Buying Now Beats Renting

See above for more utter nonsense from steve so he can somehow try to justify not including the tax deductions when comparing rent and ownership costs.

LICC - HAHAHAHA!

We already know that a) you live in Long Island not in Manhattan, yet post endlessly on Manhattan real estate, and we have now learned that b) you are a renter, because you don't even know how much property insurance costs, what type of insurance property owners can get, and what is covered and what is not.

"so he can somehow try to justify not including the tax deductions when comparing rent and ownership costs"

That wasn't the question I was asked. I was asked whether I would buy an apartment that I would lose $4,000 a month on. The answer is no.

I don't need to justify anything - every piece of literature, theory, empirical evidence ever compiled indicates the same thing: owner's carrying costs = market rent.

When that is out of line, prices are either too high (time not to buy) or too low (time to buy). Now's the time to buy.

If you're willing to give up your 3-bedroom in the Queensbridge Houses, that is.

"Now's the time to buy" in Your Mind (I forgot to type).

Not in mine.

OOOPS!

Steve is still too pissed about his stock market losses to make an intelligent argument...

calculating the closing costs of purchasing a co-op on a percentage basis is baseless, as most of the fees involved are fixed $ amounts, not contingent on the value of the property (mansion tax being the obvious exception).

you certainly can't include mortgage points, as those are optional and a financing decision. And a flip tax, if there is one (my building has none), is paid by the seller, and is in effect a substitute for assessments for major cap ex - so you can either use that # or expected assessments, but not both.

I went back and looked through all my costs, and on a percentage basis I paid just under .5% when I purchases the co-op.

"is still too pissed about his stock market losses to make an intelligent argument..."

Actually, I'm doing quite well, thank you very much. All of my shorts are up about 10%. Just because a market as a whole goes up doesn't mean that what I'm in is going up, and it's not.

And when there's a further correction - which there will be - I'll be up about 25%, when I sell and wait.

"on a percentage basis I paid just under .5% when I purchases the co-op."

That's fine, printer, but you'll eventually have to sell it (or die). When you do, it's subject to a bunch of fees, either for you or your heirs.

ALL of those costs must be amortized.

Including points, which is prepaid interest on the entire loan. If you pay 1 point on a $1 million loan, that's $10,000 in prepaid interest which would otherwise have been amortized over the life of the loan. If you don't take them into account, then it would skew the comparison between pointed and pointless loans. :0

"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."

spot on - that's what I was trying to explain yesterday. landlords don't replace wiring, upgrade plumbing, change tiling, change cabinets, skim coat, etc. they do the absolute minimal necessary - fresh (cheap, white, single coat) paint and maybe re-finish the floors every 10 years, replace appliances only when they are broken beyond repair with whatever HD has on sale that month.

Take a look at the pics of steve's place if you want to see for yourself

> Actually, I'm doing quite well, thank you very much.

Yes, we all know what you mean by "well".

> All of my shorts are up about 10%.

And your longs are down several times that.

We know.... you made all your calls right here on the board. Endless source of amusement.

It is subject to fees, no doubt. Let's assume I use an agent to sell it, and pay the full 6%, so that's 6%. and then another 1.825% for transfer taxes, and another say 2k for attorney. add that with my .5% to purchase and you are at <9%.

And of course one always has the option of trying to sell it by owner, or using a discount broker to eat into that.

"And your longs are down several times that."

Don't have a single long. Sorry.

"Take a look at the pics of steve's place if you want to see for yourself"

Which of my two places? Both have brand new kitchens and baths.

"It is subject to fees, no doubt."

No doubt. Both ends around 15%.

steve, everyone knows you are a liar, a lunatic, and your theories and assertions are completely unintelligent, and ripe with mistake after mistake.

No one is listening to you.

"everyone knows you are a liar, a lunatic"

Really? Who is "everyone," besides you?

"My" theories aren't "mine": some are from the Wharton Business School, others are from economics, others are based on empirical research by Shiller and others.

I'm sorry that you were outed as a fraud, LICC: anyone who owns property knows how much their insurance costs and what it covers, as it's a very expensive proposition. It happens that I just renewed the insurance on my co-op yesterday, but had you asked me 3 months ago how much it cost, I could have told you within $25.

Fraud, fraud, fraud. Nanny-nanny-boo-boo.

Wharton Business School? You went there?

I'm thinking that you should add furniture purchases, vacations, and the yearly wine bill to the cost of owning. Probably gym memberships, strip club expense, and groceries as well.

steve, everything you say is utter nonsense. printer had to go back to look up his insurance cost. Is he a fraud?

When you cite to an economics paper, then distort its findings and conclusions, and quote from it out of context, that becomes your theory.

actually, jm, these days at least a portion of those discretionary purchases should be added to the cost of renting. as it's cheaper, you have more money for such frivolities. not that i'd know about the strip club expenses, of course.

"Wharton Business School? You went there?"

Nope. That's where the research I quoted originates from.

"When you cite to an economics paper, then distort its findings and conclusions, and quote from it out of context, that becomes your theory."

Unlike you - FRAUD - I provide the link to the entire paper. The paper says that the purchase price of a home is a stream of capitalized rent, and only you deny it. The source says the long-term price-to-rent ratio in NY is 12x, and you say it's 25x. The source says that rents rise with incomes, and you say they rise 10% a year.

