Cheaper to own than to rent?

hmmm im still confused why cash flow even matters in year 1. Isnt this about whether it makes a good investment? If cash flow was better for buying with amortization it was be a goose that laid a golden egg --
Steve your analysis is simply too simplistic --
Tell me predictions of inflation/return on RE (could be negative)/opportunity cost (ie what you could get investing your down payment)/ transactions costs/Rent/Carrying Costs/Tax Rate/Mortgage Rate/Down Payment --

RoB - the analysis is simplified, but I include all of those things (except inflation).

All I'm looking for, for 1 property, is an investment you can make and break even in Year 1, under normal financing conditions, as if you were to rent it to an unrelated third party. Easy enough - no one can find one.

Steve - I have a great example, but a client is bidding on it so I can't discuss details. I'll let you know when a) she's outbid (likely) or b) it closes.
But it's an unusual case. In most instances it's cheaper to rent than to buy. The trick is finding the exceptions to that rule - and when we brokers find them, we're more likely to share them with our clients than with the Streeteasy board.

Tina
(Brooklyn broker)

Tina - yup.

steve still can't answer to the fact that what he is looking for is ridiculous. As clearly and logically explained in the posts above, it doesn't make sense for a residential property to be cash flow positive on a gross investment basis and with 20% down, on day 1. Maybe there are some rare anomalies out there, but it really is meaningless to the analysis of whether current prices are in line with current rents. steve's assertion that costs to own are twice the costs to rent have been shown to be very wrong.

Interesting stuff but I think most would agree that in most instances it is cheaper to rent at this time. I think LICC would agree with that. However, most instances means there are some that are cheaper to buy. I think the problem LICC had with your statement was that you said it was 50%-100% cheaper to rent than to buy and you were almost making it an absolute.

And thank goodness the gap is closing again. When we bought our first place in 1999 - with an 8% mortgage! - I thought I finally understood why owning real estate made sense. Our credit scores improved, we were offered all kinds of loans, we had a permanent address, a place our children could always come home to. I thought "This is what it means to be lifted out of poverty! This is the way, and the power of the way! Lao Tzu had it wrong!" Ownership was helpful.

After 2004, it stopped making sense. Yes, you could still flip a house and make some dough, but the whole enterprise seemed to curl up at the edges like an overwatered ficus. It got weird. Then the leaves fell off. And here we are, on the road to reason again. I welcome it. And honestly, so do a lot of other brokers I know.

Tina
(Brooklyn broker)

bob, I think that in a normal environment (not currently), it should cost a bit less to rent than to own at first. Despite what some others think, most people would be willing to spend a bit more to be able to own. Of course over time as rents increase, and your mortgage costs are locked, the costs can even out and then favor the owner after some time.
Of course, one has to decide if the spread is reasonable or not.

LICC, post some research to back up your assertions. As your BFF JuiceMan's post says, owning and renting should cost the same.

What I am saying is a fundamental tenet of modern economics: "Imputed rent is an imputation for the net rental income of owner-occupied housing. It is based on the assumption that owner-occupants are in the rental business and that they are renting the houses in which they live to themselves: As tenants, they pay rent to the landlords (that is, to themselves); as landlords, they collect rent from their tenants (that is, from themselves), they incur expenses, and they may have a profit or a loss from the rental business."

http://www.bea.gov/regional/definitions/nextpage.cfm?key=Imputed%20rent

hmmm I think inflation is very important in this analysis -- historically RE doesnt appreciate in value but tracks inflation -- to the extent you fear inflation (as I do) purchasing is a great hedge --

"As your BFF JuiceMan's post says, owning and renting should cost the same."

steve, this is ludicrous. The paper clearly states that it should cost the same to rent compared to mortgage interest (that's without principal big boy) and it doesn't mention the tax deduction because it is a HK paper and there is no deduction there. You are borderline psychotic with your claims and continue to put words in my mouth. Is it fun for you to misrepresent what people say over and over and over? Seriously, are you having some sort of mental crisis?

Have fun droning on for another 400 posts regarding day 1 break even rent vs. buy all while misrepresenting and avoiding all reasonable points of view. Me and my BFF will continue to look at home ownership on a long term cash flow basis which is the way reasonable business people look at things. Enjoy the rest of your mental masturbation.

"The paper clearly states that it should cost the same to rent compared to mortgage interest (that's without principal big boy) and it doesn't mention the tax deduction because it is a HK paper and there is no deduction there."

