how much apartment to buy?

well, your definitely not going to get a good answer since the income range you provided is very broad. My advice is to put down as much as possible. If a $1.5 million apt. satisfies you, then pay cash. How much apt. you should buy depends on your needs. Do you have kids? Are you planning to have kids within 5 years? Do you or your wife work from home? If you answered yes to any of these questions, then buy as big of a place you can afford. Otherwise buy the biggest place you can afford without having to get a mortgage.

alpine, you would put $1.5M down in cash when you had $2M in liquid assets? Why on earth would you do that?

Because he wants folks to lose money as quickly as he did.

That being said, you're investing the full amount, you have that much exposure no matter how much you mortgage.

your financials are strong. you need to figure out what neighborhood and the size of apartment you want. then look at the comps and determine how much you're willing to pay for an apartment that fits your criteria and taste.

Income is variable since primary earner is in banking (although comp is cash). One young child. One of two work from home. Ideally, we'd like a 3 bedroom or spacious classic 6 (7 if the market drops more).

But I guess my question is, where would you guys be looking, say within a few hundred thousand range, given your targeted asset allocation and ideal cash flow. $1mm, $1.5mm, $2.0mm, $2.5mm?

Interesting thought on all cash for a $1.5mm place, although my wife blanched at the thought when I relayed it to her.

"alpine, you would put $1.5M down in cash when you had $2M in liquid assets? Why on earth would you do that?"

Why not? Do you enjoy paying interest to the bank?

also, if you can buy for all cash, you will look more desierable to the seller and you *MIGHT* be able to get a better deal than had you gotten a mortgage.

b/c as noted previously, mortgages are by far the most leveraged and cheapest cost financing (at the current market) in the WORLD. Let's do another math problem:

No taxes involved:
Gov't agency bond (30yrs) pays 7% compounded annually, mortgage cost is 4%, do you:
A) carry no mortgage, pay cash for unit?
B) put $0 down, take = cost of home/condo and put into 7% bond?

quickly alpie...

only in w67th's imaginary world can you get a no money down loan on a $1.5 million apt. And who is charing 4% interest rates?

w67 -- mortgage cost is 4%,

??? Jumbo loans ( since he is looking for a classic 6 we must assume jumbo) are about 6.5% right now. Are you trying to get to 4% after tax deductions. I'm too lazy to try to do that math right now. Is that right?

HUD generally recommends up to 30% of your annual income should be for household payments. To be conservative, I would assume the lower household value of 400k. Assuming a 30 year mortgage at 6%, that means you could afford a property of about $1.67M. You would have to adjust this depending on the area, common charges, and property taxes, which I did not assume.

am I crazy? When I learned finance, take as much leverage and invest in a higher yielding asset (risks being equal). In 30 yrs, you would have earned 7% IRR on the bond and been paying 4% in mortgage, net net you are ahead 3% compounded over 30 yrs. In 30 yrs, pay off the mortgage and enjoy the differential earned.

What is so hard? Has the RE bubble smashed the laws of finance? It is of course just a little thing called math with $ in front of it?????

yes, the forumlas I regularly hear are 30-33% of your yearly income or 3.5-4 times your annual income.

so let me get this straight.... $100K/yr salary vs. $1MM/salary... the same formula holds? me thinks at $100K/yr you'd be better off renting, no?

tiny bubbles.. tiny bubbles...

someone who makes $1 million a year can likely afford to buy at a larger percentage of their income since they should have much much more in savings.

I think the formula is still good for higher income households. On one hand, higher income families can afford more. But on the other, higher price homes tend to relate to higher property taxes and household expenses, so it works itself out.

Regarding leverage that's really a question of your (and your family's) risk tolerance.

"the forumlas I regularly hear are 30-33% of your yearly income or 3.5-4 times your annual income."

Actually, the formulas for NYC are closer to 2.5-3x your annual income.

Any more than that, and you'd better have substantial savings.

Does the 3x annual income formulas apply to the total value of the home, or apply to the amount of the mortgage? What if someone has a low income but a high savings, like a retiree? Is paying cash really foolish? I'm not finding mortgages for 4% and bonds paying 7%.

