Buying Now Beats Renting

"And $7,000 a month to own."

Shameless, even with all of the numbers staring at him in the face.

Another clownish statement by steve. It wouldn't be $7k per month to own. It would be around $5700 or so pre-tax deduction, $4300-4400 after-tax.

That's right, Juicy and LICC: DON'T INCLUDE THE 15% TRANSACTION COSTS.

Because 15% of $999,000 really doesn't matter.

HAHAHAHA.

LICC, what about principal?

the clown does it again. He says to include transaction costs, but ignores price appreciation. He ignores increasing rents.

JM, correct. steve also ignores the fact that after you pay your mortgage, you actually own an asset of significant value. After 30 years of renting, you have the need to keep paying rent.

inonada
"Although owner-occupied RE has this tax advantage, investor-owned RE has its own set of unique tax advantages (depreciation, the ability to deduct the cost of repairs, etc.) that limit the relative advantage of owner-occupied RE. I'm not saying that the up-to-$20K-ish tax deduction available to owner-occupied should be ignored, but rather that it is a mistake to think that investor-owned RE is at a substantially different cost basis than owner-occupied RE."

a couple of things: 1st the maximum deduction is probably closer to 24k than 20k. but that's nitpicking. and you don't eliminate the taxes by depreciation, you just move it into cap gains and defer it, so the impact is lessened. Finally, you ignore the $500k of maximum gains that are cap gains tax free on the sale of the primary residence.

"but ignores price appreciation."

What is that appreciation?

"He ignores increasing rents."

I included it - 2% per year.

"LICC, what about principal?"

You two sound like Fox News' Beltway Boys: one says something ridiculous, the other agrees with it.

From what I could tell from the example of 8Q, the "principal" was negative.

And your average homeowner owns a home for only 7 years, after which time, on a 30-year 80/20 mortgage at 6%, you will still owe $718,319.89. Meaning that after 7 years - without transaction costs - you will still owe 90% of your mortgage.

But you will have paid $320,013.04 in interest for the joy of it.

That's $3,809 a month in interest, on average.

Your rent is $4,700.

If you make 5% on your $200,000 down payment, that's $833 a month. Subtract that from your rent of $4,700 = $3,867 a month.

What the renter pays in net rent, the owner pays in net interest, and he still owes 90% of the loan. Since transaction costs are 15%, any way you look at it, he's a LOSER.

LICC, why don't you show us the numbers for your LIC pad?

What does the homeowner do after your 7 years steve? This is another dumb tactic of yours. You can't just assume a person owns for 7 years then starts renting, or then goes into another 80/20 mortgage. Just crazy.

I guess steve has accepted the fact that equilibrium has nothing to do with being cash flow positive on day 1 since he continues to avoid my simple questions.

"that's $833 a month"

Not according to the IRS

Bulls -- Home ownership is heavily subsidized. Mortgages are heavily subsidized, since the Feds take much of the risk for free, keep interest rates artificially low and give a completely unwarranted tax deduction for a personal expense. We have a tax credit program that is simply a gift to new buyers. The owner-occupied suburbs are subsidized, by tax-payer funded highways, local government rules that allow the upper middle class to avoid paying for social problems or education, and the wars we fight to keep the price of gas low.

But rent stabilization doesn't subsidize renters. Landlords are legally guaranteed the right to a reasonable return, and builders/developers get improved conditions for new construction. All it does is limit the degree to which renters are required to subsidize landlords, who -- absent rent stabilization -- often exploit their local monopoly power to expropriate surplus created by renters. Without the economic jargon: renters make the city better, and landlords-without doing anything-charge higher rents as a result. That can only happen because of monopoly power, and rent stabilization simply takes part of that unfair and unjustified expropriation and returns it to renters. Not only isn't it a subsidy, it doesn't even lower rents all the way down to the level they'd be in a fully competitive free market.

You may think that renting money from the bank instead of renting property from a landlord is a mark of class superiority, presumably because you don't know anything about NYC, but that's no excuse for getting your facts and economics all wrong.

"You may think that renting money from the bank instead of renting property from a landlord is a mark of class superiority, presumably because you don't know anything about NYC, but that's no excuse for getting your facts and economics all wrong."

What a load of donkey meat. What facts and economics are wrong financeguy? What are you referring to?

Juiceman. Go back to breastfeeding your kid and get me a. Orange juice while you are at it. If you don't understandzzzzz financeguy, you need to take a higher level Econ and finance course. Majoring in juicing ain't helping the discussion. Finance dude nailed it on the head.

w67th, if you want to hump financeguys leg, be my guest. When you are done, wipe off your vagina and ask him what specific "facts and economics" are wrong. Don't forget to pee before you nap.

Pee bf nap? Thatz what diapers are for.

Sorry LICC, Juicy:

http://www.nmhc.org/Content/ServeContent.cfm?ContentItemID=1158

More facts.

"You can't just assume a person owns for 7 years then starts renting, or then goes into another 80/20 mortgage."

But you can assume that they stay there for 30 years, even though the average nationwide is 7?

HAHAHAHA!

"I guess steve has accepted the fact that equilibrium has nothing to do with being cash flow positive on day 1 since he continues to avoid my simple questions."

What?

ATTACK ATTACK ATTACK!

Instead, why don't you provide your own numbers and examples, instead of relying on 'three years worth of threads" that don't exist?

Unless you mean the postings of spunky, malraux, and others now long gone.

HAHAHA!

financeguy, you have taken a far-left socialist view on lots of things. Rent stabilization causes higher than otherwise rents for the market value apartments. It is government manipulation of the market, with no real means testing, that does more harm than good.

LICC + Steve: You have one major substantive disagreement, and that is how to account for the possibility of price appreciation/depreciation is purchasing real estate.

LICC wants to include future appreciation in the current value of the property. That is circular, and the core error that leads to bubbles.

One way to see this is to imagine a theoretical market in which everyone agrees on their facts and expectations: if everyone thinks the price is going up in the future (like LICC), they should all be willing to pay for that increase now, so the price will go up now, which means it won't go up in the future. So if everyone agrees, the price won't go up in the future based on information known now, because it has already done that. Information that isn't known now, of course, is just as likely to be bad as good. So, in our theoretical imaginary market, prices are just as likely to go up as down and you should ignore appreciation/depreciation. For this reason, FUNDAMENTAL analysts always ignore future appreciation/depreciation.

