Rent vs. Buy

If you make the argument that the interest on savings = interest on borrowings, then the down payment is a non-issue. Continue on....

You happen to lose your job, or divorce or both, and... If you are in the 28% bracket, then you probably don't have much savings after this 50% downpayment. You need to sell, but the market goes down other 15 %. You have no earnings to deduct mortgage, you can't rent the apt out more than a a year or 2 because it's a coop. Ughh. This sounds as surreal as the possibility of another leg down. Only time will tell. Too volatile a market to take this kind of a move lightly.

AVM, you're forgetting nyc closing cost. A round trip buy/sell will be at least 10% the value of the property. That 10% will wipe out the first 10 years of equity build. If you buy and sell within 10 years, you lose all your equity build.

Loss of job -->> yes, you are much better off renting if you lose your job AND cannot find another one. If you are out of work for 3-6 months, that is obviously a situation you'd rather avoid, but I'm not sure it matters that much whether you own or are renting in that scenario. Divorce - not planning on that.

Tax brackets -->> I was being conservative with 28%. If you take it up to 33% or 35%, that only enhances the benefits of owning.

Closing costs -->> fair point, this does have an impact. But I think 10% is too high. If all you do is buy and hold, and avoid up-front points on the mortgage, then your closing costs are rather minimal over the long run.

Savings on interest vs. interest on borrowings. Not sure I understand your point, but I don't think they are identical. I've tried to calculate them separately, and demonstrate that you are better off with a bigger deposit and smaller mortgage. You will obviously pay a higher rate on the mortgage than you can earn on cash in banks or risk-free bonds.

28% tax bracket is actually very fair assumption for nyc due to AMT. My marginal tax bracket is much higher but because my mortgage interest doesn't cover what I pay in AMT, the effective deduction for my mortgage interest is only 28%.

If you buying and holding. closing cost would be approximately 5% assuming the property is above $1mm. That basically wipes out first five year of equity build.

Thanks for the comments. I'm still wondering how you get to 5% closing costs on front-end:

1% mansion tax
$2,000 lawyer
$5,000 mortgage-related
$5,000 miscellaneous

That still sums to only about 2%. What else? Moving costs? I assume seller pays broker and any transfer taxes.

But my larger point, which I feel hasn't really been addressed, is this -- is the market for BUYING an apartment still way too high relative to renting? To me, it doesn't feel like things are way out of kilter one way or the other. You can make a good argument that it is better to be renting currently. You can also make a solid argument that it's a good time to buy. But either way, it does not seem like prices have another 20% to fall from here. Just my thoughts...

both purchase and rents are out of whack. now that reality has kicked in and the free money is gone, we're seeing both options deflate. to be honest, no one knows where the true market is

You can't buy for $1.25 million on the UWS what you could rent for $5,500. Equivalent rent for a $1.25 million 3 bdrm on UWS is probably closer to $4.5-5K or lower. But like marco_m says, no one seems to know where true market is, and both seem to be going down still.

AVM, you're missing the mortgage recording tax.

AVM, rents are down more than 20% across the entire city. A lot of investors who bought real estate in the last 2-3 years for rental income are now cash flow negative if you assume they put down 20% and financed the rest at 5%. If you calculate it out, anyone who bought in the last two years are actually accumulating negative equity each and every month. They can do that for one year but how long do you think they can hold out? They basically will become forced sellers next year. Look around the more speculative areas such as times square: Buidings like Orion, Platinum and the Link each have more than 30%+ rentals. Look at the closing price in Platinum, recent closing prices are more than 20% below ask! I know these are not desirable areas to live but once price fall in those area, it will spread to others. If you look at the progression, first prices declined in Jersey, then it was up and coming areas like LIC and Williamsburg, and then you'll see areas like Times Square and eventually more desirable areas like UES, UWS, etc. Its just a matter of time.

Marco_m, nyc_obs, LGeorge:

I agree there is a possible scenario out there, one in which the recession drags on for multiple years and unemployment gets worse. In that scenario, BOTH prices and rents continue to deflate meaningfully for an extended period of time. What is the % probability of this scenario? People can form their own views.