The facts remain, LICC: you don't live in Manhattan yet you post incessantly about it, and you don't even own a property and never have. You are as much of a fraud as petrzitz claiming to live next to Celine Dion.

I think you have Island Envy.

HAHAHAHA!

http://blogs.reuters.com/felix-salmon/2010/04/30/housing-quiz/

"But I think there’s something real going on in this chart as well, and it’s rational, to boot. Let’s ignore the difference in housing stock between purchase and rental properties for the time being, and create an oversimplified model where prices are set, in a rational market, at the net present value of future rents. Does it make sense that the prospects for future rent increases are much more robust in LA, NY, and SF than they are in Tampa and Atlanta? Of course it does: vibrant urban centers are much better placed, economically speaking, than endless crumbling exurbs.

In turn, what that says to me is that the market does a pretty good job with respect to pricing in future appreciation or depreciation in rents. There’s a clear baseline cluster around the 20 mark, and then an adjustment is made to that number according to the rental outlook from city to city.

Still, the top five cities are clearly outliers and far too expensive: it would be foolish, I think, to buy in any of them."

steve. You have been exposed. You are incompetent, and a liar. You often try to change the subject after you have been made the fool, but guess what:

no one is listening to you.

"create an oversimplified model where prices are set, in a rational market, at the net present value of future rents."

Yes - that is what should happen.

But I have to disagree with the model - the price-to-rent ratio in NY is nowhere near 40. The key is this: "what that says to me is that the market does a pretty good job with respect to pricing in future appreciation or depreciation in rents."

That is a different model, the imputed rent model, which takes that into account, and for which the ratio tends to be about 20x, not 12x.

This is ridiculous: "Does it make sense that the prospects for future rent increases are much more robust in LA, NY, and SF than they are in Tampa and Atlanta? Of course it does: vibrant urban centers are much better placed, economically speaking, than endless crumbling exurbs."

It depends on the supply and demand.

This is also stupid: "The top five cities are clearly outliers and far too expensive: it would be foolish, I think, to buy in any of them."

In SF, the ratio is much closer to the historical norm than in NY.

"steve. You have been exposed."

As what? I rent (and have owned) in Manhattan, and I have a vacation property that I own in Suffolk. You own nothing, rent in Long Island City. You don't even know what's included in homeowners' insurance, or how much it costs.

FRAUD!

"You are incompetent, and a liar."

Then I'm pretty well paid and trusted, considering what I do for a living.

Here's a test to see if you're an owner, LICC:

Call your board or managing agent and ask them whether your building's insurance policy covers earthquakes.

I'll give you an hour.

Steve, how are you not a gazillionaire?

> I think you have Island Envy.

I think steve has success envy. If others made money, and he lost money, he'll spend all day trying to rationalize.

I like how steve makes things up about me. This is similar to how he bases in conclusion on real estate and stocks. Utter nonsense.

40 minutes to answer the Pop Quiz, LICC: does your building have earthquake insurance?

SWE - you bore me. I have 2 residences, significant assets, and a happy life. I didn't marry someone to get where I got.

30 minutes left, LICC: PROVE YOURSELF.

Or should I say, SWE, I didn't let money come into me.

"SWE - you bore me. I have 2 residences, significant assets, and a happy life. I didn't marry someone to get where I got."

She doth protest too much.

For a guy now claiming to be bored and comfortable, you spend an AWFUL lot of time trying to rationalize.

Pretty clear evidence to me...

Rationalize what?

LICC - TIME'S UP!!!

Does your building have earthquake insurance? A simple call to the managing agent will answer that....

LICC FAILS ON ALL ACCOUNTS!

Proved a fraud, he can't even call the managing agent of where he claims to "own" to find out if the building has earthquake insurance.

Yes, LICC, it does: earthquake insurance is standard in all building insurance policies in New York, including homeowners' insurance. You could have even looked that up in your renter's policy - if you had one.

HAHAHAHAHA!

What a fraud. Constantly posting about things he knows NOTHING ABOUT.

Still relying on LICC's erudite opinions, Juicy?

"As what? I rent (and have owned) in Manhattan, and I have a vacation property that I own in Suffolk."

Steve, didn't I and others congratulate you on having sold your vacation property in Suffolk? Did you buy another one with the proceeds after having said that it's a bad time to buy? Or did you own two? Or did the sale fall through? Or did you mean past tensed, "I ownED"? Confusing.

"didn't I and others congratulate you on having sold your vacation property in Suffolk"

Alas, the sale fell through b/c they couldn't get a mortgage after the Lehman fiasco. It's still for sale, but no problemo, I'm going out tomorrow - I'd might as well enjoy it while I still have it!

When it does sell I'm thinking about buying a house with a pool. Maybe SWE can come out to celebrate with me.

steve the liar clown strikes again . . .

LICC, admit it, you're a FRAUD! You can't even answer THE MOST BASIC questions about homeowners' insurance.

Not how much it costs, what's covered, what's not covered, nothing.

You can't call your building's management agent because you're a renter, and they won't answer that questions.

Not that being a renter is in and of itself bad - I do that half-time - but claiming to be one thing when you're really something else, is being a FRAUD.