In the real world, of course, not everyone agrees. So, you can include appreciation if (and only if) you think the market is unduly pessimistic: that most people are predicting less appreciation than is likely. People who do this are generally referred to as MOMENTUM investors. Of course, if most people conclude that they know better than the market, they will be wrong: they will drive the price up today to include their guess of future appreciation, and therefore there will be no future appreciation. But it's even worse:

Bubbles happen when most people are willing to pay prices that are not justifiable based on net income -- they expect to make their money selling to someone else. That's only possible if they can sell to someone who thinks similarly, and is even less interested in actual cash returns. So, they are betting that momentum can overcome fundamentals, because the rising prices will encourage momentum investors to bet even more. Eventually, you run out of such people, and then the bubble pops. Now, people who think they know where the market is heading include DEPRECIATION as a cost, and they are unwilling to pay even as much as the property is worth based on its net income. That forces prices below the net income value.

The market price at any given time is determined by the relative strength of fundamental - oriented buy and hold investors and the momentum investors who are paying prices based on their ability to buy just to sell.

The first group define the "equilibrium" price, which despite the name is a theoretical point that markets rarely rest at. They will calculate the net returns to an equity investor in rental property, including the subsidies (mortgage interest deduction for owner-occupants only; subsidized mortgage rates for all mortgages guaranteed by FNMA or in the "too-big-to-fail" CDO markets; etc). If owning to rent has a higher expected return than alternative investments of similar risk, they will buy existing rentals, build new ones, or buy owner-occupied houses and rent them -- each of which tends to reduce the returns. If owning to rent has a lower expected return than alternative investments of similar risk (as Steve believes), then they will sell rentals to owner-occupants, thus tending to increase returns.

Fundamental investors, thus, pushes prices towards one clear point (called equilibrium): where investors believe that they can earn the same amount, on a risk adjusted basis, buying rental property (at current market prices) and holding it (forever) for rent as they could with alternative investments.

Note that these are INVESTORS, and they determine supply of BOTH rentals and owner-occupied properties. If other people are buying houses because of the "aubergine factor", the fundamental investors will adjust. They don't care why people want to own; all they care about is profits. So the equilibrium point for these fundamental investors is going to be a standard, Econ 101 point: price = marginal cost of production. Prices are close enough to (1) cost of building, (2) cost of renovating, (3) cost of converting condos to rentals or vice versa, that there there is no special profit to be made. Otherwise, they keep driving prices towards that point. (In today's market: building, renovating, converting rentals to owner-occupied, thus increasing supply and tending to pull prices down and rents up).

Since holding to rent is a lot of work, illiquid and hard to diversify, normally this "equilibrium" point will be where returns to equity are (1) significantly higher than current 30 year mortgage interest rates, and (2) higher than expected returns from relatively risky passive investments, like the stock market.

However, this is equilibrium, not the real world in any time frame. First, even buy-to-hold investors may be massively incorrect in their guesses about the future: rents or expenses may go up faster or slower than expected. Or interest rates can be so low or high that it distorts investor calculations. On these boards, for example, plenty of people seem to think that because FDIC insured bank accounts pay zero, it makes sense to assume vastly more risk for a tiny chance at a positive return.

Second, any investors don't think in this way. If there are enough momentum investors who, like LICC and Steve, include future appreciation or depreciation in their calculations, they will create vast oscillations in prices -- when they think prices are going up, they include that in what they are paying now, thus forcing prices up now and making other people like them even more likely to overpay. And vice versa on the way down. In real estate, momentum investors can drive prices very far from equilibrium for long periods of time, as we've seen in the last decade.

Still, equilibrium exerts a sort of gravitational force. Get too far from it, and the fundamental types will all be betting against you. On this board, there are many different opinions about where equilibrium is, precisely -- people offer rules of thumb ranging from 8 x annual rents to 15 x and they have various methods of calculation that reasonably justify all but the highest of those numbers. But no one has ANY equilibrium story that justifies current prices.

To justify paying current prices you MUST include expected future appreciation in the current price -- i.e., be willing to assume that when you sell, the market will be even more dominated by momentum players than it is today, and they will be even more more willing to pay even more above fundamentals than they are now. It's a logical error (you are counting the future appreciation, that doesn't yet exist, as part of the current value), but more than that, it is a ponzi scheme error, assuming that not only is a fool born every minute, but more and more of them get more and more foolish all the time, indefinitely. With great luck, you may be able to find your greater fool.

But if you are buying for an indefinite period and don't know when you might have to sell, all you know about future prices is that they will oscillate around equilibrium. Since you don't know whether the momentum players will be pulling it up or down from that point, the safest thing to do is to ignore them and try to figure out, as best you can, what an investor would be willing to pay for a similar apartment if they were planning to hold it and rent it forever, or how much it would cost a builder/developer/renovator/convertor to create an additional apartment of similar quality. That is the price around which the fluctuations oscillate. If you are paying more than that, you should expect depreciation to that level.

LICC: Defending competitive markets isn't a far left or socialist view in any world I'm part of.

In the rational world, people of all political stripes, except for the kleptocrats and their supporters, need to know the difference between subsidies and correcting market failure in order to approach competitive results.

And while there is a distinctly collectivist aspect to our massive subsidies of homeownership, mortgages, highways and gasoline, in standard American political vocabulary, neither those subsidies nor opposition to them are "far left" positions. Socialists, you may recall, are people who think that the military's cradle to grave welfare state, with guaranteed schools, jobs, housing, medical care and maybe even child care, should be extended to the rest of us. I haven't advocated any of that here.

All I said is that rent stabilization is an attempt to prevent landlords from expropriating their tenants, in order to mimic, as best we can, the results that a more perfect and genuinely competitive free market would generate. Every capitalist country in the world has tried such as system at some point, because it is the only way to make residential rental markets viable.

Oh, and that people buying in capitalist real estate markets ought to assess likely future prices in the way that all professionals are taught to.

FG, if LICC could support anything that he says with anything empirical or even theoretical, I'd listen. But he (and Juicy) does nothing but say what other people say - which is supported empirically and theoretically - is wrong, without posting any support.

