://www.streeteasy.com/nyc/sale/374765-coop-77-bleecker-street-noho-new-york

Apt. 331 - listed for $799k, and just listed for rent at $4500. With 20% down, the monthly after-tax costs to own are well under $4500.

That was simple.

Honest question for stevejhx, I was wondering why you would continue to spend so much time on a real estate website if you think prices are far from a bottom and it will take 10+ years for a recovery? It sounds like you wouldn't touch an investment for 3-5 years.

Stocks need to be bought cheap as well, else you don't get 'equity like' returns as we have seen.

I'd argue opportunity cost needs to be applied to the whole purchase, otherwise your opportunity cost is lower, the less you put down...even though you have the same exposure. I don't know what I think the right number is... But I know its higher than 2-3%, and 10% is a slam dunk. 5.5% @ 12x seems light to me....unless its a lifetime place and you pay all cash...5.5% is a respectable yield with a long view.

I don't think it would rent for 4500. There's a very similar rental listing in same building for 3200. Note that the main diff. (reno tastes aside) is that there is a bigger mezzanine. Which would be valuable except that it looks to be about 6 ft. high.

You did half of it, LICC. THen take your $799,0000 * 20% = $160,000 * 5% = $8000 = $655 per month in lost income.

IF it was rented at $4,500 (which I doubt as I know that building & area very well), it would still cost (with opportunity cost) much less than it cost to own. And that is already after a significant (24%) price reduction:

05/20/2008 Previously Listed in StreetEasy by Halstead Property at $1,050,000.
01/13/2009 Listed in StreetEasy by Halstead Property at $950,000.
01/21/2009 Delisted by Halstead Property. Last priced at $950,000.
02/27/2009 Price decreased by 11% to $850,000.
04/06/2009 Price decreased by 6% to $799,000.

That was simple.

bob420, I'm bored.

and yes nyc10023 - there is no way that apartment will rent for $4,500 - $63 psf. The apartment is actually about 650 square feet, and the going rate is $53 psf,

The 331 unit is bigger than the other one, not a valid comparison.

So steve has to use his flawed opportunity cost analysis to imagine that he hasn't just been proven wrong again.
Why are you using 5%? Money Market funds and short-term Treasury's aren't that high. And where is your adding in of the long-term price appreciation?

Looking at out-of-pocket costs, a completely random choice of building shows that steve is wrong again.

That was simple.

Where can you get a list of comparables for rents?

It's not much bigger than the 3200 unit. Certainly not a greater number of rooms, think the additional mezzanine/dining space is worth 1300/month? In addition, the 3200 unit is still on the market.

We're going around in circles again. I can look at your listings all you like, but you are not willing to look at
the ones we've pointed out.

"Why are you using 5%? Money Market funds and short-term Treasury's aren't that high. And where is your adding in of the long-term price appreciation?"

Oh, LICC! You compare risk-free Treasuries to high-risk real estate?

And you only include price appreciation, not depreciation?

I said using historical values.

Try again!

Why would you include depreciation if you are using long-term historical values? You continue to contradict yourself. You also conveniently exclude long-term increases in rental costs.

Try again!

Rhino, in your argument, the 5.5% doesn't include ANY increase in rental income - are you contending that over 30yrs rents will be flat in nominal terms? b/c if not, and assuming your 100% down argument, the return will be boosted by the increase in rental income you receive over the years. do you know what the long term rate (nominal) of rents have been in Manhattan?

"Why would you include depreciation if you are using long-term historical values?"

It depends on where you start in the cycle and which formula you use. Some formulas are only predictive of the next year; some include long-term predictions. It depends. Pick the one you want - if you go short- to medium-term starting with today's prices, you will likely see depreciation.

"You also conveniently exclude long-term increases in rental costs."

I don't exclude anything. Calculate them - rents increase at the same rate as wages.