You are right - it says that. You are right, the tax deduction should be there.

It also includes the opportunity cost & depreciation, which is what you and LICC deny. For the most part they offset that deduction.

"You are borderline psychotic"

No, actually, I'm quite sane - I'm still waiting for your recantation as I showed you many, many ratios that don't explicitly include that deduction.

"Enjoy the rest of your mental masturbation."

JuiceMan, JuiceMan, JuiceMan - shame on you!

Depreciation of what? appliances?

The property sans the land.

"Me and my BFF will continue to look at home ownership on a long term cash flow basis"

You really think LICC understands that, JuiceMan?

And if you really do, how do you compare it to rents?

No much depreciation there. Places that need total gut renovations sell at a discount but not that much of a discount to fully renovated properties.

"You are right - it says that. You are right, the tax deduction should be there."

Good, so we agree that to compare rents to monthly ownership costs you have to do it net of the tax benefit and net of principal. I'm glad we finally agree on that.

"It also includes the opportunity cost & depreciation, which is what you and LICC deny. For the most part they offset that deduction."

I have never denied the opportunity cost as long as you use a risk free rate to calculate it. Currently, that is not much of an offset to the deduction.

The last thing you need to consider is ownership risk, which you and I agree is difficult to measure. Rhino had some good points about this earlier in this thread but it comes down to risk of depreciation or appreciation the down payment. The holding timeframe has a HUGE influence on this risk because the longer you hold the property the lower your risk.

So what’s the problem steve? Why are you so ornery?

I have observed that steve has a lack of comprehension and understanding of economic fundamentals and application. He often throws terms around without understanding what they mean or how they work. When it is explained to him how he is wrong, he just ignores it and repeats his wrong claims over and over. He thinks you should use depreciation of a residential property over 30 years as a factor in a cash flow analysis? No wonder he is not in the financial industry anymore.

"I have never denied the opportunity cost as long as you use a risk free rate to calculate it. Currently, that is not much of an offset to the deduction."

Therein lies the rub. If you do that then you need to come up with the ownership risk premium, as you state. Which I would say is about the same as the risk premium for owning stocks, so use the S&P 500 for the opportunity cost - same effect.

And you need to include all the transaction costs of ownership. And you need to use the 30-year fixed 80/20 mortgage rate, or adjust for the risk of an ARM.

"because the longer you hold the property the lower your risk."

That's not true. Had you held your property from 1984 through 1998 - 14 years - your risk would have been very high. In fact, the longer you hold a risky asset, the riskier it becomes.

And those are the things that you're not willing to concede.

"He thinks you should use depreciation of a residential property over 30 years as a factor in a cash flow analysis?"

Did I say that? Methinks not.

"I have observed...."

That's funny, LICC.

"Therein lies the rub. If you do that then you need to come up with the ownership risk premium, as you state. Which I would say is about the same as the risk premium for owning stocks, so use the S&P 500 for the opportunity cost - same effect."

Says you and you alone. This is fuzzy logic at best. That said, at least you are taking out principal and the tax benefit, I can't be greedy.

"That's not true. Had you held your property from 1984 through 1998 - 14 years - your risk would have been very high."

That's actually a good point steve, I retract my statement.

I've never included the principal. It's LICC who does.

"Says you and you alone."

Not really. Google it - lots of people do.

"Therein lies the rub. If you do that then you need to come up with the ownership risk premium, as you state. Which I would say is about the same as the risk premium for owning stocks, so use the S&P 500 for the opportunity cost - same effect."

On this and the subject of discount rates generally. I think it is patently false to say that RE is about as risky as S&P 500 index. Fundamentally RE is a hard asset that is supposed to give very little return above inflation (some say none, but I think that's probably not true in land-constrained places like NYC and SF where population growth pressures prices to up faster than inflation). In the short term, RE has proven that it can be quite volatile, but long term bonds offer a much better comparison. Just eyeballing the charts, the risk of principal loss is about the same historically. That 1984-1998 period is an example that can be found in bond markets with about the same frequency. The key difference is that bonds are great in recessions and RE is great in inflationary environment. For the coming year or two the former is what we've got, but over the long run... well you decide.