What I don't think is true, is when people say that prices are way out of line compared to rents (currently). Perhaps they are both of of whack, but I doubt that one is out-of-line compared to the other (currently).

As to absolute rent levels, the latest data I have is as of Aug 25, 2009, a report from TREGNY on the overall NYC rental market for August. It listed average rental prices for 2-BRs in doormen buildings at $5,161, down 7% over the last year. I believe that rents in some areas are down 20%, but I don't think it's true across the city (yet). The problem with the data is that it reports mean figures, not medians, so perhaps the numbers are getting skewed up by the high end. Still -- for a 3BR in prime UWS location, I think $5,500 is not too high currently. I see 3BR rents for 1,500sf being above $6,000 in many buildings.

As to overall price/rent declines in UES/UWS...time will tell.

I think there is a severe mismatch between the risk to your down payment vs. the risk of munis that earn a paltry 3%. There are leveraged muni closed end funds currently paying close to 7% triple-tax free. There are long term bonds paying over 5% TTF.

you are assuming zero possibility of loss of principal. in your scenario, even a modest 15% decrease costs $175 K which over a 10 yr holding period is another $,1500 a month. also, this thought that by buying you lock in your monthlies? read all the threads here about significant maintenance increases and assessments. if the economy continues sideways, maintenance increases will clearly outpace rent increases.

AVM, rental prices doesn't need to come down more for purchase price to come down. Even if Rental prices are stable, many buildings are still selling at 22-24X Rent. There is a reason why the national average price to rent ratio is around 18, it is because that's the ratio that makes it cash positive for owners to rent. Even at the current rental price, there will be a lot of forced sellers. I personally know a lot of people who want to sell this year but said since prices are down so much this year, they will just rent out for one year at a negative carry and hope the market will be better next year and sell next year. If prices don't improve next year, those seller probably won't want to do another year of negative carry and you'll see inventory flood the market and depress selling prices while rent prices could still be stable.

AVM - your analysis is very reasonable. For non new construction the price/rent ratio is pretty reasonable, and your outgoings will be pretty evenly matched. Obviously if prices/rents go up/down/remain the same, that will have a huge outcome on your return, but the longer the holding period, the greater that risk will be mitigated.

Columbiacounty: I never said lock in my monthlies. I said lock in my P&I. I recognize there is some chance of maintenance increases/assessments. In many older buildings, there is also a chance that maintenance will decrease as these buildilngs pay off their underlying mortgages. It depends on the building, and I think you can figure a lot of that out by doing some diligence on the building.

LGeorge/printer - thanks for your thoughts. In my hypothetical example, the price/rent ratio is 19x. At 22-24x, I will agree that seems high.

Bond returns- For the puroposes of this example, it was comparing buying to the low-risk scenario, which was renting and re-investing the deposit cash in something risk-free. A levered ETF does not strike me as risk-free. 30-year treasuries are technically "risk free" -- but they are exposed to enormous price volatility based on the duration risk/yield curve. The only way to really accomplish what I was talking about is a Short to medium-term investment, and thosse munis will pay you 3.0% max.

Of course, you could also rent, take your deposit cash, and throw it in the stock market instead. That might even work, but it does not produce the alternative scenario that I was trying to illustrate.

You can't just use reports of avergae rents year-over-year, as almost all landlords are throwing in 2-3 months "free", which keeps the stated rent higher but in reality their average rent is down much more than 7%.

Speaking as a coop board member in an older (1912) building, two things:
Our mortgage will probably never run out. When rates became significantly lower than we were paying, we refinanced and took out some extra money for a roof deck.

You underestimate cost of selling, when you finally do. If you live there 10 years and you get your wish (prices go up) transfer taxes will be nothing compared to Cap gains, and if you live in a coop, you may have a flip tax. Ours is a punitive 10% of profit. Most are 2% - 3% of sale price. We're selling and our neighbor is selling, both A line classic 7's, and she'll pay no flip because she bought recently and will never get what she paid. I on the other hand, bought in 1991. As a board member, I have been merrily spending the incoming flip taxes over the past several years on a new lobby, hallways, etc, but when I think my parting gift will be a shiny new service elevator, it hurts.

