An other thread about buying vs renting

Sounds to me like you already answered your own question.

If you buy now planning on being an absentee landlord can be a nightmare and you have to go into it aware that you will maybe get lucky or maybe be saddled with one problem after another that you have to resolve in NYC while being abroad. Were you to buy now and sell in 3 yrs, I don't see how you would ever recapture your transaction costs and would surely lose money, imo.

If you rent but end up staying would you "miss the bottom." Maybe. Or even likely. Once you figure interest rates which may be higher in 3 yrs this may be all the more the case. But seeking to avoid missing "the bottom" by exposing yourself to the risk of owning something you wish you didn't in 3 years is not a reason to buy now. I personally would find the risk unacceptable.

That's exactly the kind of advises I was seeking, thanks!
I am not familiar with being a landlord: is there a way to pay for a management company that will take care of the possible problems while being away? So that you don't have to worry about that?

Anyway, re-reading my own question makes me think that what I really would like to know is 'is the time to buy or not'. Since I personally prefer to stay in NYC, I would buy to live in the apartment, not to make profit within x years. I can accept a reasonable downside risk, but definitively not the previous years decrease.

And if you add the fact that I may leave abroad... yeah sounds like a bad idea.

"Once you figure interest rates which may be higher in 3 yrs this may be all the more the case."

How 'all the more case'?

my guess would be slight price decrease or stagnation and higher cost of credit => buying is even moe expensive. yes, no?

It depends why rates are higher. Price adjusts to rate in my view. Higher rates make buying more attractive to me.

ok - really sorry if the following sounds dumb, I am an absolute novice here.

as far as I can see, rates were higher and increasing between 2004 and 2007, still real estate prices were increasing. the only way to explain that is that this was a real bubble, people were willing to pay more (in sale value and interest) because real estate was THE investment as the time.

now rhino86 you are saying that if rates go up, home price will go down accordingly because the frenzy is over?

you're kidding, right? yes...it was a real bubble.

hum I told you this was going to sound dumb.
but my question was in the second part, I'd like to understand how "Higher rates make buying more attractive to me".

the theory (which i happen to agree with but you should know there are others who vehemently disagree) is that if/when interest rates rise to more reasonable historic levels that prices will decline such that the net cost of owning will remain the same. if so, best to consider purchasing in that environment at a lower basis with the possible opportunity of re-financing down the road if/when interest rates decline.

Right. Also there is the possibility of appreciation due to declining interest rates, even absent refinancing...a possibility that basically does not exist right now. Further, assume I would rather put money to work in an asset when the cash return is higher. Higher interest rates should mean higher cash returns.

A few years ago, I ran across a behavioral economics study in which the researchers examined whether people correctly priced the tradeoff between interest rates and asset prices in home mortgages. Their conclusion was that people substantially underprice the value of the refinancing option on the mortgage in high interest rate environments. That is, if you buy in a high IR environment, you can refinance later if rates go down -- but the market fails to properly price this, so the asset price falls below its intrinsic value.

Now, I can't even find the study anymore, so my recollection of the study may be flawed. If anyone knows where to find that, I'd really appreciate it.

However, if my recollection of the study is accurate, this means that -- assuming you can finance the purchase at the higher interest rate -- you will get a bargain on the price because the asset price will overshoot on the downside. The effect could also be due to the comparative illiquidity of the market in high IR environments -- but regardless of the source of the phenomenon, you still get the benefit.

OK, I see.
this was really useful. given these facts, I think we are going to wait... and rent for few more years until we figure out if we stay or not.
meanwhile, I will try to find an other way to invest my money!
thanks

Try this thought exercise. Assume you're a cash buyer. Then clearly, you wait for interest rates to rise and impair the buying power of your competition. Now ask yourself, should the availability of financing, not just to you but to everyone really change your answer?

Per Skinny&Sweet, I would venture to guess people improperly the option value of holding cash and investing later at more attractive levels.