So if you're going to pick your discount rate, S&P, I think, is not good to look at. I look at bond indexes. I can get a similarly advantageous tax treatment in munis, which in NY currently yield below 4% on average. Long term taxable yields are somewhere around 6.5% basis for high quality securities (roughly ame as munis when you take the tax treatment into account). At these discount rates, you can quite easily get to a positive NPV over a 30 year horizon. And yes, you do have to assume SOME growth on rents and RE values, but nothing outrageous.

You might, of course, take issue with my discount rates, and fair game to that. Reasonable people can disagree on these numbers. What I'd rather not disagree on pointlessly is that evaluating a buying opportunity on a year-1 cash flow basis is grossly inadequate.

Time horizon is, I take it, another item that you have an issue with. That's fine, of course, and over a 10-year ownership period a positive NPV is much harder to get to. But I have my own issues with short time frames: 1) even if you move somewhere you really don't need to sell since you can just rent out to an unrelated third party (which was the whole premise of this thread) and in that way you MAKE MONEY over the long run; 2) if you sell and buy something else in a closely correlelated market, it's not really selling at all but is equivalent to rolling over your bonds. The only circumstance in which you should pick short horizon is if you decide to sell in X years and then rent for the rest of your life.

"I've never included the principal. It's LICC who does."

Now THAT is just grossly false. You have always included principal since you wanted every comparison made on a standard 30yr mortgage basis. If you wanted to exclude the principal, comparisons would have been made on an I/O basis as has been pointed out some time ago. Personally, I think including the principal but also counting the end of life sales proceeds is less distortive of actual cash flows, but that's because I am not planning to do an I/O mortgage - and to each his own.

"You might, of course, take issue with my discount rates, and fair game to that."

Might?

"What I'd rather not disagree on pointlessly is that evaluating a buying opportunity on a year-1 cash flow basis is grossly inadequate."

If you can't show a short-term break even point in a real estate investment, you're not going to get a loan for it. In fact, if you don't already have a tenant in line you might not get a loan for it. So I was told, even in the heady days of easy credit.

"Time horizon is, I take it, another item that you have an issue with. That's fine, of course, and over a 10-year ownership period a positive NPV is much harder to get to."

The average home is owned for 7 years.

"I've never included the principal. It's LICC who does." "Now THAT is just grossly false."

You're talking about a different thing. I have not ever included repayment of principal when evaluating the cost of owning a home to live in - for the opportunity cost. It's not counted. If you are renting out a home yes principal is included as part of the return on investment since someone else is paying it.

If you buy a home to rent out, you cannot deduct the principal as an expense, but repayment of the principal is counted as part of the ROI. Is that clearer?

"If you can't show a short-term break even point in a real estate investment, you're not going to get a loan for it. In fact, if you don't already have a tenant in line you might not get a loan for it. So I was told, even in the heady days of easy credit."

I definitely take issue with this because Neo clearly stated that he is evaluating on an NPV basis, and thus is including the downpayment as a negative cash flow in year 1. Apples to apples, dude. So far, I'm agreeing with Neo here.

You and he might look at it that way, but go to a bank for financing (for investment property) and get back to me.

If you want the bank to look at it as a pure investment, what matters more is debt/equity: 80/20 may not be enough to put you into positive cash flow territory, but that doesn't mean a bank won't finance the same project at the same price at 50/50.

But that also doesn't mean you as the investor can't be more profitable using either 80/20 or 50/50, especially if you are looking at different time horizons.

no one doubts that, booya. That's not the issue we're discussing, however.

Steve, once again what you say makes zero sense: if lenders only lend to cash flow positive CRE projects, how would anything ever get built??? Using your logic, construction loans would never ever happen. The true state of affairs is that a bank give you mortgate if the value of collateral exceeds the loan with sufficient cushion to account for risk of price declines. Secured lenders don't really care about cash flows other than to the extent that distressed sales migh diminish the value of their collateral. As Booyakasha says, debt/equity rations then come into the equation, which is why we've returned to the days of 80/20 financing in residential RE and 50/50 financing (if any) in CRE.

I suspect the loans you really have in mind (i.e. those that do not get made without enough cash flows to cover them) are mezzanine loans in CRE. They are a different animal in that when holdco doesn't have cash flows to cover its debt service the holdco goes bust AND as a mezzanine lender you have no recourse to assets until the secured lenders get done divvying up the pie. Those that are worth mentioning are equity investors in CRE context. And they generally evaluate projects same way I do: they have their WACC (weighted average cost of capital for acronym challenged), they have their time horizon, they have their cash flow projections under various scenarios and they compute the NPV. Which, in the end of the day, is all that matters if you got all your underlying assumptions right.