Based on LICC's and Juicy's posts, it's a good idea to invest $100,000 in a new kitchen if it can increase your rental income by $200 a month, and it's a good idea to buy property AT ANY COST, regardless of the 350-year historical norm, regardless of any of the myriad long-term equilibrium ratios that might exist - in other words, regardless of ANYTHING.

This is not a debate or an argument. It is simply Juicy and LICC saying that real estate is worth whatever they think it is, damn history and theory.

steve, no one is listening to you.

financeguy, nice diatribe. Your Econ 101 view of value is correct, for the 19th century. In advanced economics classes, you learn of the development of economic theory since utilitarianism.

Ha! This reminds me of:

I was just hoping
you could give me some insight into
the evolution of the market economy
in the early colonies. My contention
is that prior to the Revolutionary
War the economic modalities especially
of the southern colonies could most
aptly be characterized as agrarian
precapitalist and...

Of course that's your contention.
You're a first year grad student.
You just finished some Marxian
historian, Pete Garrison prob'ly,
and so naturally that's what you
believe until next month when you
get to James Lemon and get convinced
that Virginia and Pennsylvania were
strongly entrepreneurial and
capitalist back in 1740. That'll
last until sometime in your second
year, then you'll be in here
regurgitating Gordon Wood about the
Pre-revolutionary utopia and the
capital-forming effects of military
mobilization.

Well, as a matter of fact, I won't,
because Wood drastically
underestimates the impact of--

"Wood drastically underestimates the
impact of social distinctions
predicated upon wealth, especially
inherited wealth..." You got that
from "Work in Essex County," Page
421, right? Do you have any thoughts
of your own on the subject or were
you just gonna plagiarize the whole
book for me?

How do you like them apples?

Finance guy - you can't really approximate the house values in a specific neighborhood or city to the stock market. For one thing, the price history of a stock is very well known at any point in time. Housing prices isn't quite a random walk. For a specific locale, your price data may be very sparse. The housing stock may be skewed towards rentals or not, the buildings may be owned by long-time LLs with low mtge and who are inefficient prop. managers, there may be larger demographic/economic trends (see Detroit, white flight). There could be vast amounts of public housing. There may be an opportunity to maximize land utilization by demolishing existing buildings and creating new housing. My childhood house was probably priced at 15X or whatever when I was born. However, the national GDP just about exploded over the last 30 years...

There is a very well-known study of housing in Amsterdam, which says that housing doesn't appreciate more than inflation over 400 years. But if you look at the data closely, you may have long, long periods of price depression as well as long periods of price inflation relative to "equilibrium" - those periods lasting longer than a human lifespan. So what is one to do? If I were of W67's persuasion, I would hold out until death, because then at least my hard-earned $ would go towards my kids and their issue while I wisely rented because the numbers weren't at 8x or whatever.

nyc10023, many a retirement plan was lost on "how can I hold out forever if the new mode is 40x normalized earnings" in the stock market, yet within a decade we saw 12x. I understand a home is different somewhat, and I think you know what you're involved in, but I'm just saying "forever" doesn't always take as long as you might otherwise expect.

LICC, back to our $949K / $4050 example. What do you think happens on rent increases vs maintenance increases? An increase rate of 2.5% each, say, or something different?

forever = 80ys - your current age....

or on the QOL scale.... forever = Age when you wear depends - your age

or on my QOL scale forever = need viagra - your age :)

in dog years..... forever = No longer alpha dog - your age

nada- I don't have historical data on maintenance levels. Sounds fine to me.

LICC, also, what's your holding period? 10 years good, or something else?

Holding periods vary based on lots of factors. Run it for 10 years then we can run for other periods too if we like.

Run it for 10 years - way above average, but it doesn't really changed the math. 15% transaction fees = 1.5% per year = $1,250 per month on a $1 million property.

Sometimes it is a good time to buy property. Just not now.

OK. Two other questions.

What do you think on insurance? Being a coop, I think you only insure within the walls, so it's probably something around $200 a month?

How about upkeep and special assesments? I would figure that every 50 years or so, you'd need to do the equivalent of a gut renovation on the inside and have some appreciable amount assessed for outside work. I'd estimate it at $300K over 50 years, or $500 a month: 2-3 new kitchens, 2-3 new bathrooms for each bathroom, 2 new floors, misc other stuff, several special assessments, etc. Mind you, I'm not talking about making the place spankin' new every 10 years, just maintaining the condition overall to stay in line with comps. What do you think?

"if LICC could support anything that he says with anything empirical or even theoretical, I'd listen. But he (and Juicy) does nothing but say what other people say - which is supported empirically and theoretically - is wrong, without posting any support."

This posted on a thread where LICC has proved steve is wrong based on a comprehensive example, with detailed calculations validated by an intelligent, objective party (inonada). Is there any question that steve is a few forks short of a kitchen set?

Oh and nada, don't use the garbage numbers steve uses. Like with everything, he lies, distorts and misleads.

15%- idiotic.

I don't think insurance is nearly that high. More like $50/month or less. But that is also optional, so I don't think you should include it.

Renovation work is also optional. My grandmother has the original kitchen in her house from the 1950s, and it suits her just fine. A person who buys and puts money into the place is making the choice to do so because they are buying. They likely would want to spend that money just the same if they didn't own, but know it isn't worth it in a rental. We are talking about comparing the costs of owning to renting, not the costs of personal choices for appliances, cabinets, etc.

Otherwise, you would need to add the value of those improvements compared to the lesser value of the same items in a rental in your calculation. This gets too much into vague personal preferences.

JM- to steve, a reasoned analysis, rational thinking and logic are not support. Made up numbers and lies are.

"This posted on a thread where LICC has proved steve is wrong based on a comprehensive example"

Which is what? The apartment that you can rent for $4,700 costs you $7,100 a month to own?

Comprehensive sounding to me!

"with detailed calculations"

What "detailed," what "calculations"? You mind re-posting some of them for me?

"validated by an intelligent, objective party (inonada)"

I know nada didn't validate anything that LICC said. In fact, quite the opposite: he refuted the $4,700 a month rent claim, said, "In the 90s, price-to-rents were around 10x," which is EXACTLY what I said, and, moreover, he said:

"Hence, I think "approximately cash-flow even on day 1" is a good rule of thumb for RE: to ensure that you are getting inflation-based growth as the reward for your risk. Most may not understand the reasoning, but there is backing for it. "

which is EXACTLY what I said.