Let's get to the bottom of this. Why don't we just stick to the facts and try to do the proper math using arguments from both LICC and Steve, i.e. factoring in:

1) tax benefits using marginal rate of 40% (everyone seems to be willing to accept this)
2) opportunity cost limited to downpayment (although I have to agree with Steve and Rhino, this is not really fair since your levered equity is much riskier so would command a much higher yield, but I would go with LICC since I realistically would not lever my equity if I was renting and investing the cash): let's say 6% (I'm not saying I would necessarily get that, I am just saying I would require this yield considering the risk involved here)
3) potential for appreciation / depreciation: I agree with LICC we should factor it in (I think everyone agrees with this, it's just a matter of investment horizon). But as much as I want to put a number on this, I would personally keep at at 0 because I am looking at a 5 to 7-yr horizon, so sorry LICC but not sure I can reasonnably expect to make money on this unit unless I keep it for a little longer than that
4) transaction costs: amortized over 5-7 years (relatively cheap since coop below mansion costs, but still decent friction)
5) 5.5% cost of financing (that's what I got 2 weeks ago, some of you might get better terms, I don't know for sure)
6) purchase price of $750k (I would agree that there might some more room at $799k, even though 24% is already substantial)
7) equivalent rent of $3600 ($3200 is indeed a smaller unit, but let's face it, $4500 is nonsense. If the ask is down 24%, and considering I'm assuming a discounted purchase price at $750k, I have to be consistent and think I can squeeze the rent down as well)

Well, the truth is, if you carefully model this, my xls tells me that you should rent this one. Cost of ownership is 15% higher than renting. This is a fairly sensitive model so obviously if you think there is upside in 5 years, it can rapidly break even.

But in all fairness, I think Steve has a point here. Maybe not 50% more expensive to own, but it is clearly cheaper to rent, unless 1) you have unrealistic assumptions about medium term resale value, 2) do not want to take into account opportunity cost of downpayment, 3) have a longer term approach where you can be more bullish.

I just looked at the featured listings again. Completely random. Here is another that shows steve is wrong:

http://www.streeteasy.com/nyc/sale/387339-coop-243-east-77th-st-upper-east-side-new-york

steve - i'm sorry i tire you - it must be exhausting trying to dig yourself out of those holes you keep digging yourself into.

i see that you are now claiming that the longer you stay in a property, the more it makes sense to rent vs. own. amazing - which of your SE buddies is going to back up this contention?

LICC, you keep on pulling up rental asking prices, which have been delisted, likely because they can't get the rent they're asking for. At $6,000 a month, according to nybits, that would be one of the most expensive apartments on the market in that area.

Try something that HAS rented, will you?

I'm pulling up whatever is on the featured listings, so there can be no cherrypicking. It also is an asking price, which likely is also higher than whatever the actual price would be.

calimero - very fair analysis. I would say that assuming a 6% annualized short to medium equity return but zero price appreciation is somewhat inconsistent. If the markets are up 6% per year for the next 5-7 years, I would assume the economy is also in much better shape and that price appreciation on the apartment is likely to be more than 0. You also didn't factor in rental increases. If the markets and the economy are indeed up, as you assume, your $3600 would probably be over $4000 within 4-5 years, assuming even only 2-3% annualized increases.

LICC - I have factored in rental increases, you are totally right, this does move the needle and I certainly reflected it (I am a renter and have been sufficiently hit by those to avoid forgetting them in my model...). I assumed 0% this year, then 2% then 4% then constant 5% thereafter.

I don't think it is inconsistent to assume 6% return of my equity and 0 capital appreciation. Why? Because I would invest my cash in lower-rated bonds where I can clip 6% for an horizon and risk profile that is comparable to this unit. But at the same time, I don't expect this unit to gain in value.

This is perfectly fair and consistent. But I'm happy to change the assumptions one way or another if you can convince me otherwise.

also, LICC, I get around $7400 a month to buy that property, with 25% down. That's not very compelling, even if it could rent at $6000.

"LICC, you keep on pulling up rental asking prices, which have been delisted, likely because they can't get the rent they're asking for. At $6,000 a month, according to nybits, that would be one of the most expensive apartments on the market in that area.

Try something that HAS rented, will you?"

Steve is onto something here. Plenty of stuff that started at $5k ended up in the 3s.

You can pick up 2 beds for 3 these days no problem.

It's not $7400 on an after-tax basis. It would be under $6000.

AMT. I get no benefit. Even if I did, not compelling. Particularly now. With normal risk levels I think the emotional benefit of owning might negate risk, but not even close now. rent deflation has been spectacularly quick.

Yeah, what's the risk factor on another 25% decline?