I think I understand your question. Given the circumstances what kind of money should you be spending on a primay residence. I'll help you. Your upper limit is 2MM. Your lower limit is how low you are willing to live. You need and can afford a 3br. in a good neihborhood. 1.2 on the low end and try to stay under 2MM on the high end. Given the market today and your great cash position and figuring in a max income of 400K I would advise you to streach for the best apartment you could afford. You sound like your taking the long view. You will never be sorry for buying that slightly more expensive place in the better hood. When you an old fogey people will wonder how you landed such a great place. Take advantage of your good timeing.

Lots of people here citing a 3-4:1 price:income ratio. Anybody know how/when the old 2-2.5:1 evolved away? That's the one I have in my head, but then again I'm old....

I always heard 2-3 but that was for the mortgage, not the total value.

What I'd do if I were you . . . I wouldn't want more than 1/3 of my assets concentrated in real estate, so I'd limit the downpayment to $600k - $700k. Then I'd look for an apartment that, considering the downpayment, would have total annual carrying costs (including maintenance or taxes/common charges) of less than 33% of income. And for income, I'd probably estimate using your lower ($400k) yearly total. That said, you have a big cash cushion, and transaction costs are big (as much as 10%), so if you need to stretch a teensy to get a place you won't have to move out of in three years it's probably worth it.

"In 30 yrs, you would have earned 7% IRR on the bond and been paying 4% in mortgage, net net you are ahead 3% compounded over 30 yrs. In 30 yrs, pay off the mortgage and enjoy the differential earned."

I'm with the naked cowboy on this one, even without the extra 3%.

"Actually, the formulas for NYC are closer to 2.5-3x your annual income."

Unless your buying with no money down, I think 3.5 times your income is safe. After all, most co-op boards want at least 20-25% down so most Manhattan buyers have significant savings.

NWT, the 2.5 ratio was still alive and well in 1996, and I think in late 2000 it was more like 3. but i don't think it hit those higher levels until after 9/11, when interest rates were lowered so much. at really low interest rates, with low carrying costs, it may be feasible to go higher than 2.5 times, particularly for high income buyers with limited debt, but only under those circumstances. otherwise, i'd still only be happy with no more than 2.5 times, preferably only 2.

alpie, who says all sales are coops? what percentage of sales the last few years have been condos?

Many thanks to everyone for their input. Reading through everyone's thoughts, it's clear that we have been "underspending" on housing regardless of the formula used. But the flip side of squeezing into a one bedroom apartment year after year is that it has required $0 down payment and less than 10% of income, and we now have the means to jump in where we would have been if we'd been slowly moving up apartments every few years.

Falco's point is well taken. The decision is between a "lower limit [of] how low you are willing to live" vs. the sticker shock and relative financial inflexibility of having housing monthlies double or triple even after writing a check for $600-700k. Up until now, we've chosen the $4000/month rental as we've watched real estate go through the roof and apparently leave us behind. With the market somewhat coming back to more realistic levels, it at least feels like stretching may get some real value for the first time in a long time.

I also think your income expectations matter and other goals matter. If you expect your income to remain relatively stable or grow, and you have no "need" for any real big-ticket items down the road, then I think everyone on this board is too conservative.

I think you can easily put down $1.5MM (yes, it's a large "percentage", but $500K is still a very significant rainy day fund, in dollar terms). Your mortgage depends on where in the $400-$800K of salary you're comfortable counting on, but you can certainly get at least $1MM. So I would think a total of $2.5MM would be pretty comfortable for you. Also, with a 50% or more down-payment, you can get a better rate on your mortgage.

I am generally bearish, and I would be in no hurry if I were you, but if/when you do buy, I would err towards buying something you can live in for a very long time, which it sounds like you can afford to do.

Minimize mortgage.

{Manhattan real estate agent.}

w64th, don't stretch. it is always unpleasant, and doubly so if you've been living well below your means. but you may mean stretching a bit more than you have been. i'm in a similar situation, rent at less than 10% of take home, and i wouldn't go more than 20% of take home. but i'm cheap, and i stretched one time before, and never again.

newbuyer, be careful with employment "expectations". they're not always consistent with reality.