Boy oh boy JuiceMan, keep spinning, keep spinning. Eventually your legs'll get tired.

"I don't think insurance is nearly that high. More like $50/month or less. But that is also optional, so I don't think you should include it."

LICC, so here's my issue on this. This is not insuring the value of the furnishings within the apartment. Rather, it is insuring the value items within the structure. If the coop burns down, the coop insurance will cut the shareholders a check for the value of the building to the studs, but not for inside. If there's a fire within your unit that burns everything, as an uninsured coop shareholder you're responsible for rebuilding your apartment out-of-pocket. This means the walls, the floor, the wiring, the bathrooms, the kitchen, the closet, etc. As an owner, you have to take the loss. As a renter, you just move onto the next place. You might not have to buy the insurance as an owner, but it is nevertheless a benefit a renter receives for paying the rent. I.e., the renter is not exposed to a $300K liability if the place burns down. The market places a value on this. I don't care whether we add it as a cost to the owner or subtract it from rent as a benefit, but we should put the two on equal footing.

In terms of the amount, I think $50 a month is only dealing with furnishings. How about we split the difference and call it $125?

"Renovation work is also optional."

Here's my issue with this, similar to the last. As an owner, you certainly have the option to not maintain the condition of your apartment. However, what we're talking about here is comparing the rent of an apartment in a certain condition against buying the same apartment in the same condition. We're not talking about renting an apartment that hasn't been touched for 50 years for $4050. Just as an owner may choose to live in a deteriorating apartment over 50 years, a renter has the option of switching to poorer-condition apartments over 50 years. You know, imagine this apartment here, but the floor are buckled, there are cracks in the walls, the paint is peeling, the floors are so scratched that they look like sawdust, the kitchen is falling apart, the bathroom has 18 layers of mold and makes gas station bathrooms look pleasant, etc. Except the difference is that no one would pay $4050 for such a 50-year-untouched apartment today, though they'd perhaps pay $2500.

Do you see what I'm saying?

if you have a mortgage the lender will absolutely require that you have insurance.

"This means the walls, the floor, the wiring, the bathrooms, the kitchen, the closet, etc."

That's not true. The insurance policy will cover repairs to rebuild the unit to exactly what it looked like when it was built, INCLUDING walls, floor, wiring, bathrooms, kitchen, closet, etc. It won't pay for leasehold improvements.

I just finished paying the insurance bill for my co-op: $900 for the year, because it has significant improvements including the addition of a new bathroom, upgraded electricity, plumbing for an in-unit washer, etc. "Contents" insurance is much cheaper than that, and in fact I had to get a special endorsement on the policy to cover the leasehold improvements - it's not standard to have such high coverage for renters' / condo insurance.

There is nothing - NOTHING - that can justify property prices at these levels: not rents, not multiples, not tax credits, nothing.

Except distortions by JM and LICC.

Steve, can you explain a bit more? In this case, the building was build in 1940. Are you saying that the underlying coop insurance will cover rebuilding to a 40's-style interior, but that's it? And you have to pay additional insurance for improvements, which this place has probably had in the past 70 years?

From my time on a co-op board and from my discussions with the insurance company, yes, they will rebuild everything to as-built originally.

Which doesn't mean that they'll replace your 1920's stove with another one (wouldn't that be great!). Rather, they will give you basic replacements for your appliances if they were originally included; they will replace all plumbing fixtures. They won't give you a spa tub, they won't put in a dishwasher if there was no dishwasher originally, they'll build the electrics out to current standards.

That can be contentious. For instance, the plans from my 1961 co-op no longer exist; how will they know what to rebuild? The building is not built to current code; any rebuilding will have to be to current code. They won't replace my second bathroom or my washer-dryer, though they would probably have to replace the plumbing but certainly the extra amps brought in to run the dryer. If it ever happens, it won't be pretty.

I had to get special approval to have my policy approved. I don't know the specifics about the 1940's building, but don't hope you'll get them to replace bakelite with bakelite. If you improved the kitchen, then yes, you will have to insure your leasehold improvements if it's a co-op; if it's a condo same thing, just not "leasehold."

Did you put in marble floors? Same - it's on you. That decorative fire place that LICC has in his living room: ditto.

Here in my rental in the city, all I have to do is insure the contents. However, they won't cover water damage under any circumstances. I live on the 21st floor. If any pipes above me break, I would have to sue the owners of the building or the tenants above me to recover the damages. No insurance will cover water damage caused within your apartment. The building's insurance might, but yours won't.

I always understood it as the co-op's insurance would pay for everything inside (and including) the walls - so plumbing, wiring, while the leaseholder's insurance should cover finishes - so kitchen cabinets, tiling, appliances, etc - call it $50-100k worth of stuff, which makes your $200/month is way off base on that for an apt of this size. Maybe $50/month. is more realistic.

As far as budgeting $500/month for renovations/assessments, that is a difficult number to arrive at. There are plenty of original pre-war bathrooms that are still in use, and highly prized. Maybe you re-face cabinets and upgrade appliances every 15-20 years, but that doesn't cost $120k. Also, there is the fact that owner occupied places have higher quality finishes and appliances than rentals do - no one really plans on renting a place for 10-20yrs, whereas they may want to own it for that long, so these things matter. Look at AR - if I'm not mistaken, she put $$ into upgrading her kitchen when she decided she would be there for a while.

In short, to maintain an apartment to rental-quality finishes is inexpensive - over those 10 years you wouldn't upgrade a thing.

Thanks, Steve, that was very helpful. On the $900 a year insurance you are paying, can you tell us roughly how much improvement that is covering?

nada, as for renovations, if we are talking about buying or renting the same unit, then the value at the time matches. If years down the road a person renovates, that would affect the value of the unit, for both price and rental value. Theoretically, you would be able to rent the place for more if the bathrooms and kitchen are brand new than if not. Are you going to adjust the rental costs too? I just don't see how this adds to the comparison. We are comparing the costs to own vs. the cost to rent. Costs of personal decisions to renovate, to me, are separate.

