Renting vs. Buying in this economy

The true $3500 rental is this miserable tape is still asking $800k....and this simple analysis is why it can fall to $400k-$500k. Unless its super luxury, a $3500 rental in this market is a pretty decent 2 bed 1 bath.

Very quick responses around here.
Good point about the $1200 in maintenance. That sounds very high and would explain the lower price, so that works against it.
As for rewarding the person with more debt, well that is true. The more debt, the less downpayment is at risk although for each downpayment dollar the risk is higher. Truth be told, since there are no requirements for you to have to put up more downpayment if your house goes down in value, so long as you are able to cover the payments to the bank with your other resources and your income then you are ok. Buying a stock on margin would be different because if you buy with 50% margin and then the stock declines so that your equity is now only 25% of the value, you will have to put up more collateral, but real estate mortgages are more friendly and real estate is risky but less volatile.
Good points of view, thanks.

How is less downpayment at risk? The value of your downpayment can go negative.

You'll still owe the bank money after close.

Rhino: I'm not sure, for your analysis, you should have your hurdle as cap rate exceeds mortgage rate. It should be cap rate exceeds cost of funds. That will take care of your tax offset as well as capital at risk (as variance in debt/equity will affect cost of funds).

That's great but...what is your equity cost of funds and how does it vary with varying capital structures?

In my view my 100% equity case cost of funds should be at least as high as the prevailing mortgage rate. This is why I stressed it from 6% to 8%.

rhino you can make up what I said all you want, but your analysis is still flawed.

LICC, please don't address me any more. I get nothing from you.

Rhino: I'm sure this problem has been solved before. :) I'd have to look it up though.

If I had to guess, I'd say that you can get the cost of equity from a REIT and then add a size premium on top of it (to compensate for concentration of exposure). I'd probably just adjust for leverage with a linear beta adjustment, as it isn't going to affect your cost of funds all that much except in extreme cases. But that's just a guess.

Honestly, I think the best you can do is use the mortgage rate and add a premium of zero to something. I think the number you derive from a REIT is going to come out very high. I went to business school too... I think you are making it too complex.

ADMINISTRATOR: What good is the ignore function if emails with their full comments continue to arrive. Please address that. Its should be an easy fix.

I was kind of half hoping that someone with experience in this would take my mistakes above and chime in with how to solve the problem. I'm kind of lazy.

I'd kind of like to have a full model done so I can price my own bids.

Take market rent, maintenance and price your bids from a 6 to 8% cap rate. The closest thing to comp a cap rate off is mortgage rate. REITs are too far afield. Current market cap rate is like 4%...So I wouldn't be bidding on anything just yet. As well, rents are falling.

Rhino: LICC, JM are lost causes. If I weren't already in the market (since '00), I wouldn't have bought in '06. I pulled out so many direct "apples" to "apples" apts which they ignored.

Rhino: just wait for an apt that you love and can live in longterm (though I see you working and living in CT eventually from what I recall) at the 8+% cap rate. It will happen.

Baby girl is only six months. I guess CT will depend on how I feel about private school costs when she graduates out of PS 6. An 8% cap rate is cutting current asking prices in half. We will see I guess. I'm not conceptually on board with the idea of $30,000/yr grade school. Life is uncertain and that is a huge sacrifice of security.

Not to start a debate on private vs. public, but from my personal perspective, I'm glad my parents forked out for private school even though it meant I paid for college myself.

nyc10023, I don't remember engaging you in a discussion about "apples" to "apples" apts, so I find it humorous that you would state that I am a lost cause. The only thing I remember from your threads is some whining about selling your $4M apartment and renting in an attempt to time the market and some pathetic drivel about there not being enough rentals in your school district.

8% cap rate in this low interest rate environment?

Call it a cap rate that exceeds the mortgage rate...not one that is 200 bps below the mortgage rate.

That said, in order to get a good price, one should not buy in a low interest rate environment.

Commercial real estate - particularly publicly-traded - now trades at 8% and 9% cap rates depending upon the property.

So why would I want to buy residential real estate at a 3% to 4% cap rate?