I've always looked at this the same way, calculate the lost costs in each scenario and then weigh that difference (or equivelance) against the investment decision of the downpayment in real estate vs. another asset.
I think where I disagree with your anaylsis is that, while I haven't looked ont he UWS recently, I find it very hard to believe that you would be able to buy a $5500 a month apartment for $1.25 million. In the areas I have looked at recently the $1.25 places are about the same as the 4,000 - 4,500 rentals and the $5,500 rentals are more in the $1.75 range.

Where can you find a classic 6 on UWS for $1.25M? Last year they we selling for closer to 1.8M to 2M. I was surprised this winter when estate conditioned classic 6's came down to 1.5M. Now you can see some estates going for about 1.35M.

I'd agree that $1.25M classic 6 in good condition is about right and I'd buy one. When you consider that they were going for 1.8-2M, 1.25M is a 30-40% correction - which bulls say ain't gonna happen.

columbiacounty
about 5 hours ago
ignore this person
"you are assuming zero possibility of loss of principal. in your scenario, even a modest 15% decrease costs $175 K which over a 10 yr holding period is another $,1500 a month."

Really? You think that if you buy now, you'll be 15% lower in ten years?

You only get to identical, and the risked levered equity should have a much higher hurdle rate than a savings account. Further, classic sixes have not fallen to $1.2mm yet. Not at all.

Also short term bond funds do better than 3%. 5% is a better number.

Someone already commented on this...but look at ADFIX or TGMNX. 5% is a better number. But please observed that you are $300k below the current market on your purchase, 2% too low on your interest, and very low on your transaction costs....AND YET all you do is get to even.

For all these reasons, when this apartment hits $1mm, you may have a point, but that is 30% down from here, 50% down from the top. We're not there yet.

I take it back... you are pricing this place to a 3.4% cap rate. That is not far off market. I think your rent is low for a nice classic six, but your purchase price is also low. We live in a $5000 apartment here in Carnegie Hill. I would pay $750k for it, if you assume $2000 in maintenance. I need at least a 5% cap rate.

I think both of these places look like they are in reasonably good condition. They are in the $1.25ish range, and fit my original description. I am not talking about 2,000sf apartments for these purposes.

http://www.streeteasy.com/nyc/sale/413105-coop-255-west-end-avenue-lincoln-square-new-york

http://www.streeteasy.com/nyc/sale/385082-coop-601-west-end-avenue-upper-west-side-new-york

Trinity, yes, closing costs are a lot higher when you sell. I was focusing on closing costs for the buyer going in. But ultimately, if a buyer ends up with lots of capital gains, then that is not the worst problem to have.

I think it's a fair debate about where a $1.25 million place should rent in this market. I tend to think both the apartments I linked to would go for more than $5,000/month. But I could be wrong.

The basic thing here I have a problem with is you are borrowing at 6%. The debt holder is getting 6%, and as the equity holder you are creating a 3% cash on cash return. You may say APPRECIATION...but to that I would say, not when this thing already been priced to a 3% yield.

"As a board member, I have been merrily spending the incoming flip taxes over the past several years on a new lobby, hallways, etc, but when I think my parting gift will be a shiny new service elevator, it hurts."
This is a very insightful point. Flip taxes are simply not fair because they transfer cost to a departing owner. And to think that some of those departing owners are distressed sellers adds insult to injury.

On the point of rent vs. buy: if your intent is to stay or hold as investment longer than 7 years, and the numbers are comparable, I would say buy. However, in our current environment, we may be due for a multi-year down leg on property values, so waiting for a cost savings to buy may be prudent.

Rhino, for arguments sake, if we were to be in a rising rent environment, that 3% cash yield on property is not a ceiling, it's a floor. When I buy stocks for income, for example, I don't just look at the current yield, but at the prospects for that yield to grow.