First of all, neo, it seems you're talking about commercial property development and I'm not. That notwithstanding, "Using your logic, construction loans would never ever happen."

In fact, in many places (such as Florida) there must be a 50% commitment on units before construction loans are released. Most large commercial developments require an anchor tenant before construction commences. With new residential condominiums, you are likely to see them adhere to the new Fannie standards.

Residential rentals are a different animal - they do require positive cash flow projections, as renting the units in advance is not possible.

Regarding "holdcos," most construction is done under LLC's. There may be guaranties, but not necessarily financing. Ask poor Tishman Spyers.

"Secured lenders don't really care about cash flows other than to the extent that distressed sales migh diminish the value of their collateral."

Really? What bank do you work for? What gives a commercial property its worth other than cash flows? Build a skyscraper in Wyoming, get back to me.

I don't know why you're going on about this - seems like you think you're trying to write something that you think I don't understand, which you have yet to achieve. Otherwise I don't know why you want to take a simple example and make it endlessly complicated.

"Really? What bank do you work for? What gives a commercial property its worth other than cash flows? Build a skyscraper in Wyoming, get back to me."

The bank doesn't aim to OWN the property, Steve, they're looking to offload it to someone else at minimal loss - and to this effect, secured lenders don't give a damn about the cash flows of an investment over time; they care about liquidation value - for a building, that is influenced in part by its rental value, but it COULD also be based exclusively on the value of the land below it, which has the potential to have ZERO cash flow until liquidation.

You're claiming that all projects have to be cash flow positive from the get go to get financing. That is simply not true.

steve loves to harp on ownership risk and opportunity cost, yet always ignores the property's price appreciation.

LICC - apparently you ignore a property's price appreciation potential as well, having bought not only in LIC but at the top of the market.

booya, not even going to discuss this further - there are innumerable variables that go into any decision, and neither you nor I could document them all.

"You're claiming that all projects have to be cash flow positive from the get go to get financing" is not true, and I said it wasn't. I did say that breakeven was the purpose of this exercise. No one can do it, so they try to change the subject.

LICC - please!

beatyputz, it seems like you don't get out much, because you know very little about what is going on in NY. Anyway, I first bought in 1998, and since I bought in LIC, it has been down less than most other places in NYC.

LICC - I like you, you're an optimist. When you dance around all the homeless refugees and dogcrap strewn on the sidewalks of LIC, you say to yourself "I love my neighborhood! Such diversity! And pet friendly too!"

"And pet friendly too!"

Don't forget the new Duane Reade and Gristede's.

Err, sure beatyputz, sure . . .

Let's get back on point, LICC: where are those break-even apartments that you said existed?

LICC: congratulations on your great investment! I didn't know that to have a falling asset that has fallen less than other falling assets (if that's even true) was cause for boasting and celebration. Cheers to that!

Tromp, this requires a bit of intelligent thought, so try to keep up. I bought in 1998. The value of owning since that time is up tremendously. When I sold my place and bought in LIC, the value of my place in LIC has held much more than the place I had owned previously. It also has better upside potential than my previous place.
I'm glad you can admit that it is hard for you to know how things like this work.

There goes steve, making things up again.

Funniest thing said in recent memory: LICComment: "this requires a bit of intelligent thought, so try to keep up."

Worst defense ever repeated over 1 million times by the same person: LICComment: "There goes steve, making things up again."

Here you go steve, here is one in UWS

http://www.streeteasy.com/nyc/sale/407347-condo-129-west-89th-street-upper-west-side-new-york

Mortgage payment (6%, 30yr, 20% down) : $4,293
Total after tax & maint: $5,448
Tax deduction: Probably around $1200/mo but let’s be conservative and call it $1000
Principal payment: ~$900
$5,448 - $1900 = $3548
Opportunity cost: (2% * $179k) /12 = $447 (after tax return on risk free rate)

Total ownership costs = $3995 (without negotiation of sale price)

The median price per sqft is $55 for 2/2 rentals in the UWS. This one says 1,100 sqft lets call it 1,000. That’s $5,500 per month to rent. That’s seems way to high for this unit so let’s call it $4500.
So we are pretty much break even using this logic if you live in the apartment. To your point, if we wanted to rent this out and not live in it we would lose money (unless a higher down payment). However, if you are going to live there this a reasonably priced apartment

steve, you just lied about me making a statement about break-even apartments. Also, it was a blatant try to change the subject because Neo, Booya and I showed that you were wrong, again.

http://www.streeteasy.com/nyc/sale/320577-coop-411-east-85th-street-yorkville-new-york

If you do the math on this one, it works out - I am too lazy to type it out, but this one works. It's dated and most buyers would want to renovate the heck out of the kitchen and bath, but here.