SNs, related item regarding value of option embedded in mortgages. You're saying that people under-price this value, right? Well, I believe it is also the case that when it comes time for the rational debtor to refinance, they do not necessarily do so. I.e., they maintain the higher rate, even though it'd be cheaper to switch after fees. Thus, they may be undervaluing it at the outset, but that might be offset by their reluctance to exercise the option when the time comes. I believe the mortgage market actually prices this in. I.e., if you assume people will rationally exercise their option, then your rates would come out higher than the market's. Thus, in aggregate, this might all be priced in.

That being said, nothing keeps you from getting your option on the cheap and exercising it properly as an individual.

How can you expect people to be rational about the refinancing option when 99% percent of them seem to want to argue the time to buy is when rates are low. They insist on hard data to prove rates are bad for values... The problem is rates can go up because employment and incomes are rising. If you think that's going to be the reason this then raise your hand... What they seem to be hard headed about is that if rates are rising because the world is sick of skinny yields on our treasuries and/or the fed removes support for the market...then thats a very different case.

interesting. I could buy cash the kind of apartment I am targeting, but the initial plan was to borrow anyway a great part of the purchase because of the low interests (and tax reductions on the interests paid). This was somehow against my personal way of money management but almost all the people I have been talking to tried to convince me this was not in my best interest to burn a great part of our savings for buying.
and it made sense: low interest + huge prices decrease = rent price equivalent monthly mortgage payment, with a (slight) upgrade in terms of apartment size / location etc - plus the option on home appreciation.

but anyway, I think we have changed our mind, we'll stay liquid for now, and decide later what to do. better safe than sorry.

25% is a huge price decrease after you triple in ten years?

Home appreciation is not a free option when cash returns are 300 bps lower than mortgage rates.

Phil, where is this equal-to-rent home located? Just asking about general neighborhood, not a specific place.

yes well options are rarely free... and mortgage rates can't be lower than now can they?

25% is a good start right? so you are expecting a return to the 2000' levels?
what about the recent price stagnation (that is also what encouraged me to think about buying) and the few signs of economic recovery?

in brooklyn heights I was kind of breaking even.
roughly! I may have missed some parts!
but since I was planning to put 30% to 40% down (again I don't like borrowing...) well at the end of the day, the monthly payments (mortgage + maintenance [often lower than manhattan] + re tax - tax reduction) were in line with rents.

Its only equal after putting 30-40% down? Horrible! If you measure the price paid for appreciation as the difference between cash returns and mortgage rates, its at an all time high. I am less concerned with the absolute price level then I am the cash returns. If the economy roars, rents rise, and prices rise as well, but the cash return is better. A poor entry can be mitigated by monthly savings vs. rent....just not at the current market price level.

sorry I don't really understand... what is wrong with putting 30% to 40% down?
savings returns nothing right now, that is a way to use this money. besides I would have some left just in case, and the mortgage gives some tax deductions...
are you saying that the spread between cash return and mortgage rates is likely to tighten so having bigger savings is going to be preferable?

again
1/ I am a novice here - first time buyer / borrower etc etc and
2/ this is more for my personal understanding of how it really works - I won't buy right now

phil... sorry to barge in... but you understand that liquid cash can be invested. If I told you that your savings will pay out 10% next year, do you say but I only get 1% this year, so I better lock in ?

Nothing wrong with putting 30-40% down. The problem is putting that much down, and still only coming out the other side with a monthly payment equal to rent.

Phil, I cant say much for sure other than that the spread between cash returns and mortgage rates has never been greater. I can also say if you look at many coops, the maintenance charge is 1/2 or more of what the monthly rent might be. I know I am not looking to make an investment or take a loan of $1.1-1.2mm for 1/2 off my monthly rent of $5000/month...Are you? I hope not.

ok could we take an example here?

let's say I target this property: http://streeteasy.com/nyc/sale/482300-condo-205-east-16th-street-gramercy-park-new-york
listed at 1.2m.
let's say I have 800k in the bank.

so i put down 400k, borrow the rest (fixed mortgage 30Y @5.5%) - my spreadsheet is telling me that with the tax deduction etc I end up paying something like $4500 per month (actually all the maintenance + RE tax is reimbursed the first few years by the tax deductions).
Now in the same building, I believe $6500 is a fair rent price if I compare with a similar unit listed for rent.
so I am off $2000 a month, not bad. I have locked for a long time a relatively low rate.
and at the same time I am still holding 400k in the bank, so if savings start to pay much more as w67street suggest, I'll benefit from that.