It's too low a floor. It's as low as it gets historically. Also the point is we are on a falling rent environment. This deal proposed sucks. Stocks that yield 3 that number is net of earnigs retained for growth projects.

What do reits and mlps yield right now smarty?

interesting - as the mkt bubbled, the bulls found the only way to justify the prices was to bake in future price and/or rent appreciation. Now the bears are saying that current prices are unjustified because of assumed future price and/or rent depreciation. we must be close to the bottom.

On the examples, the first has monthlies of $2,800 as opposed to $2,000 which make s big difference obviously. The second would appear to be a better example of what you are talking about. My only question would be on the deductability of the monthlies. The broker web site has the field blank. Does that mean that it is 0% or is that field traditionally blank becuase they somehow don't know?

Rhino, the fact that 3 is a low number is making my point for me. That is largely what I am saying here. IF you are potential buyer, and you have saved some cash for a deposit, then it is not a bad option to invest that cash in a significant deposit (i.e., equity in the apartment), rather than just leave it sitting as cash. ESPECIALLY if printer is right, that we are now close to the bottom.

Because what is your alternative? If you rent, what are the alternative uses of the cash:
* Put in the bank, earn 0.5%? Nope.
* Try my muni-bond example of 3%. That's ok, I guess
* Put in the stock market, which by the way has rallied 50+% now from the lows. No thanks. That strikes me as a riskier move than investing equity into an apartment that is priced 20-30% off the peak prices.

And if you rent, you are very much exposed to an (eventual) environment of rising rents. That is a question of "When", not a question of "IF". So, who knows, in 3 years maybe you are still left sitting on cash, which you earned little or no return on. And you are faced with trying re-rent your apartment at much higher rates, or buy something at higher prices. Your cash buys you much less in this scenario. You would have been better off buying, riding out a year or 2 of (small) negative carry, and ending up in a better position going forward.

So there are risks on both sides. The risks are not only weighted to a declining price environment.

601 WEA is nice and I saw it quite a bit ago when the ask was higher. But it is more like a Classic 5 and last ask was about 1.4M.

255 WEA was on my list of apartments to see but didn't get the chance. It didn't trade and with high maintanence, I wonder if people realized it was a dog with fleas. If it really was a good deal, it would have traded already.

lets talk a poll...who has ever heard of maintenance going down? who expects maintenance to go down in the future?

and...as far as 10 yrs out...lets agree that none of us has a clue. the presumption, however, that it will definitely be up is based on a past set of circumstances that are no longer true.

AVM that makes your point? That is like saying that a 40 P/E on the stock market is the highest ever is making the point that its a good time to buy stock in 1999. You have all the right misconceptions.

* Cash in the bank may only make 0.5%, but it is riskless. My cash is up 30-40% in buying power in terms of stocks, real estate, crude oil and just about everything else, except gold.
* Yes 3% on a much lower risk investment is more than ok. When considered against a historically high valuation on residential real estate, its awesome. 5% in riskier bonds is even better, as they are still less risky then real estate. As a matter of fact, I will lend you the 50% to buy this classic six if you like. Especially if you really put down 50%. I would like 6.5%. Done. Thanks.
* You are under the delusion that I need to convince you the stock market is a good investment to 'stop you' from defaulting into residential real estate. That is simply not true, nor is it the way to look at this.

In three years, if I am sitting on cash and rents are higher, then I adjust my model...and again look at cap rates and values. My personal view is rents are so low and prices so high that we are likely to see a rising interest rate environment. In this case, higher interest rates will have a negative impact on values, offsetting the impact of higher rents. This would give you a tepid purchase market in a red hot rental environment, akin to what we had in 2000.

Come on, I never said anything about P/E ratios or buying stocks. If anything I said don't buy stocks.