You're a poor, miserable, Long Island City renter, and a FRAUD.

"earthquake insurance is standard in all building insurance policies in New York"

LOL -- and you can't get it in California.

Of course you can't get earthquake insurance where you NEED it, nada. Why would they do that?

A big earthquake in NY would be an utter disaster.
The lack of historical major ground movement means our undercarriage is so much more tightly packed that a 7.0 earthquake in NY would be like a 8.0 in CA.
Look what a little bubble did to AIG, you think anyone will be around to pay your claim after a major earthquake? In the end you'll get whatever federal funds will be able to dole out to EVERY owner. Save your money.

"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."

Yet here I am renting a gut-renovated place. Not just the kitchens and bathrooms, mind your. Major architectural changes made a couple or few years before I moved in. And there's the Link apartment, renting at $5600, which is at a 25x multiple.

"spot on - that's what I was trying to explain yesterday. landlords don't replace wiring, upgrade plumbing, change tiling, change cabinets, skim coat, etc. they do the absolute minimal necessary - fresh (cheap, white, single coat) paint and maybe re-finish the floors every 10 years, replace appliances only when they are broken beyond repair with whatever HD has on sale that month."

Sure. You know what the rent of 1100 sq ft with new "minimal" replacements is? About $3600, below average market for 1100 sq ft. You know what rent of 1100 sq ft done newly-done with high-end everything? About $5600, well above the market average for 1100 sq ft. We are not comparing $3600 to $1.7M, or a 39x multiple. We are comparing apples-to-apples, which in the case of the Link apartment would be 25x, or the one we're working on, 20x.

So here's my question to you two. What do you think would happen to the $5600 Link apartment if no improvements or renovations were made for the next 50 years? Would it stay "well above average" in terms of the rent it could command? Or would it fall to "well below average"?

FYI, I'm perfectly happy to disagree on upkeep costs: that's part of the point of this exercise, to see where we see things differently. I happen to think that if average rents move up at rate of 2.5%, then those that are not maintained move up at a slower rate of 1.85%. You happen to think that they move up at the same rate as the average rent, 2.5%. I'm trying to understand whether you think this is because the average apartment is left to deteriorate with no upkeep over 50 years, or something else. My observations of the rental stock in NYC seem to indicate that the average apartment available for rent has not been left to deteriorate for 50 years.

You can't avoid earthquake insurance, truthskr. There's no way to get it removed from your policy.

Like my renters policy here, they try to force flood insurance on me. I live on the 21st floor. If a flood reaches this high, we're in a whole heck of a lot of trouble.

Poor LICC - he didn't know ANY of this. Pity the LIC renter.

"Save your money."

Uh, given the predominance of brick buildings in NYC, you might not be around to make use of the saved money, so it might be moot when the big one hits.

nada - what neighborhood are you in?

wait, sometimes they do huge renovations. like pcv/st's lobby, elevator, wiring renovations for a/c that were done. that's to capture MCI increases in rent, but it certainly does happen.

i also moved into an apartment that had been gut renovated. i doubt it's as nice as nada's, but in 2004 it was the equivalent of most higher-level apartment buildings. i wanted pan drawers, a 36" counter depth refrigerator, a pull-out panty, a linen closet, so i put those things in myself. but i certainly could have lived without them.

btw, those earthquakes? one seems to be due now.

http://www.earth.columbia.edu/articles/view/2235

nada, you are the one talking about 50 years. No one else is. In your example, the owner is selling after ten years. Why would they do a gut renovation of the kitchens and bathrooms? If they bought another place after ten years, it would either not need a renovation, or it would need a gut renovation and the purchase price would reflect that. If you want to use a 50-year ownership for comparison, how many rental moves are you going to include? How many adjustments up in rent based on gut renovations are you going to include? Are you going to reduce the ownership costs after the mortgage is paid off and work that into the comparison?

Using your Link example. If the owner was renting it, and planned to do so for ten years, do you think they would gut renovate the kitchens and bathrooms of a new construction building within 10 years? 20? More likely, they would upgrade as we said before, in years 10-20: new fridge, fixtures, etc.

steve, sorry to hear about the Fire Island sale falling through - I think that would have been perfect timing, to have sold at that time - however, now you can enjoy it for yourself, and renting out there is such a pain in the rear - I would not buy a house with a pool on Fire Island, though.

Without following the blow-by-blows of your latest exchange with LICC, why would you assume he's a renter? The area he's made it clear he lives in has next to nothing in the way of rentals, and when he moved there I think there were absolutely zero rentals.

He knows I own my place lowery, he is just idiotically trying to distract the conversation away from the fact that his dumb analyses have been exposed again and everyone can see how much of a clown he is.

More questions.

Financing costs? I think you had mentioned 20% down, which I'm fine with. This bad boy'll be a jumbo. To make life easy, let's assume no points, which is currently running at 6%.

Next: tax deductibility. We've got $45K in interest and $8K in taxes (I assumed half of $1380 maintenance is deductible). I figure this buyer is squarely hitting AMT: $200-300K income. That means the marginal benefit of the federal interest deduction is 28%, or about $12.6K. The $8K in taxes gets thrown out by AMT. On the state & city side, the $45K is deductible at a marginal tax rate of 10%, except that you're giving up $7.5K - $15K in standard deductions. So, let's call it $35K at 10%, or $3.5K benefit on the NYS / NYC side. The tax benefit, therefore, works out to $1350 a month.