could you tell me what may go wrong with this plan? (let aside the fact that the apartment can go for sale at a serious discount later)

so...supposing that your downpayment (which you have valued at zero) can return a modest 5%? and suppose that including transaction cost (at 10%) and a modest further decline you lose 20% on the principal?

annual return on downpayment = 20K per year
loss of principal= $240 K

at the end of 5 yrs.... down $340 K vs. 2,000x12x5= $120K net loss of of $220K.

Phil: That's not a 6500/month apt. It has 1 "bedroom".

ok, with your numbers this is bad...
but modest 5% on the case - I don't find 5% a modest return? how do you get that?
also I was more on a 5% transaction cost basis personally.

but anyway the main part here is the further decline and of course in this case we'll lose. Still losing if I use 2.5% return on cash and 10% of loss on principal.

but basically the loss here is because of bad timing and home value decrease, not bad money management? is there a way to do better with my numbers?

If you want further refinement of your spreadsheet you should consider making your tax deduction time dependent. It goes away with time as your payments include more principle and less interest. In a number of my simulations there tends to be a local minima around 6-8 years where you max out tax deduction and property appreciation. I don't have a good solution where the market goes down for a few years then goes up again. Also no good solution for impact and variability of inflation.

yes hsw9001 the tax deduction is time dependent and decreasing...
but after 10 years the interests paid are still around 50k in this example, so quite a big deduction given at the end. i find hard to take in account property appreciation (or depreciation) here, that's why in my previous example I chose "home prices don't move for some time".

anyway, the consensus here looks to be that prices are still going to decrease - add the fact that I may leave nyc... too risky for me! I'll continue to rent, sorry for my broker.

my question about how to make 5% out of our savings still hold!

Yes. Get a better price.

Phil, a few issues on that Gramercy place.

First, it's a $4000-$4500 a month unit. Don't be fooled by asking prices that linger for months with no takers. Here, once something is priced right, it goes quickly. Not the unit froma year ago, 100 sq ft smaller, that rented with a final ask of $3800.

So on the $1.2M, you're netting $2500-$3000 after common charges and taxes if you paid all cash. You've also got upkeep, insurance, the odd month with no tenant, etc., so let's call it $30K a year. Say you hold the place for 10 years, and that $30K grows to $40K over that time, so $35K on average. That means you net $350K, but then there are transaction costs. In Manhattan, this'll be 10%, not 5%. Say you sell at $1.2M, this is $120K, so your return on investment is $230K over 10 years, or $23K a year. On $1.2M. That's a 2% return on a risky asset. The level of risk is at a level that the market will finance the 80% lower-risk portion at 6%. Yet you'd take 2%?

Therein lies the problem.

3yrs is a very short time period for buying in any environment. No one knows whether rates or prices are going up/down or sideways, but with such a short time period, given the high transaction costs, and the hassle/cost of renting out a place, I do not think it is wise. Even if you were concerned that rents might jump, you should easily be able to secure a 2yr lease, thus locking in today's rents for the majority of your expected stay in NYC.

Been there done that. Being an absentee landlord is a royal pain in the ass. Sometimes you have no choice but I would never cook it into the plan. Also, I don't think it's been mentioned but most coops have strict rules on renting. Some restrict to one year and most have to approve the tenant. Don't do it.

Printer, how long do you expect to be in a 2/2 with two kids? Lifetime sentence?

Printer, how long do you expect to be in a 2/2 with two kids? Lifetime sentence?

Printer, how long do you expect to be in a 2/2 with two kids? Lifetime sentence?

no plans to move out anytime soon, thanks for asking. for now it is enough room for us. i'll be sure to let you know when i'm moving, though - you can buy it w/o the hassle of brokers, if you can pass the board, that is.

Nah I would never buy that size with two kids. Not in this market. Although there were a couple of decent looking apartments of that size sold in 40 E 88. If I can't afford a three bed I'll move out of the city.