Yes, it's a low interest rate environment for "no-risk" Treasury bonds. Investment-grade bonds, by contrast, which do have modest/moderate risk regularly trade in the 8% region.

I think he means its a low mortgage rate environment....the most logically connected 'yield'. If mortgage rates went back to 8-9% you could easily argue real estate should have a double digit cap rate. Somehow I think having seen as low as cap rates went, the wouldn't go back in that 1990s territory again. But who knows.

Conforming loans are, indeed, fairly low due to the effective government guarantee. Not so sure I'd call jumbo loans real low as the spreads to Treasuries are at near record levels.

Regardless, I'm not real interested in signing up for a 3% or 4% cap rate today.

(My landlord is currently offering the townhouse I live in for sale at a 3.4% cap rate.)

Rhino86
about 3 hours ago
ignore this person
report abuse Call it a cap rate that exceeds the mortgage rate...not one that is 200 bps below the mortgage rate.

Mortgage rate is 6% less the tax benefit

Rhino86
about 3 hours ago
ignore this person
report abuse That said, in order to get a good price, one should not buy in a low interest rate environment.

Like a bond, price for real estate and interest rate / hurdle rates /cap rates go in opposite directions.

You miss the point. You are not the fixed income investor. The bank is. They are receiving 6-6.5%. In my opinion a 3-4% equity cap rate is too low, if only for the fact that is does not cover the debt service. If you bought investment property this way, you would be running cash negative on your equity in order to cover your debt service. That's the wrong way to buy real estate.

Take another 40% off this market..... http://www.time.com/time/business/article/0,8599,1905085,00.html?cnn=yes

Bank gets 6% or so, you get a couple percent back with taxes. You are mortgaging say 80% at this rate. 20% is your equity, which needs something above the borrowing cost. You average the two rates (weighted average). Hard to say that 8% is a good cap rate for the whole property if you can get 80% at a net 3.5-4%.
Cap rate is the expected return, just as the interest rates is on a fixed income bond or the hurdle rate is on an equity investment in the stock market.

If you wish for higher interest rates to get lower prices, read this that someone posted some weeks back:
A $100K mortgage at 5.5% (approx current rate), in the first 5 years you'll be paying $26.5K in interest expense, and at the end of that period your loan balance will only have been reduced to $92.5K.
At 7.5% mortgage, your interest in the first 5 years will be $36.5K and your principal will only have been reduced to $94.6K.
Assuming you refinance your 7.5% mortgage after 5 years at 5.5%, the difference between the two will be $10K in interest, plus $2K in principal, or 12K. This is on a $100K mortgage, assume 80% financing, or $125K property. So a whole 10% difference out of pocket because of the higher rates.
So, would you rather buy a property for $125K with a 5.5% $100K mortgage, or ...

I think you make a fundamental mistake. This is not like buying a stock where the most you can lose is 100%. Your equity downpayment can go down much more. 15% Manhattan downpayments are down 200% in the last eight months. Further, if I use your method and put down 10%, somehow I require a lower rate of return because I use more debt? Shouldn't it be the opposite.

If you look at real estate 'risk' a cash investment should return 8%. If you tell me I am levered 5 to 1, then the return should be much much higher. I think 6-8% is a perfectly defensible range for the whole property, because if you are levered 5 to 1 your equity cost is more like 30%+. Further, if you look at the history of cap rates...6-8% for Manhattan buildings (why should a unit be different?) were not out of the norm until CMBS issuance exploded. That's gone now.

higher rates.

Don't confuse cap rate analysis with WACC analysis. If you tried to put a beta on real estate equity levered 5 to 1, you would get a big big number. Market is down 40%. Assume 20% down is 'representative' real estate equity. Its down 150%.

cap rate refers to the rate on the entire property, not on the equity downpayment.
You are doing one on the one hand and then arguing another on the other hand.

Also, you can not lose more than your equity downpayment and accumulated equity paid through the amortization schedule. You can not lose more than your equity. Your bank can lose money above the equity you lose.

l8rz

you can if you choose to sell and take a loss and maintain a credit rating.

