Harlem to buy or not to buy looking for advice.

I should add that the apartment is 1050 sq feet, which results in $542 per square feet, however in addition to that there is a 180 sqft terrace and 200 sqft of roof rights, accessible from the terrace.

At age 37 and combined income of 220K, I would think you would have 100K after closing instead of that 100K being all you have to start with. Perhaps there are good reasons for that. i.e. student loans, medical bills, very generous with charities, etc... In any case, you should probably look into where your money is going each month, make some adjustments and accumulate more cash before buying.

Thanks sunday. I would like to keep this question focused on the apartment and financial comparisons as opposed to the our personal saving habits. But, I will entertain this just a bit. We both traveled around the world with academia, travel, and professional development, and humanitarian development until we were almost 30. Not financially rewarding, but good for our soul. We did save money oddly enough, but we lost a bunch of money in the stock market 2 years ago, and made some career advances since that time that have developed our annual income. So no regrets, but we are not big spenders, probably more savers at this point in our lives. We have always lived simply.

We pay 1900 a month for our apartment now and save at least 1000-1500 a month. I have no doubt if we wait that we can save another 30k or so a year. But in order to have 220k in the bank to put 20% down and have another 100k in reserve, that would likely take at least a couple years. So considering we are consistent earners now, do you expect we should rent until we are in our 40's than take advantage of the fha program on an apartment that we like?

A couple of thoughts for you.

If you are currently paying 1,900 a month and saving 1,000 to 1,500 a month ( call it 1,250) that brings you to 3,150. Where will the extra 500 come from.

Buying with five percent down means that if you should have to sell in less than five years, you run a significant chance of having to write a substantial check at that time. Are you OK with that?

There are a couple of different ways to look at this question:

1) Can you, making $220K, afford a loan balance of $540K? (I would argue here that the answer is yes. In my book I pointed out that most buyers are comfortable with a loan balance of 2x-3x annual income, which for you is the $440K - $660K range, and that people without kids tend to be comfortable on the higher end of that range).

2) Can you afford the future monthly carrying charges of the property? You don't provide them above. But put into your calculations the idea of what you'll paying monthly in 15 years when the tax abatement runs out -- I'd assume along with that that your cc:s rise around 4 percent a year, and that your income in the meantime rises maybe 2 percent a year. Do those numbers work? ("Work" means different things to different people, but I'd saying for people without kids who make housing a priority, you still don't want housing expenses to be much above 30% of gross income).

3) Are you happy with the current cost of the property? You've recently been in the marketplace; is this a reasonable thing to buy rather than the other things you can buy? (Note that this does not call for a judgement on whether the value of the apartment will go up or down; this calls for a judgement as to whether it's reasonable consumption to buy this apartment vs. others).

4) Are you happy with what you have to pay to get an FHA loan? I don't have your loan terms in front of me, but presumably you're paying on the order of $10K off the top to snag this puppy, plus maybe another $4-$5K a year over the costs of a more conventional loan in order to stay liquid. Are you comfortable with that?

ali r.
DG Neary Realty
My book: http://tinyurl.com/2ag28z

CC: We are making our final payments on our student loans in the next couple of months which will contribute another $800 n month to our monthly income. Also, saving 1000 to 1500 dollars a moth has been living a comfortable lifestyle. I make the statement in the paragraph that we could easily save another 30 k a year, which is actually 2500 a month.

front porch:

1) Yes we can afford to make the payment. In reality if I factor in bonuses we make closer to 250k annually. We do however get killed at tax time without children or a mortgage.

2) The monthly carrying charges are 750 cc and 175 re tax with a 15 year abatement that starts to enact after ten years with a 20% gradual increase. Yes, costs work, but I am not going to lie to you the idea of paying close to 10K a year in taxes after 15 years is daunting. However, looking at coops a portion of the cc for those properties goes to tax. coops may have property tax overall, but even considering 5 or 6 k per year in tax starts to make the 10K a little more palatable. If we buy a coop in ten years, we would still have to pay 10k in re taxes as well. The abatement is only a problem if you don't consider it will eventually go away. so back to the original question. Why would anyone buy if renting is overall cheaper. To what value do you put on owning your own home above renting someone elses.