As for insurance, I'm pretty sure building insurance would cover most of what you mentioned. I'm not completely certain- I never lived in a coop.

Printer, I appreciate your input. It may be the case that pre-war bathrooms are prized by some, but shiny new bathrooms bring in more rent. Furthermore, although rentals in general do have lower-quality finishes, those that do also rent for lower prices when they do. The place I rent was gut renovated a few of years before I moved in, all spankin' brand new. I've got the Boffi range/counters/shelving, the Bosch dishwasher, the Gaggenau oven, the Dornbracht bathroom fixtures, the Zuma tub, etc., etc. I pay extra for that stuff, and I pay extra because it's more shiny. How do I know? Because we looked at some place last year with outfitted with 10-year-old Gaggenau this & that and the 20-year-old bathrooms that were top-of-the-top 20 years ago, and we're like "eh, that's less nice, I'm going to deduct what I'm willing to pay because of that".

That's the point of looking at proper comps. E.g., the Link apartments were both newly-built as of a few years ago. They command a certain rent and price because of this. In 50 years, if they aren't touched, no one will pay the same price/rent for it as a maintained/renovated apartment. We see this here all the time. Some entire apartment line is going for $1M in some building. Then comes the estate-condition place that hasn't been touched since the belovedly-departed grandma lost her virginity in 1954. It sells for $700K.

I don't think it's unreasonable to say that a $1M apartment that has lagged the market by 50 years in upkeep sells for $300K less than one that has been renovated to spankin' brand new. And I don't think it's unreasonable to say that although both apartments fetched the same rent 50 years ago, the one that was just renovated will rent for 30% more.

On the AR thing, I understand, but then again AR ain't payin' $4050 for 1100 sq ft.

"Are you going to adjust the rental costs too?"

Absolutely. We are talking here about rent on an apartment that is in line with the market in general, i.e., one that has been renovated since 1940. The rental price has adjusted for the renovations done. If the apartment had not been renovated, it'd rent for much less. We renters don't like 70-year-old untouched apartments.

If you want to go down the "never renovate or repair over 50 years" line with owning, that's fine, but you cannot expect appreciation in line with the market because the market does do those renovations. You also cannot expect rental increases in line with the market, because that market does renovations as well.

>> Because we looked at some place last year with outfitted with 10-year-old Gaggenau this & that and the 20-year-old bathrooms that were top-of-the-top 20 years ago, and we're like "eh, that's less nice, I'm going to deduct what I'm willing to pay because of that".

Just to follow up on this thought, I would've gladly paid on the order of $1000 more in monthly rent for brand-new shiny versions of the same.

printer I didn't "renovate". I tweaked. I made the kitchen my bitch. almost. I still have an oven I'm not 100 percent pleased with. but I put in things comparable rentals wouldn't have. Assuming a 7 year hold period I spent, not counting the opportunity costs of the capital which these days for me are miinimal, my costs are slightly more than $100 a month.

ok, so then let's say $100/month for upkeep to market standards, which is a lot less than nada's $500/month.

of course there are also the transaction costs of renting - typically a fee of 1 months rent, and the amount of sec deposit that is withheld when you move. Entirely reasonable that you move at least once during those 10yrs, so that's another 1 month's rent, another sec deposit deduction, and moving. I would add that up as (4k + 2k (sec deposit) +4k + 2k (sec deposit) + 2k (movers)), for a total of 14k over 120 months, so $120/month give or take.

But printer that's for seven years. I'll confess that the reno here was pretty classic (maple shaker) but eventually the appliances would be outdated. actually now. I've replaced the fridge and the dishwasher is showing signs of self-destruction so that will only leave the cooking appliances for me to replace.

Just have a look-see at the white-thermafoil kitchen of the not-so-distant past.

Printer, out of curiousity, how much have you put in your place?

BTW, I've got no problem with $120 a month in amortized rental transaction costs, though I would've gotten there a different way.

Except printer the average ownership period is also seven years.

we more or less gut-renovated our place when we bought it. It is 1100 sq ft (the way i measure it, 1250 in bizarro broker measurements), and we spent $160k on the reno - opened up some walls, bathrooms to the studs, kitchen to the studs, new plumbing & wiring, plumbing & electrical for w/d, new moldings, ran cable/phone, low-level skim coating (i.e. not 'museum quality)'. Not super high end fixtures - in the Kohler range of things, and mid-level appliances (bosch, liebherr, capital range), locally built custom cabinetry and built-ins/ radiator covers, new air conditioners, paint, new fireplace surround, re-finished floors, etc.

Except printer the average ownership period is also seven years.

but what is the average rental term? I don't know where to find that number, and if it exists for NYC, it will be highly skewed by rent-control/stabilization. so you really need average mkt-rate rental period, which I'm guessing is in the 3-4 yr range.

printer, that's why this all falls apart. it's individual. i chose 7 years because i'll almost definitely be in my apartment 7 years. so my example is apples to apples as a comparison against the "average" purchase. mine is actually probably much better, because i think i'll be happy for at least another seven years with a few more tweaks, and i'm fairly certain that my price will be far better than market compared to buying.

but whenever i am unhappy, assuming i've put in my seven years or so, i can move to another property with better conditions without having to do the work myself. yes, it will cost something to move. but now landlords are spending a lot more to update and apartments are much nicer. so if i wanted, i could move whenever and not live throught the fifty year kitchen.

rent inflation, if you seriously think it's on the imminent horizon, changes this significantly. i can't have rent inflation for the next seven or so years unless the law changes (dumb luck that), but even so i still see ZERO signs of rent inflation.

We are talking about people buying to live. Not flippers. That 7 years may easily become 10 when you take the flippers out. Also, the market will affect the time period.

nada, if you are going to add the $100 month to ownership costs, how much would you adjust the rental cost to account for increases from renovations to the apartment, over and above your 2.5%?

Printer, can you tell us how many years prior that apartment was renovated before you did it? How long before it's renovated again? As a fraction of purchase price, what did that $160K work out to? I'm just trying to understand the disconnect between someone who spent $160K on a renovation that in 50 years is going to be "estate condition", i.e., well below the standards of the market and worthy of a 30+% discount to the market, and the fact that she said that budgeting $60K for a 50-year period is sufficient for renovation, upkeep, etc.