Your premise seems to be that values are still too high, while interest rates and rental yields are low. Perhaps. It was that relationship between values and rents that I was trying to examine here in the first place. My view is they are not completely out of whack, at least not to the extent the bears say. If you look at it on a tax-adjusted carrying cost basis, it turns out to be close to equivalent in a lot of situtations. Oh and yes, that 255 WEA address had $2,800 MM. But the eventual price would probably end up well below $1.25. The lower price will reduce the monthlies, because of smaller mortgage.

But interest rates are a different thing altogether. Of course they have a big impact on the purchase market, but that's not my point here. What I'm saying is that SHORT-TERM interest rates are at near-historic lows. SO- if you have a choice with what to do with your cash, putting it in the bank at short-term rates is not a very attractive option. UNLESS you are near 100% certain that all risky asset prices (including real estate) will continue to plummet. I wish I had that crystal ball. But again -- you make my point for me. Say the bank wants to charge me 6.5% for a mortgage. I say no thanks, I'll take 50% less mortgage, and put in more cash deposit. I, the borrower, save the 6.0% spread between the 6.5% and the 0.5%. This logic seems irrefutable, and it has next-to-nothing to do with 40x P/E stocks.

Re. "Adjust model, and look at cap rates/values" -- fair enough, I won't argue with that approach. I'll I'm saying is, if I'm a renter, then I'm bearing the risk that I'll pay more rent at that later time. I'm not sure that "red hot rental environment" is a good thing for me, as a renter.

Finally, CC: No, I do not expect maintenance to go down, over the short-term or the long-term.

"In many older buildings, there is also a chance that maintenance will decrease as these buildilngs pay off their underlying mortgages."

so--what did this mean?

I said something about P/E ratios and buying stocks. You said something about stocks having rallied. Not relevant your honor. You can't use "I don't like anything else" as a reason to pretend that 3% is the appropriate cash on cash return for real estate given its proven risk profile. I'd almost rather you roll over, and just say that you value the emotional content of owning...Because the math cannot be made to work here. NO WAY NO HOW. You have decided that after tax is the way to look at it. It is not. It never has been. You have an imaginary bubble frame of reference.

It has a lot to go with 40 P/E stocks.

"a chance" means it could happen in certain isolated cases. I should have said "SOME older buildings", rather than MANY older buildings. Either way, I think maintenance can and has gone down in some cases. It could happen in certain discrete situations - a minority. I definitely would NOT expect it to happen in a widespread manner.

I am not - and never was - saying 3% is the appropriate cash on cash return for real estate. I am asking what is my alternative for investing cash in NON-real estate inveestments. These are 2 quite different things, no?

Rhino, I will leave it by asking this-- what IS the proper price/rent multiple. Some have said 22-24x is on the high end. Some have said 18x is the longer-term national average. My view is NYC is now somewhere in the ballpark of 20x, on average. What do you think is the current reality, and what is fair value? -- 15x? 12x? Will we get there as a result of rents going up, or prices going down, or everything collapsing further into armageddon?

I've noticed (before this past year with rents diving faster than sales) that a rental ask and a sale ask on the same place(in NYC) is often 200 times the monthly rent which works out to about 16.66 times rent roll.

sample
$5000 per month rent

5000 times 12 = $60,000
5000 times 200= 1,000,000

1,000,000 divided by 60,000 = 16.66

"You can't use "I don't like anything else" as a reason to pretend that 3% is the appropriate cash on cash return for real estate given its proven risk profile."

Rhino, what is the "cash on cash return" of renting?

The equity owner of real estate is taking more risk on the same investment than the lender. So rational investors should insist on a significantly higher expected return on their downpayment than mortgage rates.

Same investment, more risk. Owner should insist on being paid more, unless owner is certain it knows something the bank doesn't.

And the relevant mortgage rate for comparison is the jumbo rate. Conventional rates reflect welfare payments -- the taxpayer funded guarantee of FNMA's solvency -- not any market judgment of the risk of the property.

With jumbo mortgage rates around 7 or 8%, homeowners ought to expect 10% on their downpayment from current rents alone. More if they think rents are coming down, less if they think they are going up sharply, but in no event less than the mortgage rate unless they are certain that the banks are just absurdly pessimistic.