Agreed?

i also presumed that licc owned.

his defense of the area seems rather intense for a renter. but i defend my living situation (although not the exact area so much) so who knows.

"Using your Link example. If the owner was renting it, and planned to do so for ten years, do you think they would gut renovate the kitchens and bathrooms of a new construction building within 10 years? 20? More likely, they would upgrade as we said before, in years 10-20: new fridge, fixtures, etc."

Yes, I think 10-20 years. That's why I budgeted for 2-3 renovations over 50 years. Currently, the Link is on the high end in terms of quality compared to average available for rent or buy. In 20 years, it'll be on the low end. A gut renovation would make it high end again. A kitchen-and-bathroom renovation would buff it up to the higher side of the mid end. However, during those 20 years in its transition from high-end to low-end, it would command, on an averaged basis, the average price & average rent. However, we are looking at today's price and rent, which is the high-end. To make things line up, you have to either amortize the cost of keeping it at the high end, or you must reduce the rate of appreciation, as compared to the "average" on the market", which is cycling through 20-year renovation periods.

ok, licc, if the owner is selling every 10 years they have the transaction costs. which are far greater than the costs of a broker and moving, generally, for a like product, particularly on the higher end.

$200-$300k income would give a bigger marginal benefit on the federal. 33% AMT doesn't reduce the mortgage deduction.

I'm not sure if $8k is a good estimate for AMT, it might be a little lower.

nada, we disagree. Over 20 years, it would not need a gut renovation to keep it within the normal increases in the rental market. If you are going to project 50 years, you will need to base the monthly costs on 600 total months and mortgage payments for only 360 of those and adjust accordingly.

ar- we are including the transaction costs. nada is going with 10%, and we are assuming 3 moves for the renter. nada- what are the rent transaction costs- around $20,000 total?

Financing costs? I think you had mentioned 20% down, which I'm fine with. This bad boy'll be a jumbo. To make life easy, let's assume no points, which is currently running at 6%.

Next: tax deductibility. We've got $45K in interest and $8K in taxes (I assumed half of $1380 maintenance is deductible). I figure this buyer is squarely hitting AMT: $200-300K income. That means the marginal benefit of the federal interest deduction is 28%, or about $12.6K. The $8K in taxes gets thrown out by AMT. On the state & city side, the $45K is deductible at a marginal tax rate of 10%, except that you're giving up $7.5K - $15K in standard deductions. So, let's call it $35K at 10%, or $3.5K benefit on the NYS / NYC side. The tax benefit, therefore, works out to $1350 a month.

Agreed?

No. 1st I think most people in co-ops put down more like 25%, but that would obviously impact the opportunity cost so I have no real issue with 20%.
However, I don't know where you get your tax stuff from. AMT does not affect the interest deduction for a primary home. It can effect the way home equity loans are treated (if proceeds not used to improve the house), but that isn't the case here. Agreed that the deductions for property tax would be elimated, though some of that maintenance is likely going to pay down the co-op's mtge, which I believe is still deductible, though I'm not sure. And why do you assume that someone loses the standard deduction on state/city taxes? More than likely this person already itemizes.

so, $45k at 33% = $15k + 4.5k at state level = 19.5k = 1625/month
So,

Actually, renter transaction costs on 3 moves would be a little more, closer to $23,000. $190 per month.

printer- good point, you have to assume the person would be itemizing anyway, so they don't the standard deduction in this analysis.

licc, i've never paid for a broker. nada is talking higher end, where you definitely seem to get lower rents and better terms using a broker. i'm not necessarily conceding 3 moves. i'm in my 7th year here, i did some tweaking a year or so ago (about $10k worth), the landlord will replace older medicine cabinets, etc., if requested (something many short-term renters don't realize), so i probably have another $2k in tweaking, maybe $6k if i want new window treatments and to have the living room floors redone, which i'm considering. and i expect to be here a total of about 13 years.

there are always uncertainties. but this is my most likely scenario. i'd be an absolute fool to buy.

oh, i still don't think you understand the AMT.

Yet here I am renting a gut-renovated place. Not just the kitchens and bathrooms, mind your. Major architectural changes made a couple or few years before I moved in. And there's the Link apartment, renting at $5600, which is at a 25x multiple.

when was that place renovated previous to this gut renovation? has the area gentrified a lot (meaning rents went up more than average), so that it made sense for the landlord to renovate to reach a higher price point? If rents just go up 'normal' amount, meaning in line w/inflation, then there is no need to do more than the minimal upkeep. if incomes in the area have gone up more, then it would make sense to reach that higher bracket. of course in that case the value of the place has gone up much more than 'normal'.

for instance, in a rent stabilized situation, where your rent only goes up with costs, do landlords do more than they have to? of course not. you only do it if needed to keep up with a market that is attracting a wealthier tenant, meaning you have excess return.

ar, your personal situation is not what we are reviewing here. You want to assume no broker for the rentals but a full broker fee for the purchase? You also are in a rental building. The LL is a business organization that owns the entire complex, which is different from what we are discussing. And weren't you in a rent stabilized apartment at some point, if not now? That is also a different discussion.