LICC, let me see if I'm understanding you correctly. We know that you can rent a spankin'-brand-new $1.7M apartment at the Link for $5600. We know that an equal-quality 50-year-old coop that has been recently renovated commands the same price and rent. We know that an estate-condition coop that hasn't been touched in the last 50 years sells for a 30% discount. We know that average rents have tracked inflation, and that the average coop apartment available for rent is nothing like the untouched-for-50-years wreck. Yet you think that the 50-year-old wreck rents for the same amount as the spankin'-brand-new place and the recently-renovated coop?

Can you two explain yourselves?

Flmao. Save your breath/typing/logic. It's lost on the lemmings. Once you are a 'homeowner' you can never ever ever admit a bubble, comparables, nor actual cash at end of your life. The ability to put in nails and color wo having to answer to a 'LL' makes them utter foolz.

"nada, if you are going to add the $100 month to ownership costs, how much would you adjust the rental cost to account for increases from renovations to the apartment, over and above your 2.5%?"

LICC, let me answer your question directly rather than with a series of questions.

Rents for maintained apartments go up with inflation, which the markets are predicting at 2.5%. The rents that CPI tracks are actual prices people pay, and people are not living in untouched-for-50-year wrecks. They are living in maintained places that see substantial repair, renovation, and upkeep over a 50-year period. CPI tries to track constant-quality things, but homes deteriorate over time and must be renovated to stay constant-quality. Note that by renovation here, I don't mean fancier than before: CPI makes adjustments for these. Just constant quality.

Should you choose to maintain a home over a 50-year period at roughly constant quality, then you will track inflation at 2.5%. The cost of this maintenance on a $1M 1100 sq ft apartment is $6000 a year. That buys you a renovation every 25 years and allows you to maintain parity with other properties on the market.

Should you choose to allow the apartment to simply deteriorate over a 50-year period, you will still achieve rent increases, but at a slower 1.85% rate. If you'd like, I am happy to assume that you budget zero for upkeep, but your then your rent gains should then be limited to 1.85%.

"Flmao. Save your breath/typing/logic."

It's utter torture, I tell you.

On transaction costs, on the sell side you've got 6% for the broker, 1.825% for NYC & NYS, and then misc change, so call it 8% altogether. Then there's a 0-2% flip tax since we've got a coop, coop fees, etc.; let's call it 1%. On the buy side, you've got a bunch of little stuff. A recent coop purchaser created a thread the other day complaining that this added up to 2% of coop buying costs, though that's probably on the high side for our example since they were buying a lower-priced apartment. All that adds up to 11%, but let's call it 10% so I don't get any lip.

Good enough, or do you see it differently?

nada- who brought up 50 years? If a person stays in a place 50 years until they die, many aren't going to do all these expensive gut renovations you surmise. If someone is in a place for 10 years, they may do some renovations, as a personal choice. Someone could spend a lot on renovations, spend a little, or not at all.

We are talking about buying and renting the same exact apartment and comparing the costs. I don't agree that your 2.5% rent growth bakes in expensive renovations to the apartment. I know plenty of people who pay market rent for places with 30+ year old bathrooms, if they are in good condition. Basic, inexpensive upgrades are sufficient to keep in line with growth in the rental market. Expensive renovation would raise the rent over market.

Look at printer's example- he spent $160k, but he probably could have spent $300k if he wanted to. You are getting into personal choice which is taking the rent-buy comparison off track.

You say it is torture, but you are not using practical common sense with this. I think you are trying to come up with things to skew the comparison toward renting, but as we dig in more, it seems to favor buying.

For example, in my experience, people who rent for 10 years are more likely to move more often than people who own. More renters (in market rate apartments) than owners that I know move more than twice in a 10 year period. If you want to assume a very expensive renovation of the apartment in 10 years, and not adjust the rent increase accordingly, you should assume 3 or 4 rental moves in a 10-year period and the corresponding transaction costs.

For transaction costs, 6% is high for the broker, but we can go with 10%, seems fair.

"On the $900 a year insurance you are paying, can you tell us roughly how much improvement that is covering?"

I think it's around $150k.

"For transaction costs, 6% is high for the broker"

Another delusion from LICC to try to get his numbers to work. NEVER have I met a real estate agent who would work for less than 5% - for the simple reason that no other broker will show the apartment.

inonanda, you're forgetting mortgage tax, mansions tax, conveyance tax, stamp tax - I listed them all earlier in the thread.

15% is quite reasonable for transaction costs. So reasonable, in fact, that it comes from corcoran.com.

"Rents for maintained apartments go up with inflation"

No. Rents for maintained apartments go up with incomes, with normally are higher than inflation.

steve, you have been proven clueless over and over again. No one is listening to you.

"steve, you have been proven clueless over and over again."

Show me your 2% brokerage agreement.

HAHAHA!

LICC, I've got no problem with budgeting for 3 moves on the rental side, just as I had no problem budgeting for 3 sets of broker's fees. Let's call it $3000 a move, and there will be two moves more than the buyer, so $6000 total, or $50.

Note my response: you make a reasonable point, I agree with your point. I don't start arguing about getting friends to help move boxes.

I understand that many people rent 30-year-old bathrooms, just as many an old lady dies in an estate-condition apartment. These places simply don't appreciate at the same rate as the market. We have strong evidence for this in the fact that estate-condition places lag the rest of the market by 30%. Basic, inexpensive upgrades are sufficient to keep up with the rental market of basic, inexpensive apartments. Fancy upgrades are required to keep up with the rental market for fancy apartments. We are looking at apartments at points in time, and the renter will be switching to an equal-quality apartment every 3 years.

In any case, you seem to have begrudgingly agreed if I budgeted for a move, so we'll go with $500 for amortized upkeep & misc assessments.

nada- what about the 1-month rent broker fee and the sec deposit? Cut the moving costs down to $1k per move to assume you have friends that will help out wiht boxes, that seems fine with me, but you need to include the extra transaction costs.