3) We like harlem and can afford more for the money. We wnt at least 900 sq feet with outdoor space. After looking all over manhattan it seems like the only way we can get this is in harlem. And that fact that we feel the neighborhood is changing, slowly, and has open skies and beautiful browstones is a plus. Do not get me wrong if we could get the same thing on west 80th street 2 blocks from the aprk we would buy that as well. But it wont be fha and we would have to wait. Even if prices stay the same for the next two years we would have to wait at least that long to save up the 220 k mentioned above for a traditional mortgage.

4)Yes, the 10k for mortgage insurance sucks. But i believe we can write a portion of that off, and we do realize there is a cost to having the right to own. If that cost is 10k, we are cool with that. The biggest hurdle is that fact that we can probably rent a property that is somewhat similar to the harlem property on the uws for close to 3k a month, which is approx the cost of the harlem apartment after tax savings and principal.

4)

Billy, I answered the question that was asked. You just didn't like the answer.

There are plenty buy vs. rent threads here and you will find what you need to support the decision YOU WANT to make.

Q. "So considering we are consistent earners now, do you expect we should rent until we are in our 40's than take advantage of the fha program on an apartment that we like?"

A. Yes. I know, it's also not the answer you wanted.

CC: I did not answer the second part of your question about 5 % down.

If we put 5% down and save the extra 15% in cash and invest it and get 5% interest, rather than putting that extra 15% in the down payment on a property that could maintain its value. Are we not making at least 5% on the money. I understand that I will be paying interest on the extra 15% in the mortgage, but part of that I can write off.

Where do you plan on getting 5% interest? Going rate in the bank is around one per cent.

Also, from IRS.gov

Answer:  In general, if you itemize deductions, you may deduct premiums paid for mortgage insurance provided by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), the Rural Housing Service (Rural Housing), or private mortgage insurers in connection with a mortgage for the purchase of your main home. The amount you may deduct is limited if your adjusted gross income is more than $100,000 ($50,000 if married filing separately). No deduction is allowed if your adjusted gross income is more than $109,000 ($54,500 if married filing separately). See the instructions and worksheet for Schedule A, Line 13, to figure your deduction.

Sunday,

Yes you answered my question, but attached with it judgement that we were not responsible savers. What I did not like is the justification for your answer. Assuming we can guarantee income for the next 5 years at least our current rate, it boils down to economics rather than opinion about savings habits. With interest rates at their current position, the potential of the future tax costs, and the price per square foot of the property we are looking at.... Listen other posters are actually asking questions and offering sound thngs to consider, rather than making a blanket statement if you don't have a quarter of a million dollars in the bank don't buy.

Yikes, Thanks cc. That is helpful.

I would confirm with your accountant.

Billy, maybe you didn't read the part where I wrote: "Perhaps there are good reasons for that. i.e. student loans, medical bills, very generous with charities, etc..."

I do believe saving habits is important in determining whether someone should buy something that is 5.7X their current savings.

Is it really crazy to expect someone to have quarter a million before buying a 570K apartment? Conservative in many people's eyes perhaps, but I personally find it reasonable.

If you mentioned you lost quite a bit in 2008 in the stock market. Do you believe there's no chance of losing a significant amount in this purchase, especially if you end up having to sell/move in the next few years for whatever reason? Can't have bad luck twice in a row?

Without a good among left post closing, you financial options will be limited when 'something comes up'. That's usually accompanied by stress, which leads to bad health.

its doorman or no? if not the price per SF might be high, even for FDB.

. The biggest hurdle is that fact that we can probably rent a property that is somewhat similar to the harlem property on the uws for close to 3k a month, which is approx the cost of the harlem apartment after tax savings and principal.

I think you answered your own question.

I am far from an advocate for buying however I doubt that you can come close to what you have described for less than 5 k in prime uws.

Despite all of your creative number crunching, at the end of the day, If you can't afford to put at least 20% down, you can't afford this property.

Period.

Billy, given your answers I'd probably buy the duplex.

1) if renting and buying are roughly equal cases, then in favor of buying is:

1) you can personalize your space;
2) your long-term costs are more predictable; and
3) the mortgage structure does force you to save your principal.

I know a lot of people on this board would argue that you can save and invest outside of a mortgage structure, but for many many Americans it's just easier to have it be more automatic.

