win, lose, or draw

have to throw in an assumption relating to taxes unfortunately complicated by AMT.

You're definitely down by buying. Your "10%" profit is eaten up by transaction costs. Your mtce & taxes are a little high, but even so.

In your example (assuming you're not paying down principal, interest only to keep calc. simple), you're out by the return you could have earned on your downpayment.

The only trouble is, in my sub-market, I can't find 3m places to rent for 10k easily. One will come up maybe once every 5-6 months.

That's a NO BRAINER. The real estate commission alone on $3.3 million is $198,000, which is about 20 months of rent out of the 36 months included in the example.

Mortgage tax, flip tax (as applicable), legal fees, closing costs, mansions tax, conveyance tax, stamp tax - they all total at least 15% - 20% of the sale price.

You have to hold a home at least 7-10 years to break even.

nyc10023, I think in your sub-market you can't find a "$3M" dollar place to buy for $3M easily either. One matching what you find acceptable at that price probably shows up only every few months as well, right? Otherwise, methinks you would have bought already.

nada, i did some calculations assuming $1mm down, no AMT and tax benefits of owning being capped at the 28% being proposed for high earners. the calculations are clouded by uncertainty in terms of what one could make on the $1mm down, but i assumed the 10-yr for my calculations. if the cost of the lost capital opportunity is added to the after-tax monthly costs of owning, i get that in the first year one would be paying approximately $6500 a month more to own. i'm not near a handy calculator to do more complicated calculations involving future increases, principal repaid, etc.

but given that initial monthly amount, and the transactions costs that have been mentioned, i can't imagine the disparity between the 3% increases on $5k vs. $10k managing over a ten year period to matter. a very rough run of the rent increase number gives you a rental of around $13,500 at the end of ten years? even there you'd be paying a few thousand a month less without even considering the increase in taxes/maint./insurance. the thing i'm not taking into account is repaid principal. i don't have a thirty-year amortization schedule handy.

steve, nada's example was to hold for 10 years.

Shouldn't you add the "perk" costs of ownership. Most people-- like me-- only want to own in order to make the apt into a HOME. That usually means custom paint, window treatments, maybe even new floors and appliances.

Then there are the general costs of ownership. In 12 years of co-op living, the pipes in my walls burst two different times. The Co-op paid for the pipes but refinishing the interior walls and decorator paint finish was my expense. Plus I spent thousands for a plumber over the course of the 12 years. And, when an underground stream rerouted under my garden apt, the floors buckled and foundation was damaged. A cantankerous board president refused to pay for repairs. Had to go to court. Co-op paid for damages in the settlement but I was out $50,000 in legal bills.

Plus if you own, you are forced to either live with mean neighbors or sell. Damage to psyche -- impossible to calculate.

No no no. The calculation does not solve for x. A wife/partner incessant whinning about a 'home'. That my fellow bears is what makes lemmings, well lemmings. The problem is not the lemmings' inability to do the math, it's the lemming's inability to choose a 'good' partner.

And if you are single buying a 1bdrm or studio w/ the tax credit in this mkt, you my friend, will be the lemming half of any relationship.

LOL, apt23. The intangibles aside, I meant to say that the $5000 a month in maintenance/taxes/insurance/upkeep included dealing with issues such as your walls and plumbers and whatnot. I left out renovations because although that increases costs (including cost of carrying the place while not getting any benefit), it also would increase price. So to keep things simple, I just proposed simple upkeep.

In any case, here's how I look at it. The transaction costs are probably around 10%, so the $3M to $3.3M appreciation is eaten up there. I think steve's 15-20% number is too high.

On the cost of financing, I'd throw out equity & principal altogether and just look at interest on the full amount (yes, cost of capital on down payment should be higher, but let's just price it all equally for now). Let's call it 6% on $3M, or $180K a year, or $15K a month. The first $1M is tax deductible, so $60K of that interest, and let's call it 40% deductible, so $24K or $2K a month.

So on the one side, we've got a fixed $13K a month in interest plus $5000 a month in other costs, rising up to $6700, so an average of $18.9K a month over the 10 years. On the other side, we've got rent at $10K rising to $13.5K, so an average of $11.8K a month. Take that $7.1K difference, multiply by 120 months, and you're at an $850K loss by my math.

Any bulls want to chime in on this? I'm curious how you view it.

"The problem is not the lemmings' inability to do the math, it's the lemming's inability to choose a 'good' partner."

I don't think so, w67th. I think there are a number of people out there looking at this financially, as an investment, an opportunity in the market, better than throwing money away on rent, etc. For example, wannabuy. The "it's a home" people who are looking at it as a discretionary purchase, fine.