3 moves in 10 years for a renter seems quite reasonable to me.

Oh I'm not necessarily talking about my situation. Weren't you the one who said you didn't know the turnover rate for rentals? nada, what was it? about 12000 total rental units in manhattan per year? math, I love math.

"when was that place renovated previous to this gut renovation?"

No idea. The owner had gut renovated for themselves, did major work, and wasn't really thinking about the rent it would command. Nevertheless, it commands a certain rent. This rent is higher than the average place on the market, which doesn't have such a recent renovation. Left untouched for 10 years, it'll command only average rents. Left untouched for 20 years, it'll command significantly below-average rents.

I don't get why you don't understand this. The average place on the market, rent or buy, is not a 50-year-old unrenovated apartment. Therefore, the a 50-year-old unrenovated apartment does not achieve the same appreciation, rent or buy, as the market average. In fact, we have pretty good datapoints (estate condition apartments) that show that this discrepancy is on the order of 30%, probably for periods less than 50 years even.

AR, I'm not sure I remember the number on free market rental turnover.

Printer, I don't thin you understand AMT. Under the AMT system, you don't get deductions for state taxes, but the marginal tax rate is 28%. Under the normal system, you do get deductions for state taxes, but the marginal tax rate is 33% or 35%. In both cases, you get interest rate deductions. When you fall under AMT, marginal income is taxed at 28% for as long as you are under its spell. The way you come out of its spell is that the regular tax rate, which is higher than 28% but with more deductions, slowly creeps its way up to a higher number than the AMT calculation. But as long as you are under AMT, your marginal tax rate is 28%. Even at incomes that are double what our imaginary $200-300K-er makes, you are still well under its spell. That is the nature of the Bush tax cuts: the wealthy end up at a marginal tax rate of 28% because of AMT. Therefore, the value of a deduction is 28%. Not 33%. That's why at the federal level, you get 28% of $45K of the interest and nothing for the taxes.

As far as the state standard deduction, it's $15K. For state taxes, you do not deduct state income taxes, which is what puts people automatically over the standard deduction level for federal. The only things a typical person will deduct is donations. Maybe some people have some other things. That's why I said $10K. With the standard deduction, you have $15K. With itemization, you have $5K other stuff (donations, etc.) plus $45K interest, so $50K total. The difference is $35K.

How much do you deduct outside of taxes and state income? What do you think the average New Yorker does?

nada, we are not talking about leaving it untouched, but we are not talking about gut renovations either. It just doesn't make sense to assume a gut renovation for a ten-year time frame. Standard upgrading for ten years does not cost nearly what you projected for gut renovations, and will keep the apartment in line with market rents. If you want to project 50 years, then account for the lower cost for the 240 out of 600 months when no mortgage payment is required.

"No. 1st I think most people in co-ops put down more like 25%, but that would obviously impact the opportunity cost so I have no real issue with 20%."

I think most people put down whatever is the minimum, which happens to be 20% at this coop. In any case, I went with that number because that's what LICC used.

"nada, we are not talking about leaving it untouched, but we are not talking about gut renovations either. It just doesn't make sense to assume a gut renovation for a ten-year time frame. Standard upgrading for ten years does not cost nearly what you projected for gut renovations, and will keep the apartment in line with market rents."

Fine, let's agree to disagree.

I'm not talking about a gut renovation over 10 years. I'm talking about one at the level of what printer did -- $150K -- over 25 years. I believe that because the average age of the interior of an apartment is 25 years, then that's what it takes to stay in line with the market average. I am happy to account for it either through amortization (monthly charge) or a discount to average rent increaes (reducing the 2.5%). I am happy for your numbers to be different than mine.

To keep things simple, I'll adjust to your convention. Would you like to maintain 2.5% but charge something (or nothing) monthly for amortization of upkeep with the market, or would you like to reduce 2.5% and charge nothing for amortization of upkeep with the market.

6 fing pages of this crap? No wonder we just had the greatest bubble in the world in NYC...

once again to the nimrods on the other side.. if 25x is even remotely normal => here is a brain synapse connection..... just maybe just maybe.... RENTS increased as a direct result of incomes growing from a phantom/short lived BUBBLE!!!! NOW take away BUBBLE economy.... WHERE do brokers and contractors and flippers make $500K/yr to pay for said $7K/month rental?

Now take 25x and hack away rents by 10%... how fking sensitive is the "ASSET" price now?, you little painting, nailing, get on coop board, have the doorman know my name (KNOW MY NAME Beeeeyth!) lemmings? And you had 2 full yrs to sell into this bubble deflating... f'n laughing my azz offfffff.... Hey gotta suck for the beach homes on the panhandle, no? NOT IF YOU RENTED.....

nada, you need to look at this practically. We are basing this on 10 years. You are counting the transaction costs on 10 years. If someone buys a place for 10 years then sells, they likely are going to rent or buy another place that would be the same quality at the time as the place they sold was at the time they first bought that one. They wouldn't spend $150k on a gut renovation if they are selling and buying another place. If you want to assume a 25 year period, they would be down to the last 5 years of their loan, and would likely re-fi and take some home equity to do the gut renovation. You need to account for all that if this is the game you want to play. If you want to add $500/month for gut renovation, reduce the mortgage payment by 50% to account for the 20-30 years of owning the apartment after the mortgage is paid off. And amortize the transaction costs over 30 or 50 years too.
Or, just look at the numbers that we initially were discussing and stop trying to skew the comparison with personal choices on renovations.