"cap rate refers to the rate on the entire property, not on the equity downpayment.
You are doing one on the one hand and then arguing another on the other hand."

I'm not sure what you are saying that I am doing on one hand and another. I don't think 6-8% is unreasonable as a rate on the whole property. As a matter of fact, before 2004, it was right in the norm.

http://www.realestatechannel.com/news-assets/GraphC.jpg

This is even more on point. Notice how cap rates during weak periods are higher than mortgage rates (fear of depreciation) and higher than mortgage rates during strong periods (greed for appreciation).

http://www.realestatechannel.com/news-assets/GraphD.jpg

1992 to 1999...cap rates were higher than mortgage rates. This arguably defines the period over which purchasing was a no brainer relative to renting.

In 2005-2008, when cap rates dipped way below mortgage rates...all those buyers are now flat to down on their purchaes.

"you can make up what I said all you want, but your analysis is still flawed."

LICC - WHERE THE HECK ARE YOUR NUMBERS?

You've had 3 days to let us know how you come up with them. THREE DAYS! Should I lend you my old abacus?

His numbers are clear. They don't include transaction costs. They include tax benefits. They don't include opportunity cost. On those numbers, and a 20% down payment, he can get close to rents.

Oh yes and he refuses to accept that this kind of relationship is out of the norm.

Four days have gone by LICC!

Juicy - why don't you chime in and lend your BFF a helping hand: how do you guys reach the numbers you claim to reach?

Remember you are asking someone who tucked themselves into a LIC condo at peak for his analytical framework.

Who are YOU criticizing? So quickly forgetting how you were so frustrated you couldn't argue with stevejhx you call him a loser and pulled out the homosexual card to cite your superiority.

Who are you, period? If Steve, can get past it, that's good enough for me. I thought I was arguing with him quite effectively.

I actually go out and do things on weekends steve. Maybe you and Rhino should try it, you may have a better perspective on things.
My numbers have been stated above. I worked off your initial example and added more numerical examples. Most normal people who read it can understand it.
rhino, I already called you for misstating my analysis, but there you go and do it again.
You are both so hung up on the transaction costs. In a transaction, you are going to pay an ultimate amount, the price plus the transaction costs. Most people pay cash for a portion and finance a portion with a mortgage. The mortgage amount is a monthly out-of-pocket cost and the cash amount can be measured by opportunity cost. If you want to include an opportunity cost, which is a projection and cannot be based on an actual number like a mortgage payment, then you have to include price appreciation, also a projection. That is what I have always said, yet you want to always include items that increase the cost to own without including the tax benefit, which decreases the cost to own. Sorry, it doesn't work that way.
rhino, I see that when you are losing an argument, you like to try to change the subject to a personal attack. Let's set the record straight. I bought my first home in 1998. I've sold and rolled profits into a new home twice. The last home I sold before I bought in LIC was sold in early 2008, before prices on comparable homes fell about 15%. I rented in LIC until I bought a condo after prices fell about 15% from peak there. So I've been doing quite well as an owner for quite some time. Now when people who have been renting for ten years try to say that they know better about buying or renting real estate, well I get a good laugh at you.

Its pretty interesting that you bought in 1998, but still lack the understanding of what a better buy it was then than now. Don't count your chickens until you sell in LICC. Probably down 30% on the biggest purchase of them all.

LICC, you came up with a figure, didn't show how you did it, then reversed yourself and increased the figure by 50%.

I copied all your "numbers" which proves you didn't post anything. Your reality testing is faulty. Post your numbers.

Still waiting, LICC!

LICC - you've had nearly a week now to post your theory & back it up with numbers.

Where are you?

Let's repeat for the reading impaired:

My numbers have been stated above. I worked off your initial example and added more numerical examples. Most normal people who read it can understand it.

"I worked off your initial example and added more numerical examples."

Funny that! So how did you go from $525,000 to $750,000 being the appropriate price for a 2-bedroom, 2-bathroom apartment? A 50% jump?!

I copied all of your "numbers," LICC - you said NOTHING. What's the tax benefit? What interest rate? What opportunity cost? What transaction cost? What time horizon?