I do think you're buying into a rapidly gentrifying area (I'm known as a downtown real estate agent, but since hubby and I moved to the Upper Upper West Side a year ago I've been spending more time with clients in Harlem, especially along that burgeoning FDB corridor) but I wouldn't build that into your expectations, just let it be the possibility of a pleasant surprise.

ali r.
DG Neary Realty

"Billy, given your answers I'd probably buy the duplex."

Of course you would, you're a broker.

It's this kind of advice that encouraged people to buy homes that were priced 10X their annual income because they were "sound investments" and the value "will only go up -- after all it's Manhattan real estate for God's sake!"

And here we are today. And here you are giving advice like it's still 2006.

An FHA mortgage at today's 30-yr fixed rates may be an opportunity of a lifetime. Nobody knows what is going to happen to inflation or to property values in Harlem along the FDB corridor. The immediate outlook looks week, but the long term is a big question mark.

It sounds like you accounted for the tax abatement that will eventually disappear- but what about the common charges. A lot of sponsors low ball the budgets to make the carrying charges low in order to sell the place quickly. It's not uncommon for common charges to increase significantly (20-25%) within the first few years of a new building. Perhaps you have factored this in- but it couldn't hurt to be mindful of this aspect.

Billy,
everyone's been to this place in their life. There is this notion that somehow this isn't your town until you own. There is the straight analytical approach and then there is the emotive approach. I really believe that you have to consider both aspects. Let's say that you LOVE this place. It's got the goods. Duplex is great for a marriage. I love outdoor space so, I'm there with you for that one. Harlem is on it's way up. How far up is a matter of future consideration. No kids are a real plus for a Harlem decision. Think hard about the space. Harlem is for dreamers. You get to stay on the Island, you get to walk to central park, public transportation is good. If you're a good shopper you can get a fair shake for your money. If you can envision yourself living on the block you've chosen and the apartment is one you could see yourself in for the next 15 years AND you can afford it without killing yourself than you just may want to go for it. There are more wise investments out there but, none you can live in.

By the way...I'm in my late 40's and still rent.

the comparison should be "how much does this condo would rent for in HARLEM", not UWS. if you answer $2-2,500, then it's clear that you should not buy. take a day or two and take a look at rentals within a 5 block radius of this condo.

you mentioned that you expect that the property taxes will be $10K in 15 yrs. that is based on the current market. you need to compound a 3% increase over the next 15 years. this will end up costing you closer to $20K then 10.

read the bottom of page 2 and top of page 3
http://www.nytimes.com/2009/02/08/realestate/08COV.html?_r=2&pagewanted=2&sq=tax%20abatement%20property%20condo&st=nyt&scp=18

It sounds to me like you don't really want to buy it. What you really want is not regret missing a buying opportunity, if this, indeed, is one...Have you considered getting a house in the country for the weekends instead? They can be considerably cheaper and you can stay on the uws while still building equity. Just a thought.

I completely disagree on the rent vs buy decision for a gentrifying area like Harlem. The rents escalate radically in gentrifying neighborhoods. I know because I have always lived north of W 86th Street. The people who say don't buy will be dead wrong if the 125th Street corridor, and FDB continue to gentrify. Just look at the couple that bought a W 94th St brownstone 45 years ago for $25,000. Their parents thought they were crazy at the time, and they could have chosen a safer neighborhood but their money wouldn't have stretched as far. Now, they're retired in a safe neighborhood.

The W 94 couple story was published in the NYT today.

" The people who say don't buy will be dead wrong if the 125th Street corridor, and FDB continue to gentrify. Just look at the couple that bought a W 94th St brownstone 45 years ago for $25,000. Their parents thought they were crazy at the time, and they could have chosen a safer neighborhood but their money wouldn't have stretched as far. Now, they're retired in a safe neighborhood."

"IF" the 125th Street corridor and FDB continue to gentrify.

That gentrification is slowing down radically as prices shift and downtown becomes more affordable again. And let's not fool ourselves, this "9%" unemployment is the New Normal, so get used to it. At this rate, Harlem won't really "gentrify" for another 45 years.

Matt, There's an old saying, no risk, no return. A couple in the 30s is willing to shoulder a lot more risk than a couple in their 60s If the city goes to h311, then at least they only put down 5%.