Transaction costs reduce your net proceeds or increase your upfront costs. Amortization is just an accounting gimmick, another one by the typical rental lobbyists. Any sophisticated investor looks at actual cash flow. This is not unlike the falsehood of net effective rent. The people at the Sessanta who were tricked into amortizing the free months into their view on monthly costs are facing a nasty shock at the time of their renewal today. Owners are happy to be in their own home, and make the decisions such as if they want to renovate every 3 years, 7 years, 20 years or never. Renters have little choice on the matter and must spend every year or two years negotiating, without the upper hand, with their landlord.

So now people are thinking in terms of 25 years? I guess 1 thing to look at might be what's happened in other 25 year periods. NYC real estate went through something of a bubble in the mid/late 80's right, about 25 years ago? (Before crashing in early 90's.)

What if we compared the mortgage payment on a late 80's (cyclical peak) purchase to market rents today on that same/similar unit. Miller Samuel says Manhattan average rents are currently around $48/sft. Assume ZERO capital gains or price appreciation; just compare today's rents to the mortgage. Then of course lob in CC/taxes/insurance/transaction costs/reno/light bulbs, etc. This way one can make his own of assumptions/conclusions about apartment size, interest rate, any future refis, and the implications of the mortgage being almost paid off by now.

MIller Samuel
Average Sale Price $ / sft

Studio 1BR 2BR 3BR 4+BR ALL
1994 290 310 330 387 445 329
1993 278 282 296 309 360 294
1992 196 244 288 369 461 280
1991 209 262 299 355 489 291
1990 255 279 347 418 543 319
1989 273 298 352 466 538 332

What a bunch of finance flunkies. What the F do you think I'm doing with the differential between owning and renting all these 30 yrs? Do you know how much even a 2x leveraged cash position based on a rent / cost differential btwn 1985 and 2010 would have netted you in equities stupid lemon heads?

Do you think I'm buying pink dildos with all the money I am savings? What's the point of conversing with financial idiots? You'll know you are wrong when you are shopping for cat food and you ain'tz got none. What a f'n joke. Hey I'm buying a donzi with the money I'm saving by renting the last bubble. Flmao.

LICC, we'll just disagree on that point. No big deal. Should I put you down for 2.5% rent increases, but no upkeep budget? Or would you like something else? I'm fine with your side of the ledger being different from mine.

Also, what do you like for insurance? After hearing from Steve, I like $100 a month, figuring $200K needs to be insured on this particular place. I was wrong in thinking $200 because the basics of the interior are covered.

Also, I'm fine with $200 a month for broker fees and moving costs on the rental side. I understand AR would do something much more infrequent, but that sounds about right for me were I to rent at this level of place.

"He knows I own my place lowery"

I know no such thing, LICC. You've never given us any indication of what you "claim" to own, you can't answer basic questions about home ownership, you're a FRAUD.

Plus you talk a load of crap: "They wouldn't spend $150k on a gut renovation if they are selling and buying another place."

How do you know what they will do?

Unless coops are much different from condos, $100 seems high. Throw $100 in for upkeep and insurance, that seems like a fair compromise.

We need to figure out the taxes too. I need to look at your analysis more closely, but why would you reduce the marginal rate you are using and also reduce the amount by the assumed dollar amount in AMT paid? Seems like you are double counting. It also seems like $8000 is high. My income last year was more than the example we are assuming and I didn't pay that much in AMT. Maybe I just have a great accountant?

"Maybe I just have a great accountant?"

AMT of $8000 is way high for that income level

"I know no such thing, LICC. You've never given us any indication of what you "claim" to own, you can't answer basic questions about home ownership, you're a FRAUD."

steve, after almost 600 posts you have yet to realize that no matter what nada's model squirts out, it is not going to be anything close to the $7,000/mo you said it would cost to own this place. Who is the fraud?

"once again to the nimrods on the other side.. if 25x is even remotely normal"

Who said it was numnutz? The issue is that, on average, the market isn't anywhere near 25x. Can you find a couple examples, sure. Don't buy those. Simple eh?

So here's what I've got on the net ownership benefit on day 1 for our $950K John Murray House coop (discounted 5% from last ask of $999K) example:

$ 4050 rent benefit (discounted 5% from $4265 given a 3%-superior comp at $4400)
$ 200 saved brokers fees and moving costs
$-1400 maintenance, 50% deductible
$ 200 maintenance deduction benefit at 28% because of AMT
$ -100 insurance
# -800 10% transaction costs, amortized over 10 years
$ -400 upkeep
======
$ 1750

My justification for the upkeep is that the average coop in Manhattan is renovated every 25 years, at a cost $120K for an 1100 sq ft apartment. Although one may choose not to renovate their coop, it will lag in terms of appreciation compared to the rest of coop market, which has an average renovation age of 12.5 years. Percentage-wise, $120K works out to 12.5% on a $949K apartment, which seems in line with the discount between a new / newly-renovated coop and a 25-year-old / 25-year-ago-renovated coop.