What I'd like to know is how they will account for it once all is said and done. Should the $3M go to $4M instead of $3.3M, is that a $1M win to them, or is it a $250K loss?

Inonada: in some sub-markets, that 3m apt comes up for sale more often than for rent (prewar, bet. 66th & 80th, UWS). I'm not looking to buy a 3m apt. Just like looking.

Bulls?

Who, me? Nope. I had a hard time finding a rental, so I bought.

Nope, not you. I'm talking about Sisyphus, prospective buyer, wannabuy, etc.

you really can't put a price on being able to paint the walls aubergine. or so i've heard.

Based on your parameters and 20% down, 2% inflation, 5% ROI, House Math says your true monthly cost is about 20k/mth

http://www.housemath.us/

The NYT calculator will put it more bluntly.

http://www.nytimes.com/interactive/business/buy-rent-calculator.html

"Nope. I had a hard time finding a rental, so I bought."

People don't realize that family apartment rental stock is crap.

OK, spninny: you got $20K a month, I got $18.9K a month. Close enough.

That still doesn't answer the question. In your mind, at a sale price of $3.3M, are you up or down and by how much? What about at a sale price of $4M?

I have yet to find a calculator that measure this, or accounts for the aubergine factor.

spinny, thanks for linking to the calculator. haven't taken a look at it since my rent declined. i'd need to find a 2/2 for approximately $620k with maint. at a constant $1300 or so per month to start making money during year 11.

even with an apartment that cheap i'd lose around $150k in the first ten years. at a million i'd never pay less to own, over the 30 year period, and i'd lose about $450k during the first ten years. over the next 20 years i'd lose $25-35k per year.

You're down 'nada, DOWN! Hypothetically, you are down 7 figures, but play with the happy bar (annual appreciation) and you can make anything look good. So why does anyone buy? Either they tickle the happy bar too much (delusional) or the modest 1% annual appreciation gets them into positive territory in 5 to 10 yrs, in which case their annual rent # could be suspect.

You guys are way too smart for me. I don't even know what the "aubergine factor" is. I guess that MBA is more valuable than I thought.

'dreamer, then I guess you'd be a bad one to ask about the chalazae effect.

so Ino, you've created a hypothetical scenario, asked and answered your own questions - what is your point?

inonada:
Based on your assumptions, this is irrefutably a big loss. The way I look at it is this per your assumptions. Over 10 years you would have paid aggregate $1.375 million to rent this property. To own could cost well over $2 million in carry depending on your chosen cost of capital. But the obvious counterpoints:

a) You've used a 25x rent multiple. That is not the current market except maybe a handful of new dev projects.
b) Show us some $3mm properties have have $5,000 maintenance. That is not the norm either.
c) You're assuming less than 1% annual capital appreciation.

But yes -- your example is a big loss.

I'm trying to understand how different people view the same set of facts. Believe it or not, people can interpret things differently.

well, when you supply all of the inputs and boil it down to a subtraction problem, there isn't any room for interpretation

Printer, that's some serious lack of imagination. A person could say "I have $3M sitting in the bank collecting 0% interest. My alternative with the same duration is to put it in 10-year treasuries where it'll earn 2.5% after-tax. So my cost of financing is $6250, plus $5850 in other costs, so $12.1K a month. Renting is $11.9K a month. So, at $3.3M I break even. If prices go up to $4M, I make $600K."

Not that hard, see?

What if we kept all your assumptions the same, except assume a purchase price 18x rents and
the maintenance/taxes in year 1 are $3,000/month instead of $5k.

In this case you would be roughly break-even at $3.3 and a sizable profit if you sell it for $4M, all things considered.

to clarify, by 18x rent I mean keep the $3M purchase price the same and assume it would have cost $13,900 to rent it in year 1.

Seg, thanks for playing.

a) You've used a 25x rent multiple. That is not the current market except maybe a handful of new dev projects.

That's what I've found in my own search. While renting a $3M place for $10K (25x) would involve effort on the part of the search, I think something like $12.5K (20x) is a piece-of-cake. What do you think you would pay if you were looking at $3M apartments to rent?

b) Show us some $3mm properties have have $5,000 maintenance. That is not the norm either.

Clearly not. I was considering something like $3500 in maintenance/CCs/taxes (something like $1.25-$1.50 per sq ft on a 2500 sq ft place), $1000 insurance, and $500 in random upkeep like the stuff apt23 mentioned. What do you think is the norm on these.

c) You're assuming less than 1% annual capital appreciation.