Rational analysis suggests that NYC prices have a long way to drop.

Of course, as the last decade demonstrates, there are no guarantees that rationality will prevail. Still, when ten dollar bills are lying around on the ground, eventually someone picks them up. If people like the original poster convince themselves that it is ok to invest in risky assets at prices that assume they are risk-free, eventually someone will find a way to create enough of the product to meet the demand--and compete the price back towards rationality.

I just did a quick survey of some listings in new developments on the UWS that have the same (or cookie cutter duplicates) listed for both rent and sale. Obviously asks are still asks because nobody hit them yet and maybe you can get them cheaper. The rent number is also a bit hazy because it won't factor in free months and such. And in general, new construction might behave a bit different from prewar in the neighborhood.
All that being said, the average of this small sample is much closer to 25x than 20x

15x is the historical average AVM. A reasonable cap rate is 5-6% Do the math (backwards).

Juiceman: Return should reflect the risk of the investment you are making, not some other investment. If your savings from renting are invested in stocks, you should demand a stock return. If they are invested in cash, a cash return. If you spend them, no return.

If you are making a highly leveraged investment in urban real estate, you should demand a return on your downpayment that reflects an illiquid, leveraged, depreciating asset, the value of which is dependent on the rent it could command (or that an owner-occupant would pay for equivalent housing), which, in turn, is dependent on a highly complex economy that is likely to succeed only with sophisticated regulation by a reality-based political class, and even then, not always.

Part of the risk reflects the likelihood that your real estate is going to drop in price over time. Basic math guarantees that rents cannot increase faster than incomes for very long, so it is highly unlikely that real estate will increase faster than incomes for very long. But that is a ceiling, not a floor. In free markets, prices tend to drop to marginal cost, absent monopoly or some other market failure. In a productive economy, you'd expect that the cost of producing housing would decrease over time, so rents for any given quality of housing should generally drop over time. And of course any given unit tends to drop in quality over time as it wears out.

AVM, stop clogging this board... you've been so brainwashed... then by all means STFU and go BUY BUY BUY!!!!

A stock broker can tell where IBM is trading today... Warren Buffet can tell you where it'll trade in 10 years, 20 yrs, 30 yrs... well I AM YOUR F'n WARREN BUFFET, you and all the other lemmings pleaze clear this f'n stale old listings... please please.... I can't wait for the GOOD STUFF.... all these UNITS are morons that can't hang on for 2 yrs.... .can you IMAGINE the kind of gilded units w/ private elevators, terraces, secret escape hatches and private "french maid" chambers that are lurking? I mean the "real" units can definitely hang for more than 18 months....

JuiceMan, you are DONE... you've bought... away w/ you... consider yourself lemming DOS 1.0

The 15 x number comes from national studies that compare MEDIAN sale prices to MEDIAN rental prices -- not the sale / rental value of the SAME house. Median owner occupied houses are higher quality than median rentals in most of the country.

So that ratio is useful to identify national bubbles, but it is not useful to decide if you are overpaying on your own place.

No investor could expect to make a reasonable return if they paid 15 x annual rents, unless they anticipated rapidly rising rents or a bubble that would allow them to sell to someone at an even higher multiple.

financeguy-
Agree with you 100% that the owner takes more risk than the lender. But it does not follow logically to say that owners necessarily must expect a cash-on-cash return, year 1, that is greater than the mortgage rate.

As an analogy, GE stock trades at 2.7% dividend yield, which is lower than the risk-free 10-year, which yields 3.5%.

Does that mean GE stock is risk-free, or even less risky than risk free? Or course not -- GE stock is much more risky. So why does it trade that way? The expectation is that over time, the dividends will grow.

This is just like how over time, rents can grow, while those mortgage payments remain fixed. So it is quite possible to earn a very good return over time - well in excess of mortgage rates - even if the return is not there day 1.