AR, say we were to decide that 20% or so is the upper limit from a cash flow perspective. Would you let the down payment grow significantly in order to get to a satisfactory apartment while keeping monthlies in that range? Would you cap down payment as a percentage of net worth or be flexible up to the $1.5mm some have suggested (which we had never considered and scares me, but is a great suggestion if only for opening our eyes to another way of getting to the finish line)? Would you buy down as much as needed to get to a conforming $729,750?

Our ground rules always included keeping the down payment small since the mortgage money was and is so cheap, 20% once upon a time or 25-30% if that is what is needed for a Jumbo in today's market. But if we err on the side of caution on monthlies and don't pony up on the up front, we're stuck with not a lot of apartment since we can't have it both ways.

I think a lot of it would depend on if you're at the $800k or the $400k side of the income range. The conforming will only get you a relatively slightly lower rate. Where the conforming really comes in handy is for buyers who are benefitted by the down payment terms, etc., being easier because the loans are guaranteed. With your downpayment ability, steady-ish income and good credit that's not as big an issue.

Prices aren't going up, particularly for the larger more expensive units. That's also the market that will be affected by many of the new development condos that are waiting in the wings. The overdevelopment of the family-sized apartment given the lack of infrastructure for families (schools, of course) will put more downward pressure here than the usual market, and there are all the other downward forces as well.

I personally, if I were in your shoes, would wait for interest rates to rise a couple of points (making the larger down payment make much more sense), allow up to $1mm for a down payment and maybe $150kish for renovations, and look for an estate sale where the mortgage beyond the $1 million is no more than 2.0 times your income. So, $2.6mm, roughly, at an $800k income, less than $2mm at a $400k income. That may be more than 20% of after-tax income, I haven't run the numbers, but I'm a bit extreme and I only have one child so I'll be buying well below my limits. This may take you another year or so to find, and by then you may have saved a portion of the renovation costs. I'm financially conservative, but I think that should be very doable in the next year or so, and while it's hard to continue to be patient when you've been waiting so long, i don't see any downside and a fair amount of potential upside, to being patient a bit longer. And I wouldn't want to invest more than half of the savings in the NYC real estate market even next year. Best of luck.

"Setting aside whether the market has bottomed, leveled off, or just paused awaiting further movement downwards, do people have any basic guidance for determining how much to spend on an apartment?"

Sorry...but how can you set this aside? Isn't it similar to asking "Setting aside whether or not I'm in love, should I marry the blonde or the brunette?"

For the first time in almost 20 years, there is a significant chance of losing significant money in NYC RE. From everything you've said, you have worked hard (and saved hard); if you buy an apartment for $2 million, are you prepared that you might lose $300- $400 K?

I've never been convinced by arguments like columbiacounty's. If they lose $300-400k on their apartment, they're just as likely to lose on their equity holdings. They're relatively young, so sinking their savings in low-risk debt securities seems like an overly conservative approach.

I've decided to buy all-cash using approx 67% of liquid assets. I don't like debt, and I found an apartment that I think is a very good value, even in this market. If the RE market doesn't recover or falls further in the next few years, then the stock market won't be in great shape either. If the stock market recovers, the RE market will too. Also, when I move onto a new home in a few years, I'll be selling and buying in the same market (whether it's weaker or stronger than today's). I'm happy with my decision because my new apartment will be approx 80% larger than my rental, and my monthly payments will represent approx 35% of what I'm paying today in rent. This approach isn't for everyone, obviously, but there are compelling reasons for it.

have you looked at what the stock market did in the late 80's vs. nyc re? its only been cited 100 times on various threads. answer is that the stock market moved up off its lows while re continued to go down.

plus...there is such a thing as a stop loss order in equities--tell me how that works with real estate?

and, tell when what represents "good value" in this market? how can you or anyone else for that matter determine good value? that's the basic problem--far too much uncertainty relative to the lack of liquidity and the amount of the investment as a percent of overall net worth.

look at the most recent history. am you suggesting that apartments have gone up in value since march the way the equity markets have?

march, why wouldn't you wait until there is some stability in the prices? which usually takes a couple of years, at least. is renting so awful that a quick $300-400k loss works for you? and as cc states, real estate and equities don't always move in tandem.

sometimes when you gotta pee, you gotta pee.... : ), especially true of a 3yo. Last nite as I tried to lift the toilet seat for him, he started peeing on my foot... after which he said he had to go see Dora.....

another premature equity ejaculator... it takes practice to hold back....