We are not going to agree on the upkeep costs. If you are renting the apartment, you just aren't going to do a gut job on a kitchen and bathroom. You may upgrade appliances once every 10 years, change a vanity or shower door, fixtures, things like that, but not a gut job. And those kinds of less expensive upgrades will be fine to keep up with the rental market. Part of the benefit of owning is having the option to spend as much or as little as you like to renovate your place however you like. Renters accept this. If you are going to assume a gut job and an expensive renovation, you need to significantly increase the rent cost that year and then go with your standard increases from there. But we are going beyond what the comparison should be- the cost to own v. the cost to rent. Not the cost to own plus the cost of optional expensive upgrades based on personal choice v. the cost to rent.

I'll go with $100/month as printer said to appease this argument, but not $500.

Steve, there is no mortgage tax on coops, I don't think. I offset mansion tax with 5% fee as you cross $1M. What is a stamp tax?

LICC, for the record, how much do you pay for insurance as a fraction of your purchase price?

Stamp tax is a UK thing, inonada.

My personal monthly insurance payment? Why include this? Don't renters as well as owners have the option for very similar insurance? Why would this make a difference to the analysis?

Monthly insurance for owned property should be higher than that for rented property, because you the homeowner bear the cost for replacing fixtures. My home insurance policy costs me 10x what my insurance policy would cost if I were an owner. Tell me that it doesn't make a diff. to the analysis.

"My personal monthly insurance payment? Why include this? Don't renters as well as owners have the option for very similar insurance? Why would this make a difference to the analysis? "

I am trying to get a sense of what insurance rates are paid by various people to reach an informed conclusion. As a renter, you simply insure the contents of your place, or not. To insure something like $25K would be something like $150 annually, or a 0.006% rate. As a coop owner, you have to insure the improvements to your place since the place was built. This place was built in 1940, and has likely had improvements. Steve gave a data point of $900 on $150K of insurance, or 0.006%. As a condo owner, I'm not sure what exactly you need to insure. For example, if the building is not insured by the common charges, then you'd presumably have to insure the apartment itself since the bank does not look favorably on lending to uninsured assets prone to potential destruction. By giving us your information, it'll give us another data point. It'll also help me learn about how condo insurance works.

BTW, I don't want the payment amount. Just the amount as a percentage of your property value or amount insured.

"there is no mortgage tax on coops, I don't think."

You are correct - I offset it with the flip tax, that doesn't usually exist for condos.

"Why include this?"

HAHAHAHA! More ignorance from LICC. Insurance is the second "I" in PITI: principal, interest, taxes, INSURANCE.

You need title insurance and PROPERTY INSURANCE to get a mortgage. They are hefty in cost.

Renters have the option of buying CONTENTS insurance, they do not and cannot get PROPERTY INSURANCE.

Nada, each insurer is different: since I have improvements insured, my co-op insurance is titled condo insurance. Were I to insure just the contents, it would be renters' insurance.

Stamp tax is another name for the conveyance tax: you're paying for the stamps they put on the deed. It's not just a UK name; it's commonly used here, too.

Inonada: when I refi-ed recently, the bank required a minimum of X in insurance. So I upped the insurance. I am paying approx. .5% (Steve, by the way is paying 0.6% NOT 0.006% - you forgot to multiply by 100). By the way, it's not a clean replacement # because it also includes personal effects. I'm paying approx. 10% for my personal property.

For those who say there is nothing in the current market that has a chance of providing an adequate return in excess of financing costs, here's a few units to consider. Differnt types of units, different types of buildings.

555 W 59 #31A (Element) -- Sold $2.46m, rented for $9,923 net of free month ($10,750 gross).

205 W 76 #8G (Harrison) -- Sold $1.64m, rented for $7,000

155 W 68 #31C (Dorchester Towers) -- Sold for $1.04m, rent appeard to be $6,000

2025 Bway #6CDE (Nevada Towers) -- ASKED at $1.5m (did not sell), rented for $11,000

The respective cap rates (after MM) are 3.9%, 4.0%, 4.7%, and 5.2% (on Day 1). If you add in the (much discussed) generally accepted 2-3% expected inflationary growth, then the expected returns are in the 6.0% - 7.5% range, which is in excess of today's prevailing mortgage rates. And quite significantly in excess of mortgage rates if viewed on a tax-adjusted basis.

Any thoughts here? Maybe these are outliers but the notion that there hasn't been aything close to providing an acceptable return is not quite correct, I don't believe.

And yes, my calcs ignore transaction costs. IMHO, transaction costs to buy are not going to make a big difference amortized over time. If you assume that you sell, that of course does move the needle.

http://streeteasy.com/nyc/rental/550691-condo-555-west-59th-street-lincoln-square-new-york

http://streeteasy.com/nyc/rental/629116-condo-205-west-76th-street-upper-west-side-new-york

http://streeteasy.com/nyc/rental/537663-coop-2025-broadway-lincoln-square-new-york

[it wouldn't allow the 4th link]

So...the investment thesis is to buy an asset that cannot be resold?

I'm trying to recall the difference in insurance payments. I may be paying a little more now, but it really isn't that much. I think renter's insurance also has some personal liability protection, not just furnishings.

steve, everyone knows you are a fool and a liar. No one is listening to you.

CC: My investment thesis (really more of a hypothesis), is to examine an owner's expected nominal returns ignoring capital gains. If you assume no capital gains, and simply look at expected returns vs. financing costs, then that is premised upon holding the property. I acknowledged that if the owner sells then transaction costs to reduce the returns. Anyone can feel free to do the math and calculate it for themselves.

So, you've chosen to ignore two large costs? What is your point?

Just in case it wasn't clear - I am paying 90% more because I own (insurance-wise).

seg, I don't know where you get your numbers for, but if 31A sold for $2.45 million - a hefty discount from the $2.93 million asking price - but that is NO WAY that comes close to covering a standard 80/20 mortgage, which at a VERY GENEROUS 6% has monthly payments of $15,000.

Plus tax of $400 a month, plus insurance, and you're talking about carrying costs of $16,000, versus $9,900 in rent.

Seems like a money maker to me.

"IMHO, transaction costs to buy are not going to make a big difference amortized over time."

That's really funny. 15% of $2.5 million is $375,000.

Spoken like a true realtor.

LICC - seems my suspicions that you don't even own a property, not in Long Island City or anywhere, are TRUE!

You don't know how much your insurance costs, or what it even covers?

Pleeeeeeze.