I'm not saying it's going to happen, just saying it is very possible, and I think the math does work over long periods of time, on a historical basis. All-in-all, I am trying look at both sides, vs. a lot of people who already have their minds made up about everything. OK, will stop clogging this board now...

I told you already. It is not like a stocks dividend yield because companies retain earnings for growth. The yields on full payout stocks like MLPs and REITs are much much higher. 3% is a low cap rate. 20x rent is a high multiple. Get the joke dude. Get the joke. These are both extremes. This is the analogy to 40 P/E that apparently I was unable to get through to you. You have a 40 P/E that is down to 30 and you are calling it good. IT STILL SUCKS. In this case is isn't even down much because rents have fallen nearly as much as prices.... -15% say vs. -30% for values... Rent are going to stabilize first and prices are going to fall at least another 30%. Only then will we have a near-average ratio and cap rate...Never mind that it still would not be close to prior market bottoms. STUDY HISTORY. Stop saying 20+ price to rents are normal. They are not. Not here in NYC not anywhere.

You shouldn't pay more then 3.5x times your annually income for a home. In NYC the median household income is $55,000. So that means you can't afford a home more then 170k. Even if you make a $100,000 a year, you can't afford a home more then $350,000. If you are dual income to be safe you really shouldn't buy anything over 2x because the probability one person out of two will lose their jobs is higher, and if you need that income to pay for that home you are screwed. Lets get real here, how many people really save money anymore for that down? Everyone just thinks they can sell something they own and take that cash and trade up. That kind of thinking has got to stop. When NYC housing reaches those numbers, go buy. Otherwise you are just contributing to another bubble or ponzi scheme. Don't overpay those damn boomers!

What people can afford is off topic. The average family in NY rents. The problem here is that AVM is trying to justify historically high valuations on any conceivable metric with bad math. w67 has it right. If AVM wants to buy, he/she should buy. This math exercise presented above is full of holes.

Look, Rhino, I get your joke. You think multiples are too high and prices will fall another 30%. Fine, maybe they will. And yes -- you should look at stocks on a fully-loaded earnings basis, not just dividend yield, because of retained earnings. So the S&P trades on 17x next year's earnings. 5.9% cap rate if you will.

But -- the math exercise I presented at the very beginning is not full of holes. The only hole you mentioned is analyzing it on an after-tax basis. I have yet to hear why that is the wrong way to look at it.

And yes, this IS about affordability to a large extent. I am not smart enough to tell you where prices are going over the next 12-24 months, or where/when the bottom will come. I will not even try to do that, I'll leave that exercise to you.

But what I can do is make an assessment of where things are likely to settle out over a 5-7 year period. If I'm right, a buyer now will end up making a great return over this period. If I'm wrong, my equity will certainly decline in value over the near-term. But worst case, I still have an apartment that I can live in and afford, afford on both an absolute basis and vs. renting (which was the point of the initial exercise). And I still own the option to sell later if prices rises.

I'm was not trying to do this math to magicaly justify these valuations. They may still be too high, I'm not arguing with you there. I was simply analyzing whether for a buyer with a significant deposit, it might make sense to buy now, vs. renting. Taking into account all factors, such as alternative investment options on cash.

Disagree if you like...that's fine. Just don't put words in my mouth that I am trying to "justify" anything. Things like price direction in the near-term, a topic which I frankly have no opinion about whatsoever.

NO HOLES? Your equity cost is too low at 3%. You use treasury rate for equity risk. Your mortgage rate is too low at 6%. There are no nice classic sixes yet available at $1.2mm. I never said post tax is wrong. Bottom line, if you think TIP returns are appropriate for equity risk go on in. It shouldn't be hard for you to tell where prices are biased in the near term. At the least understand the history. These are historically low cap rates and high price to rent multiples. If you think you can get 3% returns off this purchase price, then you are only just matching the lending rate. That is not a bet I would make off this base, but if you'd like to go ahead.