Aboutready, in the long run we're all dead.

If someone buys a $1 million dollar apartment that is well within their means of affordability for the life of their mortgage, what difference does it make during the interim whether the "value" goes up or down? It doesn't change the apartment's ultimate affordability.

And frankly, there are other concerns besides financial when it comes to buying over renting, not the least of which is the ability to do whatever you want to your home, not having to answer to a landlord, and not worrying from year to year about rent hikes.

it seems that OP is in an apartment that is too small for the family. the choice is

1 - rent a bigger place for a few yrs and buy then. this means moving the family twice
2 - stay in your small place and look to buy now

if you are planning to buy in good school zone and stay for 7-10 yrs, i would buy. moving with kids is no fun, but it is fun for them to be in a new place :-).

NYCmatt, have you ever in your lifetime bought something on sale or waited until the frenzy died down?

Here is TVM. I had a $50/yr job after college.. worked ballz to the ground, saved $5K that first year... that 22yo w67thstreet would've taken 100 years to save up the $1.3MM in paper losses i avoided by not buying in 07'.... and my point being you don't want to be financially dead before you are physically dead... some people choose physical death b/f financial death.. we are the only animals that commit suicide, funny....

Thank you, ab. I forgot the whole notion of "permanence" in setting down roots when you buy versus rent.

With renting, there are never any guarantees beyond your current lease. It's difficult psychologically to feel completely "at home" in a home that's only "yours" from one year to the next.

Renters by and large end up living like gypsies, hopping from one rental to the next, trying to keep just ahead of affordability. Frankly, I don't know how people live with all that packing an moving all the time.

"affordability" => unless you are a trust fund jerkoff or milking the copyright racket, NO job is guaranteed. My wife is actually on the committee determining whether a doc is gonna be referred to lose his MD. You'd think he'd have a job for life, no?

"NYCmatt, have you ever in your lifetime bought something on sale or waited until the frenzy died down?"

There's a huge difference between buying a Harry Potter book or a PlayStation versus buying a HOME.

It's silly to even make a comparison.

"Frankly, I don't know how people live with all that packing an moving all the time."

how do you think i get my wife to go through the closets once every 3 yrs lol

""affordability" => unless you are a trust fund jerkoff or milking the copyright racket, NO job is guaranteed. My wife is actually on the committee determining whether a doc is gonna be referred to lose his MD. You'd think he'd have a job for life, no?"

I never said that any job WAS guaranteed. But if they keep their expenses low and live BELOW their means, hardworking people will always be able to find work that pays enough to keep their head above water.

Matt, not everyone is a serial renter. I've been in my rental for five years, and will likely be here another two or three more at least, which i think is more than the time the average owner lives in one place. My rent increased, is now steady, and will likely decrease. I've painted, added cabinets and a new refrigerator to the kitchen, etc. My costs are still lower than they would have been if I had bought, even adding the costs of my renovations.

So many of you portray renting as this awful alternative filled with uncertainty and unbearable compromise.

"Matt, not everyone is a serial renter. I've been in my rental for five years, and will likely be here another two or three more at least, which i think is more than the time the average owner lives in one place. My rent increased, is now steady, and will likely decrease. I've painted, added cabinets and a new refrigerator to the kitchen, etc. My costs are still lower than they would have been if I had bought, even adding the costs of my renovations."

And yet, when you leave this rental, you walk away with nothing.

first off, I can't believe you waited on line for the playstation. That's pathetic for a grown man. Secondly, that's right buying a HUGE "home" and all that entails IS NOT like buying the latest wonderbra for you chick.

Answer me this batman, why is it that so many people are losing their homes, if they kept expenses low and were hardworking? I assume a Caterpiller worker would fit that bill, no?

ah, again the world according to matt:

"when you leave this rental, you walk away with nothing."

and when you bought for $2 million, and sell for $1.5 million, you walk away with ? i guess, nothing would look real good there.