"Most normal people who read it can understand it."

Your idea of "normal" differs from the norm. You posted NOTHING.

So - back up your example with your assumptions, and your calculations. Show us how you go from $525,000 to $750,000 being the appropriate price for a 2-bedroom, 2-bathroom apartment.

"You can not lose more than your equity."

as far as i know, this isn't true in new york. in california, yes, but here, my understanding is that the bank can come after you for the deficiency and obtain a judgment against your personal assets.

now, if you're judgment proof, perhaps you can't lose more than your equity because you have nothing else to give. but i bet most of us are not in that situation.

steve, I didn't go from 525 to 750. The initial question was whether 525 was a good price. If I think up to 750 would be fair, then 525 is obviously a good price. Learn to read.

There was no "initial question" LICC - you just said "my numbers show" and spit out the $525k price. When I challenged you to find a 2-bedroom 2-bath apartment in a good neighborhood in Manhattan, you upped the price to $750k.

So - what are the assumptions behind both of those prices? Interest rate, terms of mortgage, common charges, taxes, maintenance, transaction costs, opportunity costs, etc. Show us how you came up with the numbers!

Come on, LICC - you said it, you should be able to support it.

PS: I read fine, when there's something to read. There's no beef behind what you say. Plenty of bull, not a lot of beef!

I would really love to see the math that justifies the purchase of a one bedroom at $750k as fair in a rental market that commands $3,500 tops for said apartment...as well the math that makes $525k a good price. I normally think of a 30% discount to fair as great, not good. Remember the magic of compounding! 70% of fair is 43% upside TO fair.

Reality: $525k is a fair price for a $3500 rental. $750k is a ridiculous bubble price. Expect it to trade at $400k some time in the next few years!

steve, you are either confused or untruthful. Someone posted a question where they said they were renting at $3500 and saw a comparable place at $525k and asked if people thought that was a good price. Put aside whether the two places actually are comparable, I said that if they were, $525k was a good price. That doesn't mean that $700k or $750k isn't a fair price. Why are you finding this so hard to understand?

I've always said that comparing rents to prices is a present-day analysis. If you expect prices to fall based on other factors then you likely should wait because the rent to price ratio is less relevant.

Let's assume a $600k mortgage and $1200 maintenance. Your after-tax monthly cost will be around $3300-$3800, depending on your tax and mortgage rates. If you don't expect prices to fall (not my position, but reviewing this as a current-day analysis), that is a reasonable comparison of rent to price.

If you bought it as an investment at $750k and renting was permitted, you can earn a whopping 3.6% cash on cash return. If that seems low, its because it is.

LICC, no one else looks at price to rent ratios the way you do. Most everyone looks pre-tax price to gross rent. The ratio is very high right now. I never tire of repeating this historical fact to you.

This guy has a good take. If your 'rental return' can't cover your mortgage, there is a problem with buying. No one should buy this apartment for more than $450k. That's the lowest that matches the mortgage rate.

http://patrick.net/housing/crash.html

LIC, no matter how much you're trying to convince yourself, it's not going to take long before most people use the rent vs buy comp to determine if a sale price is set correctly. More and more people use internet to research properties and street easy is becoming more and more popular. You may or may not agree with the Reuters's armagedon's theory below but in this economy, i don't think most people will risk themselves into buying a property when incomes are dropping, unemployment is rising and they witness more & more people becoming underwater every month.
http://www.reuters.com/article/GlobalRealEstate09/idUSTRE55L3YZ20090622?

I don't think he's arguing prices are not going to go down. He is arguing that the relationship between owning and renting right now is 'normal' relative to history...despite a lot of evidence presented to the contrary.

rhino, your "historical fact" is very suspect, as I've pointed out based on actual prices and rents from the 90s.

sledge - no disagreement. And when the economy starts growing again, whenever that is, housing prices will increase again.

Its not suspect. Urbandigs agrees - a recognized expert. I posted two reasonable charts that were sourced. I offered my own rental from 2001 currently asking 13% more than I paid...against a purchase market that has at minimum doubled since 2001. Its not really suspect at all. You have at best, and only at times, offered half the required information from the 1990s. Further, many have chimed in offering their purchases from the 1990s. I am not sure what drives your desire not to appreciate history.