I love you, Juiceman! You make this so, so easy.

$5,500 to rent, ha? Try this:

http://www.nybits.com/apartmentlistings/a4a2ce7584ba8eef8929ccca3d662b96.html

Rent stabilized, right next to the park, $3,940 + 1 month's free rent.

Total cost for YOUR apartment:

Down Payment $179,000
Mortgage Amount $716,000
Mortgage Payment $4,065
Total Monthly Payment $5,220

So, buy your apartment, lost $1,000 a month.

Then there's your "risk-free" opportunity cost at 2%, when you don't adjust for the increased risk of owning. It's part of a different argument, but quintuple it.

Try again.

"Also, it was a blatant try to change the subject."

I can't change the subject on my own thread, LICC. It was you guys who changed the subject.

Oh - and let's say total transaction costs of $75,000 (at both ends), over your average home ownership period of 7 years, adds an additional $1,000 to your costs.

Not to mention if something breaks, you have to fix it.

adds an additional $1,000 to your costs PER MONTH.

Sorry.

Still twice as expensive to own as to rent, and far riskier.

Look at how steve has to contort and stretch to try to save himself from admitting he is wrong.

"Contort and stretch?"

Ha-ha-ha! Seems to me that I've included all the things that you and JuiceMan have agreed to.

Show me what I did wrong!

You are comparing this condo to a rent stabilized unit? That's the best you can do? I can pick a $7000/mo 2/2 in the UWS instead if you want to be entirely random about it. I took the median per sqft, decreased the square footage, AND then took $1000 off the rent to get to $4500. You picked the lowest rental you could find on nybits.com. Nice try. Poor steve, can't argue the numbers so he picks a rent stabilized unit (which by the way is STILL break even)

"Oh - and let's say total transaction costs of $75,000 (at both ends), over your average home ownership period of 7 years, adds an additional $1,000 to your costs."

Well if you want do that, than I'll use a 7/1 ARM rate of 5%. You have always said you have to amortize all costs over a 30yr timeframe, why now are you changing it to 7?

"Still twice as expensive to own as to rent, and far riskier."

Only steve can look at all of these numbers (which he asked for) and make this comment. Even when proved undeniably wrong by the numbers, he STILL says it is twice as expensive to buy than to rent. steve, the numbers are right here. What math are you using?

And how about those rent increases over the 7 years or 30 years or whatever timeframe steve wants to make up next?

"You are comparing this condo to a rent stabilized unit?"

It's an 80/20 market rate rent-stabilized unit, JuiceMan, just like Related Properties. Therefore, initial rents are above market rents. Look at any of the Stonehenge properties in Manhattan Valley, and see for yourself.

I see - take transaction costs that you MUST pay, and use an ARM and not compensate for the interest rate risk.

Then use the risk-free rate for opportunity cost.

Nice! You should switch from dentistry to banking. You're a natch!

LICC - include the rent increases, I don't care. And the 30% decline in value for the apartment over the next 7 years.

Or the 30% increase in value, unless you just came back from the future and you know exactly how much it will sell for in 2016.
Give steve long enough and he digs himself holes so deep that he looks foolish trying to get out of them.

steve, no need for me to show any more numbers, everyone can read this thread (that cares) and know that once again, you have been blowing hot air for the last 450 posts. I don't expect you to admit defeat because that's not your style, but we all know it to be true. I'll take that victory lap now and maybe head out to LIC and buy my BFF a beer.

"everyone can read this thread (that cares) and know that once again, you have been blowing hot air for the last 450 posts"

Let's see:

a) you haven't been able to find even one break-even apartment after 450 posts.
b) you said that you would retract if I showed a formula or ratio that doesn't explicitly show the tax benefit; I showed 3, no retraction.
c) you don't include any risk premium for ownership or ARM's, yet you use the risk-free rate for the opportunity cost.
d) you exclude all transaction costs involved in owning.
e) you post a link to an academic paper that you say proves your point, when in fact it proves mine: that owning should cost the same as renting.