"first off, I can't believe you waited on line for the playstation. That's pathetic for a grown man. Secondly, that's right buying a HUGE "home" and all that entails IS NOT like buying the latest wonderbra for you chick.

Answer me this batman, why is it that so many people are losing their homes, if they kept expenses low and were hardworking? I assume a Caterpiller worker would fit that bill, no?"

First off, I don't wait "on line", I wait "IN line" like a normal human. And no, I don't even own a Playstation.

And why are so many people losing their homes? Because they stupidly bought homes priced at more than three times their income.

CC, when you buy for $2 million you simply DON'T SELL for $1.5 million. You hang onto the property until prices rebound. If you can't afford to wait, you really couldn't afford the property in the first place.

No, matt, i'll walk away with significantly more money than i would have had had i bought. and if i had needed to sell anytime, or needed to in the next two or three years, then the amounts could have been huge. and i CAN walk, once a year i can decide whether or not i would like something different, or if the London office is calling out lyrically, the scenarios are quite varied. i don't have to walk, but i can. that's called freedom, and in this economy i'll take it.

buying isn't always a bad idea, but buying in 2004 vs. my rental was a no-brainer.

matt, the unemployed appreciate your empathy.

Conservatively, your mortgage should not exceed 2x annual income but could be up to 3x annual income if your income is very stable and secure. How much place you can afford depends on how much you're equity you're willing to tie up in real estate.

"f you can't afford to wait, you really couldn't afford the property in the first place."

tell me again how this works. if the unexpected happens, you're stuck until the market recovers....kind of like geithner? wouldn't it be interesting to see how he affords two homes on his salary? guess he's counting the big book deal and speaking engagements or better yet the vice chairmanship of citibank.

but, supposing you're not geithner? how long can you go with two places?

Here's how it works when you're at the level of buying a $2 million dollar property: you have OTHER ASSETS you can fall back on when the "unexpected" happens.

No one should be buying property that expensive without having other significant assets.

First off, I don't wait "on line", I wait "IN line" ... like a mainlander.

No. Like a Manhattanite who uses proper grammar.

A line is two-dimensional ... as are you.

hey--matt's lucky if he has one dimension.

so matt--lets figure out the arithmetic according to matt.

if i want to buy a 2 million dollar apartment--how much in other assets do i need to fall back on when the unexpected happens?

"buying isn't always a bad idea, but buying in 2004 vs. my rental was a no-brainer."

Why do you assume that? Someone who bought in 2004 is standing good in today's market. They might even be able to make a small profit.

"According to John Oliver, Geithner bought his Westchester house for $1.6 million in 2004. Once he got the new gig in DC, he put it on the market, asking $1.635 million. So the joke is that he bought at the height of the (Fed-approved) bubble and is now, in this shitty marker, asking for even more money. Even the realtor, Ms. Debbie Meiliken, says he's asking way too much!"

hmmn....

Alan don't you have a YouTube video to enlighten our matt?

I'm interested in Hot Property's question: "Does the 3x annual income formulas apply to the total value of the home, or apply to the amount of the mortgage? What if someone has a low income but a high savings, like a retiree? Is paying cash really foolish?" When cash flow is low, doesn't it make sense to live more cheaply?

Cheaply?

If I can earn 10% on $1MM and pay 6% mortgage on $1MM, then at the end of year I'm left with $40K.... I guess you'd live more richly.. but if you want to live more cheaply, by all means give away the $40K at end of year... :)

alpie, today has not been your finest day. because i saved a shitload of money monthly, you idiot. and odds are that unless i got out by 2008 i would have lost money, equity as well as monthly total costs, if considering moving and transaction costs. plus, you can't put a price on not feeling trapped.

I agree with notaboutready. In this economy, I feel like taking on a big mortgage feels like being trapped. But if you don't stretch, will you regret it in 30 years? W67, where are you earning 10%? My broker recommended this strategy for an apt we bought for my mom, right before the last equity market crash. I didn't listen, and paid all cash. I was glad I had invested the money in RE, rather than in the market, and she didn't have a mortgage payment to worry about. My thinking is this: if it's so easy to make money on the spread, then wouldn't the bankers be doing it, rather than lending me the money? They could invest it and get the 10% rather then giving me a mortgage at 6%. Why arn't the mortgage lenders investing in this 10% vehicle?