LICC, tell me this. Have you presented one example of one source that incorporates both rents and values? You at best have presented one side, and filled the other in from memory. You really are a curious beast. Here is the graph for the 100th time (GRM = gross rent multiplier = same thing as price to gross rent).

http://www.realestatechannel.com/news-assets/GraphC.jpg

I'd like someone other than LICC tell me that those figures look suspect based on their experience and knowledge. LICC, if I had an opinion like yours about history (not projection) and tens of people on a board offered their individual experience to the contrary..as well as sourced graphs... I mean, wouldn't any intelligent person consider? I mean, its a fucking joke. Your denial of history is a fucking joke. Price to rent was in the toilet for a decade. It was never higher than 2004-2007 for all time. And this fact is at the center of the biggest financial crisis since the Depression. Its all over the news. Yet the denial? Are you insane? Cheap money made asset values explode. Nowhere more than here for obvious reasons of the demographics. Continue to deny it.

Nobody looks at the price-rent comparison the way I do? Like most of your "historical fact"s, you just pulled something random out of the air again. A few people threw out anecdotal examples that once we looked into them, showed that they weren't apples to apples comparisons. Of course the renter bears will choose to remember examples favorable to their position. I looked at reported rents and prices as listed in the NY Times and Miller Samuel reports. Sorry, but that is much more reliable for accurate information.
Most people, when they consider buying their home, look at their monthly expenses and see how they would compare if they were to buy rather than rent. They don't think about the kind of yield they will receive based on expense savings. And you call my thinking curious?

When Noah at Urbandigs makes a statement like, prices are still out of line relative to rents... What comes to mind? What exactly do you think you know that he doesn't know? What do you think he is missing?

Prior to 2004, the compensation for risk of owning, in the form of a lower-than-equal, not equal, after-tax cost of owning was the norm. I am sorry, I don't think the mix and match you have played with NYT and Miller Samuel data is very helpful here. You need one source, otherwise you have no idea.

I don't really what was debunked about anyones personal example. What was debunked about mine? Alcove studios in the Princeton House at 215 W 95th Street are barely asking 13% more for rent than in 2001. Clearly, you can't believe the costs of owning haven't doubled since 2001...can you? CAN YOU?

"depending on your tax and mortgage rates."

What are they to get the figures you came up with, LICC?

And where are the transaction costs?

And what is the time frame you will own for?

And what is the opportunity cost?

Because right now you can get a 2-bedroom 2-bathroom apartment for $3,500 a month, and I don't know of any apartment anywhere in Manhattan you can buy for that price, or even close.

So put up your figures!

Why is it so irresistible to bang this over his head. It really is amazing that he will take issue with the accepted premise that the relationship between owning and renting is out of whack. He goes as far as to redefine the measure for the current market...and then completely denies facts about the past relationship.

The NYTimes lists 3,935 2-bed, 2-bath rentals for all of Manhattan. 89% of them, 3483, are more than $3500. But of course this is where steve decides we should measure the market, based on his cherry-picked example. wow.

rhino, give actual, comparable rent and price numbers for different points in time. You have never been able to do that.

LICC, go fuck yourself once and for all.

LICC, a) what does that matter? and b) the New York Times doesn't give out percentage figures, so I don't know where you came up with that figure.

So give us the ACTUAL numbers for your premises. You have never been able to do that.

Give us

Transaction costs.
Time frame for ownership
Opportunity cost
Mortgage terms
Down payment
Property price
Tax benefit

to support what you say.

All you do is ask other people to provide you more and more information, yet you provide NONE, ZERO, ZIPPO, NADA, NIENTE, ZILCH.

"But of course this is where steve decides we should measure the market."

Again, NO! You said it, not me.

Fess up, LICC - show us the beef.

Why thank you rhino, and you have pleasant day yourself.

steve, did you take math in school? Try 3483 divided by 3935.