Even still, you're doing a victory lap! Sounds like evacuating Saigon: WE WON!

"no need for me to show any more numbers...."

Of course not, because you can't show any that would allow you to buy an apartment and rent it out to an unrelated third party and even come close to breaking even in the first year. Yet you continue to insist - without proof! - that properties aren't significantly overpriced in Manhattan with respect to (falling) market rents.

Amazing!

LICC: "Or the 30% increase in value."

If that's your assumption, god bless!

You guys are too much! Enjoy your beers!

The thing about steve I can't figure out is if he actually believes the out-and-out BS he posts, or if he is just a flat-out liar. I tend to think he is a liar, because if he believes what he just posted, he would be one of the slowest, most unintelligent people on this board.

Hey Juiceman - looking forward to that drink. There are lots of good places to check out in LIC, we'll have to pick a good one for a beer. I would invite steve, but it may blow his mind to see how many people are having fun and enjoying their condos in LIC.

I am solidly on Steve's side here, despite being an owner. All I know about is my neighborhood, and it is a VERY far cry from rent vs. own (provided you could find the right apts to compare).

"it may blow his mind to see how many people are having fun and enjoying their condos in LIC."

It may very well. The bigger shock would be to have to leave Manhattan, however, so I can have a view of it.

I am on Steve's side in the argument that it is more expensive to buy than to rent in most cases. However, I don't think it is the 50-100% that he claims in all cases. Every example he uses he picks high ends for costs, large losses in value of properties over short time frames along with the lowest end of rents in order to get to his 50-100%

"I don't think it is the 50-100% that he claims in all cases."

I never said "all" cases. I said in general.

I didn't pick any of these examples - other people did. I also don't pick the rents - I either get them from streeteasy or nybits.com.

By every example, I mean the examples people posted. You take the highs and lows that make your argument valid. Everything works itself to that magic 50-100% no matter what.

"Everything works itself to that magic 50-100% no matter what."

No. Some are not.

"You take the highs and lows that make your argument valid."

No. Read carefully. I always use the same assumptions regardless, and always have.

You cherry pick rent at the lowest possible rate. I have seen you calculate tax considerations before but you didn't in this example. Under what circumstances do you choose to use tax considerations?

"You cherry pick rent at the lowest possible rate."

Show me where.

"I have seen you calculate tax considerations before but you didn't in this example. Under what circumstances do you choose to use tax considerations?"

I gave LICC all the tax considerations he wanted. Show me which one was wrong.

bob is correct- steve thinks that everyone else is stupid enough to be fooled by the way he attempts to manipulate the assumptions and numbers to fit his argument. Then when his machinations are pointed out, he denies it and says he is using other peoples' numbers.

bob, I never argued that initial out-of-pocket monthly costs to own are cheaper than rents. I think it is natural for day-1 costs to owne be higher than rents during normal market situations. I am arguing that steve is drastically overstating the buy/rent disparity.

"bob is correct- steve thinks that everyone else is stupid enough to be fooled by the way he attempts to manipulate the assumptions and numbers to fit his argument."

Did Bob say he said I thought people were stupid? Shouldn't have, because I didn't.

LICC - I gave you all the assumptions you asked for, and you still can't find anything remotely close to break-even. Even though your BFF's paper said that the cost of owning should equal the cost of renting.

In that sense the first year is the only one that matters, because that's when future rent is capitalized. So your "theory" flies in the face of reality.

"I am arguing that steve is drastically overstating the buy/rent disparity."

By how much, and how, and show some examples.

The last example from Juice. He came up with $4500 in rent and you picked a $3900 rent stabilized apt.

Rent stabilized, right next to the park, $3,940 + 1 month's free rent.

Total cost for YOUR apartment:

Down Payment $179,000
Mortgage Amount $716,000
Mortgage Payment $4,065
Total Monthly Payment $5,220

So, buy your apartment, lost $1,000 a month.

Mortgage payment (6%, 30yr, 20% down) : $4,293
Total after tax & maint: $5,448
Tax deduction: Probably around $1200/mo but let’s be conservative and call it $1000
Principal payment: ~$900
$5,448 - $1900 = $3548
Opportunity cost: (2% * $179k) /12 = $447 (after tax return on risk free rate)

Total ownership costs = $3995 (without negotiation of sale price)

The median price per sqft is $55 for 2/2 rentals in the UWS. This one says 1,100 sqft lets call it 1,000. That’s $5,500 per month to rent. That’s seems way to high for this unit so let’s call it $4500.