On the net benefit side, we have $1750, and all of the items listed grow with inflation at 2.5%, so this $1750 benefit grows at 2.5% annually. Given a sale price of $950K, this amounts to a 2.2% net benefit that grows 2.5% anually.

On the financing side, we have a 6% zero-points interest rate on an 20%-down loan. This is discounted by 35%: 28% because of federal deductibility since you are gated by AMT, plus 7% for state+city because you have to first work through $15K of standard deductions with little else available to deduct other than mortgage interest. This gives an effective interest rate of 3.9% on the 80% loan, plus the requirement to put up 20% equity capital.

That's the way I see it. If you feel differently, please detail out the way you've see it. Preemptive note to those who like to snipe: these are my numbers, if you don't like them, I don't want to hear "but that's too high, that's too low". Just list out your own full set of numbers.

"I need to look at your analysis more closely, but why would you reduce the marginal rate you are using and also reduce the amount by the assumed dollar amount in AMT paid? Seems like you are double counting. It also seems like $8000 is high."

On the federal side, I'm saying that you get no benefit on the $8K property taxes because it is not deductible when your taxes are determined by AMT. You do get a deduction on interest paid, but because the marginal tax rate under AMT is 28%, that's the extent of your benefit.

I'm re-posting my analysis, but correcting for the fact that property taxes are not deductible under AMT, which is likely where this buyer is sitting.

=============

So here's what I've got on the net ownership benefit on day 1 for our $950K John Murray House coop (discounted 5% from last ask of $999K) example:

$ 4050 rent benefit (discounted 5% from $4265 given a 3%-superior comp at $4400)
$ 200 saved brokers fees and moving costs
$-1400 maintenance, 50% deductible, but rendered useless because of AMT
$ -100 insurance
# -800 10% transaction costs, amortized over 10 years
$ -400 upkeep
======
$ 1550

My justification for the upkeep is that the average coop in Manhattan is renovated every 25 years, at a cost $120K for an 1100 sq ft apartment. Although one may choose not to renovate their coop, it will lag in terms of appreciation compared to the rest of coop market, which has an average renovation age of 12.5 years. Percentage-wise, $120K works out to 12.5% on a $949K apartment, which seems in line with the discount between a new / newly-renovated coop and a 25-year-old / 25-year-ago-renovated coop.

On the net benefit side, we have $1550, and all of the items listed grow with inflation at 2.5%, so this $1550 benefit grows at 2.5% annually. Given a sale price of $950K, this amounts to a 2.0% net benefit that grows 2.5% anually.

On the financing side, we have a 6% zero-points interest rate on an 20%-down loan. This is discounted by 35%: 28% because of federal deductibility since you are gated by AMT, plus 7% for state+city because you have to first work through $15K of standard deductions with little else available to deduct other than mortgage interest. This gives an effective interest rate of 3.9% on the 80% loan, plus the requirement to put up 20% equity capital.

That's the way I see it. If you feel differently, please detail out the way you've see it. Preemptive note to those who like to snipe: these are my numbers, if you don't like them, I don't want to hear "but that's too high, that's too low". Just list out your own full set of numbers.

You are being obstintate on this upkeep issue and are overstating those costs. I think you are also understating the tax benefit, but I have to look at it more closely.

"You are being obstintate on this upkeep issue and are overstating those costs. I think you are also understating the tax benefit, but I have to look at it more closely."

I brought it down $100, and I gave reasonable justification. You disagree, that's fine. I don't think I'm being disingenuous, nor do I think that you're being disingenous either. We obviously have come to different conclusions on the matter, and part of the point of this exercise is to understand why. Given that this is our only substantive difference thus far, I'd say

So we'll just analyze it both ways, nice and easy.

Do your homework on taxes, let me know when you are ready. Oh boy, not 2 weeks since April 15th, and you're already working your 1040 again. Good times!

It just doesn't seem consistent. If you want to do a 25+ year comparison, you should reduce the mortgage cost. If you want to assume a 10-year ownership, you shouldn't assume such high upkeep costs. At the end of the comparison, we will be $300-400 apart, so we can just note that.
I agree that so far that is our one substantive disagreement- not bad.

"Given that this is our only substantive difference thus far, I'd say ..."

... I'd say that's pretty good.

Inonada: shouldn't you add -X for the loss of return on the downpayment? And the loss of return on the forced-savings-of-principal aspect? And then the return is the net benefit/downpayment (not net benefit/total cost of apt) which will change. The interest rate will also change as the deduction of interest decreases with each payment.

Inonada: I would do this: -X for loss of return on down and -Y for loss of return on forced-savings-of-principal (will increase with time) and +Z for any tax advantage (will decrease with time) and divide by downpayment. That's your rate of return on that downpayment.

And of course, -W for interest payment.

What I like about my model is that you see what difference it makes if you make a larger or smaller downpayment, and right away you see that you are NEGATIVE if your interest payments exceed the rent benefit and the amortized costs of owning/mtce.

And you can adjust your denominator (downpayment) by the amount of principal you are paying down (or not).