You can afford up to 3M if you make $800,000 per year.

Assuming, of course, you're going to make $800,000 EVERY YEAR for the life of the mortgage. Even celebrities and professional athletes don't have that kind of guarantee.

"alpie, today has not been your finest day. because i saved a shitload of money monthly, you idiot. and odds are that unless i got out by 2008 i would have lost money, equity as well as monthly total costs, if considering moving and transaction costs."

Even if you sold today, it is likely you would break even. Let's not get ahead of ourselves. Apts. are not trading for 2001 prices.

hotproperty, notaboutready is funny. i chose the name a couple of years ago, when i really wanted to buy even though i thought it was a dumb idea. sanity prevailed, and i should rename myself, but it seems like a hassle.

matt: still waiting on the numbers, buddy.

alpie, i don't take advice from people who have trouble selling property in NJ. trust me, i've done the math.

CC, someone buying a $2 million dollar apartment should have the financial resources to go without income for at least a year if the "unexpected" happens.

How old are you? We bought our first place at 27 yo mortgaging 2 times our HHI (definite started place). Second place at 30 yo (3 times our HHI, but we had tons of income growth potential that did materialize). Now, pushing 40, I wouldn't go 2 times our HHI. I had dreams of only mortgage one time our HHI on our next place, but the bubble went BUST! :)

Damn, I wish SE had edit buttons. This is what I get for posting after a long hard day at the office and then with the kids. Sigh. I'm really a highly educated professional. ;)

matt: what happens if the unexpected lasts more than one year? what happens if the unexpected happens during a downturn similar to the one we are currently experiencing and you lost 30%?

You don't "lose" any percentage as long as you hang onto the property.

And the "unexpected" rarely lasts more than one year. If you have at least one year's worth of living expenses in the bank, you can easily stretch that into TWO years if you find employment that pays you half what you were making before.

It's all about budgeting.

"And the "unexpected" rarely lasts more than one year"--except when its unexpected like now and lasts a lot longer.

" If you have at least one year's worth of living expenses in the bank, you can easily stretch that into TWO years if you find employment that pays you half what you were making before."

except if you wait too long into the year to make the incredible compromise of accepting half of your previous compensation. are you really this stupid?

matt, i think you just made the case for renting.

Prices never go down, so you should leverage to infinity.

Every bull on here that is recommending less than infinite leverage is intellectually incoherent.

UWSer made a point I was trying to make. If you're both relatively young and on upward trajectories in your careers (especially if they're both well-paying and unrelated to each other), I think you can justify a bit more risk. Of course, stuff happens and you may make less than you plan, but you build that into your cushion.

More generally, I think the concept of living below your means is a good one, but the concept of living way below your means forever is pretty silly, because, um, then why did you bother making all that money to begin with. If you think of it as an investment, sinking 75% of your net worth in NYC RE is insane. But if you think of it as a fantastic place to live for a very long time, it's the reward for which you've been working all this time.

If I had $2MM in the bank, I'd MUCH rather buy a place I really liked, with enough room to grow, etc., and only have $500K in the bank, than continue to live in a place that was too small, but have most of my $2MM left, sitting in diversified assets, etc.

Obviously, you can take my logic above too far, and people stretch way too much, as was done all over the place during the bubble. In fact, I am firmly in the camp that you shouldn't stretch at all. But I just don't see $500K in leftover liquid assets and a $1MM mortgage (even on a $400K income, let alone an $800K income) as stretching.

To play a hypothetical. What would you tell the OP if he asked the exact same question, but his total in savings was $500K, not $2MM? I don't think anyone would tell him he can't afford a $1MM apartment. Ok, now he won the lottery and has an extra $1.5MM, for a total of $2MM in savings. If he could afford a $1MM apartment before, why can't he afford a $2.5MM apartment now?

Whether he wants to put his entire "lottery winnings" into a downpayment is another question, and that depends on what else he might do with it, his view on the direction of RE, family needs, etc. But that's a different question than what he can afford.

Sorry for the rambling message.

All the above said, I still think waiting is the better option if you can. But when you do buy, I think being overcautious is as shortsighted as being overly aggressive.