I am concerned about the fact that your disposable income is going way down with the purchase. Seems a rather unpleasant way to live. Having been there, I would say that the reality of doubling monthly expenses is unpleasant even if it looks good on paper. And buying in a gentrifying neighborhood where you haven't lived is risky. Personally, I would save more and try to get into the multifamily space.

"I am concerned about the fact that your disposable income is going way down with the purchase. Seems a rather unpleasant way to live."

My other concern for OP is that they're stretching themselves financially to afford the purchase; " We have a combined income of around 220k. If we scrape together all the savings we have about 100k. Both of our job security is above average."

For the life of their mortgage, both parties will have to remain at full employment, earning generous incomes. I realize that they feel that their job security is "above average," but so was everyone else's before the economy blew up in '08. I don't care who you are or what you do, there is no such thing as "job security" these days.

The first thing I noticed about your post is "sleepless nights." If you were an adventurous investor, a speculator, you'd be in contract and sleeping just fine right now.

So you might want to take a little time to figure out the source of that anxiety before you proceed. It isn't lack of data, I promise. It's a little voice in your head that is frightened of buying this duplex.

Real estate is an investment whether you like it or not. So, as an investor, you need, I think, to get in touch with what kind of investor you are.

Are you both tenured professors at financially sound institutions? That would be nice. In any case, you could buy term life insurance sufficient to pay off the mortgage if either of you dies prematurely. It's cheap, and might help with the insomnia.

Understand you would indeed throw away about $36,000 a year on interest as a speculative investor if you buy this duplex. As a renter, instead of throwing that money away, you would be spending it on lodging that is worth what you're paying for it, according to the market. In the duplex, you'd be overpaying for what you're getting, because of the money lost in interest/PMI.

You might want to calculate how much you are throwing away after 5 years if you buy. Back of envelope, it's $150,000 or so? That's more than you have in savings right now.

It is not difficult to forecast whether the value of the duplex is going to increase or decrease. It is going to increase, or decrease, or stay the same, and nobody knows for sure which it will be.

If you lose your entire down payment on paper over the next 5 years, are you cool with that? You should be, because that could happen.

If you just want to invest in real estate now for a tax write-off, or for fun, there are plenty of other ways to do it. I like both the country house idea and the two-family house idea, the latter being a great way to get a good return on investment, but you'd have to move to an outer boro to buy a 2-family.

Karla Harby
Charles Rutenberg Realty
kharby@crrnyc.com

"It is not difficult to forecast whether the value of the duplex is going to increase or decrease. It is going to increase, or decrease, or stay the same, and nobody knows for sure which it will be."

are you trying out to be yogi berra?

Thanks for everyones input.. Let me say that our hesitation is based on trying to be conservative. Any inclination to buy is based the fact that we love the apartment (layout, outdoor space, exact location in harlem) and the opportunity the FHA provides us. After looking for a couple of years we have not found a place we have really liked that we could "afford" even if we had 20 percent down with our salaries.

WIth that being said,

NYC matt. Your fear of buying scares me. In one post you claim this discussion represents the ailments of financing years ago where mortgages were given out to people at 10 times their salary. I do not see how this is quite that irresponsible. NYC10023 Makes a valid point that this transaction will decrease our disposable income, by our calculations that amount would be 1800 monthly for the first year. If the other valid point that the cc increase, then that loss of disposable income would could reach 1900 or 2000 in the next year.I also stated that we will gain 800 a month that we were paying for student loans. Which now takes that lack of disposable income to 1200 a month. For a couple that brings home after taxes, 40lk deductions medical, and not including yearly bonuses over 9K a month, I do not understand how it would be stretching us financially. If we decide to upgrade rental apartments to match or come close to the FHA we would be decreasing our disposable income in that scenario as well.

And I agree that no one has pure job security, but most people even if they put 20 percent down would be carrying a mortgage that if they lost their job would likely make it hard to pay their mortgage. Having half of the remaining mortgage in the bank would offer obvious cushion, but that it is not realistic to expect that everyone who wants to buy a home is going to have that. The fact that both of us make a solid income allows that if one of us lost our job things would get a little rough, but with at least 10% of the remaining mortgage in the bank in cash that makes us feel slightly more comfortable. And for what it is worth even though no ones job is secure, my job is completely dependent on the columbia expansion, which is pretty solid, and my wife has a three year contract where if she loses here job she still gets paid.

ab11218: I just got back from harlem looking at rentals to compare costs. The closest thing was 2500. It is something to think about, but if rent goes up that should be considered as well. Alternatively I think we would probably stay where we are before moving to harem as a renter. We passed on dozens and dozens of harlem apartments because they were not right. I think if we move at this point wether if it is a rental it will be where we want to stay for at least the next few years. If we buy that duration lasts for at least 5. I am also starting to feel like we would be very lucky to find a 900 sq foot rental wth outdoor space on the uws for less than 4k, even in a walk up brownstone.