He actually had a higher total cost of ownership before tax considerations. He came up with $5448 and you came up with $5220. He lowered it by principle and tax implications(on the low side). You didn't. This entire exercise is silly unless everyone agrees on how you are going to calculate it. Each example is treated differently.

bob, you need to know what you're talking about. The "rent stabilized" apartment is a luxury 80/20 building, meaning that it's vacancy decontrolled. Since future rent increases are governed by rent stabilization laws, the initial rents are higher than comparable market rents.

This is the case with ALL Archstone and Related buildings.

Sorry.

I didn't "lower it" for the principal and tax benefits because that's not the issue. The issue is whether you can buy an apartment and rent it out to an unrelated third party and break even. The Archstone property rents ABOVE most market rents because of the stabilization. While it is true that the principal would have to be deducted from the mortgage payments, the amount is insignificant in the early years.

If you look at it this way you don't look at the "tax considerations" or the opportunity costs. That's a different model. But if you use that model, you can't use the risk-free rate for the opportunity cost because real estate is not risk free. And you MUST amortize the significant transaction costs over the time you plan to stay in the apartment. JuiceMan didn't do that, either.

There is nothing false about my example. You're confusing two different models. I'll accept the results of either, done consistently.

Why didn't you just use a market rate rental? Because it was easier to be manipulative by complicating the argument again?

steve: "The issue is whether you can buy an apartment and rent it out to an unrelated third party and break even." - Actually no, that is not the issue at all. That is your made-up issue. The issue is to compare the costs for a person to buy their own home or to rent their home.

Pick a model, everyone agree on all the assumptions and then look for examples. Otherwise, it is useless.

"Why didn't you just use a market rate rental? Because it was easier to be manipulative by complicating the argument again?"

Because it works to your favor. But if you insist:

Here's a typical floorplan:

http://www.nybits.com/photos/101w90-typical-2br.html

for 101 West 90th.

Rent:

http://www.nybits.com/apartmentlistings/e7704fb5f8d2dcd2a9d853dcc4c75cca.html

$3,650.

Happy?

LICC: "Actually no, that is not the issue at all. That is your made-up issue. The issue is to compare the costs for a person to buy their own home or to rent their home"

Unbeknownst to LICC, they are the same issue.

Because the result is the same if you use the proper risk adjustments.

Unfortunately, bob, that's what the other side won't do.

Or amortize the transaction costs.

Or a bunch of other things that need to be done.

The problem

the proof is in the pudding... sale inventory continues to rise... so people are making the decision it is cheaper to rent than to buy...

The BEST f'n examples are when a seller lists his unit for sale or rent... LMAO.... it's like dude, your own numbers makes me want to RENT! It's usually 2x the carry than to rent....

Go STEVIE!

w67, you have to talk to LICC & JuiceMan to make sense of that.

I can't.

steve, the person who ignores tax deductions, principal appreciation and increasing rents, says you have to use the proper adjustments. Priceless.

Steve, serious question. In your opinion when exactly was the peak for Manhattan RE?

"steve, the person who ignores tax deductions"

I granted you that.

"principal appreciation and increasing rents"

I granted you that.

"says you have to use the proper adjustments."

They're yours!

"Priceless."

No. Overpriced.

bob, I think real estate peaked 1Q2008.

LICC... your mom just called
... she said it's cheaper to rent :)

Oh yeah... it was your mama! bring it with your mama jokes!

w67th, yo mama is so fat, I had to roll over twice to get off of her.

JM... that's funny!

JuiceMan, what were you doing on her? I don't understand.

I'm glad LICC & JuiceMan have given up the fight: they can't find even ONE apartmetn they could break even on renting it out in the first year!

Meaning - real estate is still VASTLY overpriced!

LICC, JM, Bob, etc -- I thought you had Stevie on this one. But the condo you guys picked is really a converted Junior 4 and has a live in super (i.e. no doorman). The Archstone building has much better amenities - a friend lived there until right before Lehman got snookered (long story, Archstone manipulated their rental holdings last year right before LB paid a bunch to purchase them).