Agreed. I'm pretty sure everyone views capital appreciation the same from an accounting perspective. If you prefer, replace $3.3M with $4M. I just want to understand if people, in the end, would view that as a gain or a loss.

where do you get $1k in insurance? Co-op owners insurance is no where near 12k a year. It is pretty much the same as renters insurance would be - maybe slightly more b/c you are insuring the fixtures/built-ins.

OK, seg. So what we have with my numbers is a $7K gap, and you think my rent is $4K understated an my non-financing costs are $2K over-stated, so you think the gap is only $1K a month.

Do you really think $3K covers CCs/taxes/insurance/upkeep/random assessments on a $3M apartment? That's just 1%. And do you really think $14K a month gets you only a $3M apartment?

http://streeteasy.com/nyc/sale/507326-condo-30-west-street-battery-park-city-new-york

seg, here's an example. this is 24F. 32F, which has also been listed for sale at $3.5mm was available for rent for $17k recently, but no indication that it rented. 20F and 29F were both available for rental last year for $8500 and $8900 (one of them was rented in '08, last listed at $12,500. quite the drop).

24F has taxes and ccs of around $4000 (i think this will become increasingly common as abatements run out). nada was also including insurance and upkeep costs, so not so far off.

what i prefer to do though is go backward. find an apartment that you'd like to own that is for rent, and figure out at which price it would make sense to buy. if 20F is your goal, at a $8500 rent with both rents and homes appreciating at 3% a year, according to the NYTimes calculator, you quit losing money on the deal after 27 years if you purchase it for $1.8mm. at $1.5mm it only takes close to 11 years. and that assumes no increase in maint. costs. and 24F is listed for exactly twice that last figure.

"where do you get $1k in insurance? Co-op owners insurance is no where near 12k a year. It is pretty much the same as renters insurance would be - maybe slightly more b/c you are insuring the fixtures/built-ins."

OK, snipey, why don't you educate us with a number. I thought 0.4% was a typical number for a condo, or $12K for a $3M place.

For example, spinny's beloved NY Times rent vs. buy calculator defaults to 0.46%.

AR: For the taxes/ccs on 24F, is that not a land-lease building, like much of BPC?

inonada: I'll concede $3k/month is maybe a bit low for a $3M apartment. But fully-loaded, I still think $3.5 - $4k is very doable.

As to rent muliples, I frankly don't know the rental market well for $3mm+ properties. Maybe you can find one for $10k with some effort. I tend to take AR's approach and start with a rent number in mind and see what you can buy. I think there have been some decent opporunities at slightly lower price points to buy in the 16-18x range. I agree buying at 25x is not wise as your example shows.

I think the higher-end you go, the higher the rent multiples become: finding 25x is very doable. Where have you been seeing 16-18x? Things look much better at those multiples. I was commenting to AR about a month ago that Sutton Place seemed to have the lowest prices compared to rents, particularly at the sub-$1M level.

sorry if this shows up twice. my computer is rebelling again, i sent this from another computer awhile ago.

seg, there's no recent rental comp for this unit (although i suspect it would rent for more than $10k), but i'm posting it to demonstrate how high taxes and cc's are for non-abated recent condo developments (this a pre-war conversion). the future may hold a fair amount of shock for the new development market.

http://streeteasy.com/nyc/sale/465731-condo-260-park-avenue-south-flatiron-new-york

this is 10% more than the $3mm price, but the cc's and taxes are approx. $5200.

nada, i think in certain pockets of the market you can do much better than others. mid-town east, coops in kips bay, coops on the UES. but the condo re-sale market (not new development) seems to be getting worse in terms of rent/buy.

My thoughts on this:
- Agreed that there is a problem for expiring tax abatements- that is an issue for condos
- I tend to look more at coops, and there it is difficult to determine the right multiple because fewer rental properties are available. So it's inherently a judgement call.
- OK, so I agree 16x is a stretch. That is probably too low in the other directoin to accurately reflect a market multiple.
- Nonetheless, in various other threads people have pointed to nice 2/2's or 5-room apartments that have sold in the vicintiy of $1.1mm, and people have agreed they would be ~$5,000 rentals. That's 18x.

My only point -- which it not a profound one -- is that in the 18x range you can construct a credible case for buying. Reasonable people can disagree on this. But at 25x it is virtually impossible to even make an argument for buying.

seg, i was only interested in condos. and i prefer pre-war, so the charges were very apparent.

i agree that some properties make a lot more sense than others. also, if you can buy your "forever" apartment at 30 and you live in it until you are 85 your decision will be (or ought to be) much different than someone who anticipates moving for whatever reason 5, 10 or even 20 years down the road. i know it's impossible to plan with precision, but obviously if you are buying a one bedroom and plan on having kids the need to move will be apparent, or in our case being less than 10 years from deciding whether or not we wish to remain in nyc.