If taxes go up as expected, the value of the real estate deduction and the mortgage deduction increases. There is no deduction for rent. Furthermore, I would expect rents to continue increasing. The equation favors buying for those with time and resources.

What a nutty stmt riversider.... The f'king question IS, given the SAME time and and resources what are you better off doing given a rational 'cost' analysis post a bubble popping in RE using actual own vs. Rent analysis. Inonada is pointing out 'owners' overestimate their tax savings, underestimate Reno costs and transaction cost.

Your stmt, is like saying given a longer penis and better looks this man is better off.

You can't deduct for forced savings of principal. We are comparing monthly payments. You would make a monthly payment of principal and interest or a monthly payment of rent.

LICC: You should deduct for lost return on forced savings of principal. Any principal paid is added to downpayment, and is your denominator. If your downpayment is zero, then yes, the negative returns blow up to infinity.

nyc, that doesn't make sense. Are you going to add to rental costs the lost return on the forced payment of rent?

nyc10023, I think your analysis is more detailed (and correct) than where I'm headed. However, it requires a spreadsheet to detail the mortgage deduction loss and the reduction of leverage as more equity is built up, which reduces your return on equity. It also opens up a can of worms with regard to opportunity cost of equity capital, and price appreciation. So I'm gonna take it all to present value and look at it from that angle.

You telling me that there is no difference between paying interest-only and paying a portion of the principal every month and having that money tied up in your house equity?

This is a calculation of the net return on OWNING, LICC. Therefore, you take your money OUT every month (mtge payment, mtce, taxes, whatever is attributable to OWNING - inny has included things like extra broker fees if renting) and SUBTRACT your money (or imputed $) IN (which is the rent you would have been paying for equivalent place, costs of owning such as additional insurance, amortization of upkeep, tax advantage). Your money OUT should include the money you would earn on your principal and if you add to that principal, you need to include that money too.

LICC - I sincerely hope that you are not teaching my children math. If you want to meet up IRL, I can diagram it for you on a blackboard. Take it as my good deed for the year.

Inonada: Devil's in the details. You need to account for everything, otherwise some %**#%$$#% will say (oh, but you're paid off in 30 years and instead of throwing $ out the window, you will own 100% of your place).

Typo in my last post - amortization of upkeep & additional is in money OUT every month. Money IN would include the costs of paying rental broker.

What could be more simple? Money out - money in every month.

LICC: if you can't follow my model, please restate your model. Don't bandy about 10x, or 15x or 25x. Show me your calculations on why it makes sense for YOU to buy vs. rent.

With my assumptions, the asset yields 2.0% today plus a 2.5% perpetual increase with inflation. With LICC's $300 a month disagreement, it yields 2.4% plus a 2.5% perpetual increase. I've already explained why a 2.0% plus 2.5% increase cash flow is like a fixed 4.5% increase; or 4.9% in LICC's model. This accounts for both yield and appreciation. If the value of the asset is $950K today, and it yields $19K this year (plus future yields growing at 2.5%), then in a year you're left with $19K in cash and an asset that yields 2.5% more than the original asset. Therefore, if all else remains the same, the asset appreciates by 2.5% in addition to your 2% cash flow. Therefore, it behaves like an asset that yields a fixed 4.5% (or 4.9% with LICC's assumptions).

Riversider: we don't have infinite time. Yes, given a timespan of 1000 years assuming our human civilization survives that far into the future, it doesn't matter. I give you permission to buy a RSB condo now, at today's prices.

Now, let me make the bull case on this. You are financing 80% of this asset at 3.9%, so you have to pay out a fixed 3.2% in interest to yield 4.5% (or 4.9%). Thus, you've got a carry of 1.3% (or 1.7%) for your down payment of 20%, so a return on equity of 6.5% (or 8.5%). Booya, not a bad yield. And, it's tax-free.

If only I could convince my partner to go Libor+1 on the mtge. Our (current) return on downpayment goes to 20% or somethin' crazy.

Actually given that one pays taxes on 40% of their interest on savings and deducts the same %. There should be on difference from a tax or p.v. on io mortgage, fully amortizing and paying cash. But of course the leverage is different.

Now, let me make the bear case on this.

If the world remains steady, then yes you will yield 6.5% (or 8.5%) on your equity. However, that low a yield on equity is way out of equilibrium, an you'll be whacked with a capital loss or lack of appreciation in a way that will put that number back in line.

First problem, we've got a risky asset that yields 2% plus CPI. Hell, I can get exactly that risk-free and extremely liquid through TIPS. That's gotta correct: risky illiquid assets need to yield more than liquid risk-free ones.

Second problem, the debt which is senior to the downpayment demands a 6% yield, and here you are demanding only a 0.5% (or 2.5%) premium to take the brunt of the risk? That's gotta revert to a more normal number.

Third problem, government support for low interest rates will be removed, and when it goes away, yeah you'll have your low cost of financing, but the lack of it for new buyers means that the price will have to come down (or appreciate slower than 2.5%) just to allow for a 6.5% (or 8.5%) return on equity, which is too measly anyways.

In short, the risk of depreciation or lack of 2.5% appreciation is high while the possibility of improvement to that 6.5% (or 8.5%) yield is next to nil. You have a very asymmetric risk profile just to collect that meager yield.