Also, for everyone who doesn't understand how rent stabilized and 80/20 works in NYC. IF you build a new apartment rental building, you (the developers) get a tax break if you allocate 20% of the units to low income households and the remaining 80% of the apartments are priced at market price at the time of construction. thereafter the 80% of the originally market-priced apartments are subject to rent stabilization, no matter the income of the tenants or the level of the monthly rent. Therefore, you can have a doctor making 250k/yr living in an Archstone building, renting a "rent stabilized" apartment for 4500/mo. and the apartment will NOT fall under the decontrol provisions. The doctor in this example would be subject to an increase set the by the rent guidelines board.

nice work again steve.

The only thing, jmkeenan, you need to add to that is that the units are vacancy deregulated: each new tenant rents at the current market rates.

The program is not permanent; it lasts from 10 to 25 years in most cases, I think.

At least you are using the word VASTLY now instead of 50-100% which was what the debate was about and which we proved that you were VASTLY wrong. steve, its over, you lost, get over it.

JuiceMan: "At least you are using the word VASTLY now instead of 50-100% which was what the debate was about and which we proved that you were VASTLY wrong. steve, its over, you lost, get over it."

w67thstreet: "The BEST f'n examples are when a seller lists his unit for sale or rent... LMAO.... it's like dude, your own numbers makes me want to RENT! It's usually 2x the carry than to rent...."

So JuiceMan, which part of 2x = 50% or 100% didn't you understand. Did you know that they're the same, looked at from different ends?

And which part of 2x does not mean VASTLY?

steve's source for generalizing the Manhattan rental market compared to purchase prices is w67th? Talk about desperation . . .

No, LIC - you're my source for all things wise!

"At least you are using the word VASTLY now instead of 50-100% which was what the debate was about and which we proved that you were VASTLY wrong. steve, its over, you lost, get over it."

Is this how desparate the bulls have become?

That if real estate doesn't decline 100%, then they're right!

Worthless Masters Degrees According to George Washington University and the New York Times:

The Value of an M.A.

Stephen Joel Trachtenberg is president emeritus and professor of public services at the George Washington University. He is also chairman of the Higher Education Practice at Korn Ferry International.

The M.A. degree is neither fish nor fowl nor good red meat. I had a classmate at Columbia who remained on after receiving his B.A. degree to earn an M.A. degree on a fellowship while waiting for his fiancé to graduate from Barnard. Another classmate who started a Ph.D. program was informed after a year that he had no real promise but if he went away quietly they would give him a booby-prize: the M.A. He became an M.D.

What’s so bad about reading a lot of French literature at someone else’s expense?

Does earning an M.A. (distinguishable from an M.B.A. or other professional degree) make any sense from a cost-benefit point of view? It does allow one to upgrade one’s alma mater. If you originally matriculated at a college you are vaguely uneasy about, taking an M.A. at a more elite institution allows you to kick down and kiss up, henceforth letting you tell people you “went to school” in New Haven. And it does, of course, ornament a resume indicating academic sitzfleisch — the ability to keep your behind in a chair in a diligent manner. A “B” undergraduate can become an “A” graduate student.

The M.A. permits someone who has a generic B.A. degree in a field she didn’t much care about to change direction, to add a line to her curriculum vitae that says she has a documented competency. M.A.’s also allow their owners to check the right box on corporate personnel forms and similar documents used by the armed services, N.G.O.’s, schools and public agencies that like their civil servants credentialed.

Close

Earning an M.A. degree can be fun; it can provide knowledge; and can stretch the imagination. A cynic might conclude that the M.A. degree is the stepchild of the university community, is increasingly a commodity offered by universities in order to earn tuition dollars devoted to the Ph.D. programs. But in the marketplace, it adds to one’s personal narrative. It makes one more interesting.

Degree inflation increasingly obliges more degrees to compensate for the devaluation of earlier degrees. Jobs that once were filled by high school graduates and later by college graduates today often require a master’s degree. This is largely optical, but one deals with the world he or she lives in. Still, just as the double and triple undergraduate major is a form of gilding the lily, a form of product enhancement, meant to seduce the hiring partner or the human resources director, the growing interest in the M.A. reveals the inadequacy of the baccalaureate.

In a bad job market does it make sense for students to seek a safe harbor and earn a master’s degree? Absolutely: if they can afford it; if the debt from their previous academic work is not too great; if someone else is paying; if they seek to reinvent themselves. If, if …

Universities are, after all, wonderful, magical places, and learning something new is the greatest of pleasures. My friend married his fiancé, never used his M.A. degree in any professional way but had the satisfaction and joy of having read a great deal of French literature at somebody else’s expense. What is so bad about that?