Why wouldn't you just continue to rent?

well then, see you, b/c it appears that all of the 2-beds you've brought up in the past have sold well above where you found them affordable, so I can't imagine you'll be able to pull down a 3-bed.

There's a difference between finding them affordable and finding them attractive. Whatever makes you feel tough and cool I guess. I'm enjoying watching sixes and three-beds fall. I can't imagine feeling good about committing long term to a 2/2 with two kids.

not sure why you think I committed long term to a 2/2 w 2 kids. I committed when we had no kids. Figured that by the time we had 2 kids and they were old enough that we'd probably move on, it would be 7yrs. Now into year 5, so I feel fine, thanks.

but good luck to you - i hope that if you finally feel secure enough to buy a place that you enjoy it as much as I have mine.

this is a great thread...
i have asked this same Q before and gotten similar good advice here, but some of the #s examples are v helpful here. I'm currently renting in a 2br/1ba with 2 small kids and getting cramped! I've been looking for years that UWS 3br and finding prices still north of $1.5 for anything remotely acceptable. They all come in around $10k out of pocket per month like these:
http://streeteasy.com/nyc/sale/494751-coop-885-west-end-avenue-upper-west-side-new-york

whereas finding rents under $7k per month like these:
http://streeteasy.com/nyc/rental/575824-condo-650-west-end-ave-upper-west-side-new-york
http://streeteasy.com/nyc/rental/628872-rental-200-riverside-drive-upper-west-side-new-york

dont really see any rationale for buying, esp with zero prospect of appreciation anywhere on the horizon (could move to China, I suppose...)

So looking at renting and maybe paying cash for some vacation home for the tax benefit, but that leads me to some Hamptons or Jersey Shore headaches, ugh. At least my kid got into a good public school, so that saved a ton of cash.

Love reading all the postings in here -- keep up the good work!

another example of the 'to buy' type of places
http://streeteasy.com/nyc/sale/396743-coop-251-west-95th-street-upper-west-side-new-york
(it wouldnt let me post with 4 links in there -- weird!)

Its sad what the bubble did to distort this decision.

so what is the good thing to do after all right? (i am not referring specifically about the current conditions)
is it better to buy cash an apartment? or borrow a certain fraction of the price?
how do you use the market rental to see if your investment make sense or not (and does it make sense to try to do so)?
for example, say you have a lot of money, and can easily pay cash for an apartment. does this make sense to take a mortgage? if so, how much and how you get the ratio borrowed over price...

i would love to have some basic rules of thumb that can be applied on different scenarios of rates / tax deductions etc etc etc, or any links that could provide such information.

personally, i don't really like the idea of borrowing, so my plan was (and for now is) to wait, save some money and the day i am ready to settle, i buy cash the place and that's it. except that more than often i have been told that can be sub-sub-optimal...

i realize these are a lot of questions, sorry!

As I said before, your math will be easier if you just get a better price for the asset. Then, complicated things won't matter.

Purchasing just about anything over 200 times the real monthly rent(16.66 times rent roll) is a waste of time.

The sad part is that it is nice to nest, and the bubble created an unnatural exposure to buying your home at a bad time. There are some things to find in that 16x range in Manhattan. Sadly thats the prior peak top of range.

rhino86
Well that's just it, nothing happens overnight. Either rents will climb up to this watermark or sales fall down within a year or two. This is a highly transitional phase.
One can always put a premium on "nice to nest." Especially when finding an apartment you consider perfect for you and affordable by you. But how much more premium...18X? I'm still seeing 25X. If one feels the market is in for a sharp turnaround up in the next year, 25X may be acceptable.
But I see no sharp turnaround for 2/3 years.

It sounds stupid, but I wouldnt mind if the market went up a little, if it were because rents went up a lot, and rates went up a little. At least then I'd be locking in an attractive monthly payment. I just don't see the opportunity in the market right now...especially in the 3 bed market. I have no desire to spend $1.6mm on something I can rent for less than $7k.

Remember, flexibility is worth something. Options are almost always worth something (even if out of the money, there is the time value).

The ability to choose later has a value.