HAHAHAHA!

CC: I think I already explained myself. You have carte blanche to add them in and prove that my returns are wrong. Be my guest. I excluded sale transaction costs because I was calculating returns for holding (for carry), not selling (for a capital gain). Believe it or not, some investors/homeowners do take a buy-and-hold approach, in all asset classes, as rare as that may be in the NYC condo market.

But let me try to humor you. Let's say total round trip transaction costs are 12%. 15% is absurd. (As an aside, coop purcahse costs are more like 1.5% - 2%.) But anyway, let's take the unit at the Harrison. To keep it simple, let's not amortize and just add 12% to the purchse price on Day 1. The cap rate goes declines from 4.0% to 3.6%. I'm not sure how you could be much more punitive than that on transaction costs.

The one correction I will make is that I portrayed a 2% premium to financing costs as "adequate". That is not strictly correct, and many would argue (with some justification), that 2% may not be sufficient to compensate for the risk. Ultimately it seems it must be a matter of risk tolerance and comparisons to other investment alternatives.

(As an aside, coop purcahse costs are more like 1.5% - 2%.)

Really? You realtors work for free when you sell co-ops?

And none of them charges flip taxes?

And their conveyance is free?

And nobody has to pay points on their mortgages?

HAHAHAHA!

"Believe it or not, some investors/homeowners do take a buy-and-hold approach"

I believe that. Just not when they're losing $5,000 a month.

Double HAHAHAHAHA!

You guys are unreal.

There has been a call coming from multiple directions to post units that demonstrate that the market (in some areas) is lower than 25x price/rent. I posted 4 units all significantly below 25x.

I am sorry that you did not find it helpful.

Steve, did I ever claim that buying a coop grants you magical powers to avoid paying your broker when you sell it? REALLY?

"I posted 4 units all significantly below 25x."

$9,900 * 12 = $118,800

$2,450,000 / $118,800 = 21x.

And that's why they lose money renting it out.

IF that's the actual sale price. The asking price was 25x.

"did I ever claim that buying a coop grants you magical powers to avoid paying your broker when you sell it?"

Yes. "coop purcahse costs are more like 1.5% - 2%"

Nobody's talking about just the PURCHASE cost. Eventually, you have to sell the place. Unless your immortal.

"seg, I don't know where you get your numbers for, but if 31A sold for $2.45 million - a hefty discount from the $2.93 million asking price - but that is NO WAY that comes close to covering a standard 80/20 mortgage, which at a VERY GENEROUS 6% has monthly payments of $15,000.

Plus tax of $400 a month, plus insurance, and you're talking about carrying costs of $16,000, versus $9,900 in rent."

Steve:
1. The $2.46m sale price is clearly marked on the Recorded Sales history for the building.
2. The monthly payment on a standard 80/20 mortgage at 6% is $11,800, not $15,000 as you say. And that is before any tax deductions.

"That's really funny. 15% of $2.5 million is $375,000."

Wasn't trying to be funny. In my statement I said costs TO BUY. You are having reading comprehension issues again.

And I demonstrated in the other example the impact of full transaction costs. Again, feel free to run them yourself.

You're right on the mortgage - my bad. I pressed the wrong button. That's the payment on the entire price, not on 80% of it.

Nonetheless, the loss is still there, and it's still hefty. And it's still 21x annual rent.

And - you don't get a separate mortgage tax deduction on a rental property. In this case you would have a loss of about $4,000 or so a month, EXCLUDING transaction costs, IF the mortgage rate were 6%, but it's likely higher as this is not a conforming mortgage.

That loss is NOT tax deductible, unless you have a business renting property that MAKES money. So you're talking about a nondeductible loss of about $50,000 a year for the foreseeable future.

Or, you could sell the place (maybe) and (likely) at best break even, though you'd probably have to take some money to the table to dump the place.

"And - you don't get a separate mortgage tax deduction on a rental property. In this case you would have a loss of about $4,000 or so a month, EXCLUDING transaction costs, IF the mortgage rate were 6%, but it's likely higher as this is not a conforming mortgage."

Steve, you have chosen to run with the example at the Element, which is proabably the WORST of these examples because at 21x it has the highest multiple of the 4, and it's also is big enough that you're right, it would not have a conforming mortgage.

But here's how I would look at it. Let's think about it not as an investment rental property, but as an owner-occupied property. What is the comparison of owning it vs. renting it yourself?

Let's say 6% is the overall financing cost. Whether it's the opportunity cost on your cash for a cash buyer, or the rate on a mortgage for someone who finances the purchase. So apply the 6% to the entire purchase price, not just the 80%. At 28% tax bracket, that gets to a tax-adjusted payment of about $11,300.

So yes, you are correct, it is negative carry on Day 1 vs. renting. Add maintenance and it's more negative vs. renting.

Question is, with 3.9% cap rate + expected nominal inflation growth (2-3%), does this property to make sense to buy? In my mind, still probably not, because the price is still too high. But it's at least debatable here, as opposed to 25x properties.

I just picked the first one - I didn't do it on purpose. I didn't look at any of the others.

"What is the comparison of owning it vs. renting it yourself?"

That is the contention on this and every other thread that LICC posts on.

Historically:

1) Owner's costs = market rents
2) In NY, the price-to-rent ratio is 12x annual rent = price

Based on that, this unit does not make sense, and it's not even close. Not something I would touch.

"expected nominal inflation growth (2-3%), does this property to make sense to buy?"

No. Property prices are not figured into inflation - rents and imputed rents are. Therefore, it's very possible - and likely IMHO - that this unit will fall in value, and significantly, in the medium-term.

Regarding "owner's costs = market rents," this is because buying a place to live is considered a capitalized expense - a future stream of rental income - which is amortized over the life you hold the property. Therefore, no matter how you slice it, regardless of any tax deductions you take into account, owner's costs must equal market rents, else your capitalizing something that is more expensive than it would be just to pay it as a current expense.

That is also why - except during this recent boom - imputed rents are used instead of property prices: they are assumed to reflect market prices, and there was an underlying assumption - based on historical precedent - that people won't for long pay more to own a place to live than to rent one.

That is, all property bubbles burst.

"a future stream of rental income" = "a future stream of rental expense"

OOPS!