If I were you I would at least use a 6% cost of equity capital, and a 6.5% mortgage rate. I would look for a cap rate closer to 5% (at least then it is a pre-tax 8% for the owner occupant) and it isnt so low that you need a ton of appreciation from the current base. On a practical note, I think you can wait to buy at least until you see rents begin to rise. At least then one of the elements of momentum in this matter is working in your favor.

Rhino has always based his incorrect conclusions on his inaccurate historical data. He has no accurate supportable basis for his conclusions, and he lets his biases control his opinions.

AVM, your analysis is spot on.

The problem with the tax deduction is that it is time dependant. The deduction is greatest when you buy the property and disappears when you are paying off the principle. You should do a time-dependant model and you'll see that there is typically a local minima at 5-8 years whereby you maximize the tax deduction and would support your hypothesis. However, if you intend to keep it for 20-30 years, the tax deduction benefit disappears. This is assuming a 30 yr mortgage - the local minima can vary with the mortgage length and other assorted variables like inflation etc.

I've brought up this point several times before, but people seem to ignore it.

Wow that is a subtle point. What if you just simplify the analysis with an interest only mortgage?

PS: I have posted link after link on historical price to rent and cap rates. Many have thanked me for the data. LICC refuses to read it for what it is...fact.

I've yet to see any property that generates positive cash flow on 15x or more.
12x to 13x is fairly often the break even point when you leave out appreciation of property in your figures.
The old school 10 times rent roll formula is still king.
Will our leveraged world allow the return of this? Hopeful but unlikely.

Yes but the issue here is we are still at 20x and people are defending this. We don't need to get to prior lows of 8x or 10x. 15x is 25% down....and its the old top of the range. 12x is 40% down.

Actually that's part of the problem, rents haven't been stable enough to multiply it by a number.

You'll find a listing that is 20% below last year, but they are stuck with an empty apartment and will rent it (after 2 months free) at 40% below last year. hence the 25x time rent roll.

As I said in anther thread, sales cannot stabilize until rents do. Sales have a lot of catch up (or catch down) to do.

That instability should call for a discount...but hasn't yet. 15x works for me as a starting point. 20x is a non-starter for anyone who wants to approach this honestly.

Ya that's my approach to my apartment buy.
If it can rent TODAY for $7500 per month I won't pay more than 1.5m and that is 16.6 times.

So far those apartments are still asking 2m plus. And that's why I've stopped going to listings until they adjust.
I was going to 6 to 8 open houses a week for 4 months. I stopped. Call me a shadow buyer.

I have been shadowing it forever. I came close a number of times. In a rising rent environment it is tempting. Obviously paying a big rent for a two bed does not sit well on surface... But borrowing too much money for something such that the interest payments and maintenance come to just as high a number or higher, doesn't make intellectual sense.

Yes I imagine $7500 is a pretty solid 3 bed. I dont think you find that for $1.6mm yet. I actually have a friend who put his Chelsea condo on for like $2.1mm then pulled it because there was zero interest. That is about a $7500 rental. He paid $1.6mm in 2006, so I dont know what he was even thinking with the asking price to begin with.

He was thinking, "I would like to sell." He wasn't in a position of "I have to sell."
And in a declining market, that will be the only sellers that close.
That list should "catch up" in the coming year as well.

He doesn't need to sell. He will eventually take the makers price lose money and rationalize by moving to the burbs into more space.

doggie says: well I AM YOUR F'n WARREN BUFFET

Even Warren Buffet doesn't drive a Porsche. And he might own a Rolex but he'd rather talk about drinking Cherry Coke and DQ.

mmmmm.... pig penis covered in shrimp ice cream from Dairy Queen. Do you know shrimpie.. pig penis is indeed a delicacy in some parts of the world as is dog?

shrimp I started a stupid borker of the day thread just for you... : ) enjoy.

A birdie just told me of a 3 months free rent deal.
Could never live in financial district though.

But can't help wonder, how can anyone today rely on what the rent roll is?

LMAO... 3 to be 4 to be 5 to be just squat in my unit and make sure my pipes don't burst in the winter.... I'll pay you to squat in my unit.