"Try 3483 divided by 3935"

Don't know where you got those figures from either, because that's not what I get.

What I do get on nybits.com is the vast majority of 2/2 Manhattan apartments are below $3,500.

Still, LICC: WHERE ARE YOUR NUMBERS?

Give us

Transaction costs.
Time frame for ownership
Opportunity cost
Mortgage terms
Down payment
Property price
Tax benefit

to support what you say.

I don't think he wants to go through the trouble of coming up with all those numbers...and then just plugging an annual appreciation figure big enough to offset opportunity cost and transaction costs. That is his basic premise..that appreciation offsets transaction costs and opportunity cost. Then when you tell him appreciation outlook is poor based on current prices relative to rents...he just denies prices are out of whack with rents....and then accuses YOU of being circular.

You are almost correct rhino. Short-term appreciation outlook is poor, but not because of current prices relative to rents.

LICC, do you recognize any relationship between the availability and cost of debt and the price of real estate? Most people now realize the hard way, that prices were inflated by cheap money. Do you see how that might distort the normal cost relationship between owning and renting?

The reasons appreciation outlook is poor is one hand hand, the reasons you imagine relative to the economy. Also, the unsold glut of condos... As well, people such as you remain anchored to recent years when you examine the cost of renting vs buying...you have forgotten the normal risk compensations buyers have received through price before this credit bubble expanded.

plus, anticipation of returns itself led to returns. Everyone who bought expected x% higher the year after, and that in itself led to higher prices.

Now that folks see that RE goes down, too... you lose the pyschological factor as well.

If nothing else, the aversion to "not breaking even" is being chipped away as continued lousy RE news hits the market.

LICC insistence aside, I think the graph I found is pretty telling. Basically before securitization exploded, the mid range of a cap rate for residential real estate was 6-8%. Price to gross annual rents...like 12x.

"but not because of current prices relative to rents."

Then what?

And - WHERE ARE YOUR NUMBERS?

Give us

Transaction costs.
Time frame for ownership
Opportunity cost
Mortgage terms
Down payment
Property price
Tax benefit

to support what you say.

Steve, to be devils advocate for a sec....what good would it do for him to lay this out, in isolation from what the historical normal relationship is? He doesn't realize 'normal' is chipping away at your principal with the tax refund, not needing it just to get to the market rent level.

rhino, that is where your theory does not make sense. If you expect prices and rents to increase, why would you require ownership costs to be cheaper than rents on day one? That is irrational.

Ownership costs have normally been cheaper than renting...if you exclude opportunity costs and transaction costs as you do. The incremental 'cheapness' is compensation for putting a down payment at risk. Listen, I didn't write history. You should know this if you bought in 1998. Your pre-tax payment was clearly lower than rent in 1998. Your tax deduction was 100% windfall. I guarantee it.

Until money was 'easy' it was more rare and difficult to come up with the down payment and income to satisfy a bank... Then it became easy to satisfy a bank then it was to show 40-50x annual rent as income for the landlord.

LICC.... bc they are "perfect" substitutes.... pls explain to me how in Communist Russia, people were able to build bombs and nuclear weapons on par with the US w/o the possibility of home ownership? for 50 yrs?

and pls don't say the lack of home "ownership" was what caused it's collapse.

w67 ya lost me.

"why would you require ownership costs to be cheaper than rents on day one"

To provide some amortized compensation for transaction costs as well.

"what good would it do for him to lay this out, in isolation from what the historical normal relationship is?"

First he needs to explain where he gets his numbers from (seems Only The Shadow Knows), then we can see how it fits in historically.

Historically, purchasing prices are 12x annual rents. So an apartment that rents for $3,500 a month should be sold at $504,000. LICC was for once honest when he said that, then came back with his $750,000 price, to get his 18x annual rent figure.

So, he needs to show us what he's talking about so we can understand it.

I feel like what he is talking about is an after tax carrying cost with no regard to transaction costs and opportunity costs...or a lazy assumption that appreciation offsets those last two.

I do so like your 12x...almost as much as I like remembering that is an average.

$750k x 80% x 6.5% x 65% = $2,500 + $1,200 maintenance = $3,700....those are his numbers....and they suck. Then he probably assumes 3% appreciation is $22,500 and in five years that offsets transaction costs of 15% or so. Its just a review of the bad math that got the bubble where it got to.

i do recall you saying from 12-15x would be appropriate for Manhattan, steve-o. 15x will likely be the new norm...and that's where I'm renting out a Brooklyn condo. $465k = $2600/mo = breakeven point on 20% down @6%, $250/mo taxes, $500 maintenance.

Why should the new norm be the old peak? Real estate used to be an income investment... Not an investment where you covered your costs, assuming a 100% occupancy rate, and expected appreciation. If you paid cash for that thing, your cap rate would be 4.8%...not great. I just bought some bond funds today that have averaged 6% over the life, with worst 3-month drawdowns in the 3% range. How is residential real estate comparable to that kind of risk profile?

I've had the 12x annual rent posted multiple times. LICC then takes that ratio - which is a naked ratio - and adds the "tax benefit" in and says, magically, the "real" ratio is 18x.

Of course he completely ignores the fact that the 12x ratio implicitly includes the tax benefit (and everything else), so it is illogical to include it again, explicitly. He also ignores the fact that it is - given average interest rates - exactly the same figure as PITI = 30% = 40x monthly rent. He also ignores the fact that the "tax benefit" is not counted when you apply for financing (the "T" in PITI does not mean "Tax Benefit"; rather, it means "Taxes").

Most egregiously, he allocates a tax benefit to offset owners' costs, which ignores the fact that tax benefits are a function of taxes, not of rent. Tax benefit therefore reduce rent, not owners' carrying costs. If you lose your job your mortgage payment and housing payments do NOT go up; your income goes down and, therefore, you don't pay tax and so have no tax benefit.

These are just some basic concepts LICC doesn't understand. He also doesn't understand that tax benefits are calculated at your average tax rate, not your marginal tax rate, as all tax benefits are taken at the same time and so have the same weight on your after-tax income. I even had him do the math once (hard to believe as that may sound!) of what happens if your tax benefit causes you to cross tax brackets; he did the math right, yet still denied the result!

Oh - and the opportunity cost is properly calculated at the levered amount, as that is how much you are actually investing. It doesn't matter whether you beg, borrow, or steal the money: the opportunity cost is the same if you pay cash or borrow 100% of the value. This concept also escapes LICC, who denies it, all the links to economic theory I gave him, included (as usual) none of his own figures, and then had the audacity to declare himself the victor.

He is very, very amusing.

"Tax benefit therefore reduce rent, not owners' carrying costs" = "Tax benefit therefore reduce taxes, not owners' carrying costs."

Ooops!

Who is this curious fired up to make his payments if his investment rental property is 100% occupied with a cap rate below his mortgage rate? I need a break. Wake me up when cap rates are > mortgage rates.

"i do recall you saying from 12-15x would be appropriate for Manhattan, steve-o. 15x will likely be the new norm."

15x would be an extreme value if interest rates were about 2%-3%, and depending on factors such as maintenance and taxes. 12x is the historic norm - we went up to about 25%, are now down to around 20x, but since corrections typically overcorrect I would predict falling to 10x, or (as I've repeatedly said) another 50%, which is what Rhino's cap rate analysis indicates - a total decrease of about 65% from peak.

Which is about what it is in Florida. My mother bought a co-op for $48,000 in 2005, at the peak it would have sold for $115,000; one recently sold for $50,000, which is a 56% decline from peak, and still falling.

It will bottom out there.

But this is Manhattan, so it should rise as much or more and fall less....cycle to cycle, forever...as it is the center of the universe, increasingly so.

not fired up in the least bit, just stating that even in this softened or apocalyptic market (wherever one is on the continuum), there are still ways to navigate the storm. What's so wrong with coming out ahead a few hundred dollars/mo and someone else paying down my principal? I'm not suggesting that near breakeven is anything to brag about right now, but if i'm looking to trade up to a 2BR, there are certainly deals to be had. Are other people entertaining the idea of sell-low, buy-low?