Billy:

1, your primary question should be whether you are getting good value for your money.
2. O dont know Harlem market values so cant address that question
3. if your building is a walk-up 542/ft. sounds kind og high
4. for similar money you could own in Fort Greene/clinton Hill, which are more stable neighborhoods
5. it is better to put minimize down payment in today's economy so you have more cash for emergencies
6. I have bought many apartments with 95-100%+ financing and am better off for having done so
7. your anxiety and mixed feelings are normal
8. the first seven apts I bought i woke up in the middle of the night terrieid I'd made a mistake
9. and one was a studio on 83rd west of central park bought for $36,000 with #164 maintenance in 1985

Kharby,

Thanks. That is some sage advise. I figured out that after tax savings, equity, and subtracting our current rent of 1900 a month over a period of 5 years we would be throwing away 89k. That does not include an increase in cc, but it also does not include an increase in rental prices. That value includes closing costs as one lump sum. At the same time we would have paid off approx 50K of the principal, plus the 5% down which means after year 5 we would have 78,5K in equity.

That is a dangerous game if the value of the property looses more than 10% in 5 years. But then again only if we have to sell, likely we will be making more income and have enjoyed the property for 5 years.

rb345, Thanks. brooklyn is a sage choice and we spent plenty of time looking there. At the end of the day although the market seems more stable it did not connect with us. we also found that what we were looking for was kind of expensive. We looked at 100 gold in vinegar hill, and that was close. Also, I work a lot near columbia and wife in midtown, so the train options of harlem and commute location was better.

I love the two family idea, and if we could do that it would be great. But we want to live in manhattan and in order to do that we would have to go out farther than we want.

rb345, I would agree the 542 per sqft is kind of high, but how do I factor the approx 1000sq foot of outdoor space with that. I would like to see harlem prices closer to 500 sq ft., however with the outdoor space I feel that offers a premium on that number.

i would urge you to stop thinking as though you are throwing money away. When you eat dinner, you don't think of the expense for the food as throwing the money away, do you?

Billy, you keep on saying the same thing... you would rent in UWS and not even consider Harlem. then what is the point of owning in a neighborhood that you really don't want to live in?

you also mention the additional expense vs paydown of mortgage to be within $10K. did you consider that the closing costs on new construction are typically 6-7%, especially using the FHA option. $100K - $62.7K (5% down and 5% closing) = $37.3K. realistically, you'll have closer to $30-33K after everything.

Billy
A summary of this (and other rent/buy discussions here) is that
1) rent is a consumption decision
2) buy is an investment (and consumption) decision
3) investments do typically have principal and other risks, and also rewards
4) If you were looking at an area other than FDB where gentrification has progressed quite a bit, and there is some evidence of stability, then I would say the continuation of gentrification is a question, or rather the speed. Some of the other areas in Harlem provide a more distinct gamble -- you may be able to pick up a property for a song, and then you may sing yourself all the way to a million dollar profit, or you may be singing a country song and hoping time can be reversed so you can recover your sanity and principal. The FDB area does not promise the same down side, but also not the same up side. It will likely appreciate at approx the same rate as UWS in the long run, perhaps maintaining the same price differential that exists today. There is some chance that the Park and transportation advantages and the migration of Columbia people into the area will improve it further, but you can't really count on that other than as a stabilizing influence for the down side.
5) The ultimate decision depends on your taste for gambling or taking risks, and also for the quality of life factors. You should spend time at different weekday and hours in the area and assess whether it suits you. The restaurant choices, while much improved do not compare with UWS, though if you access the cluster of restaurants in the 120s and Amsterdam you have good choices in walking distance. The grocery store, Best Yet, is indeed v v good and I would say that it has eliminated our Fairway trips but not the trips to Trader Joe's or a walk to Whole Foods once in a while. You do not have the schooling issues so that gives you flexibility for location.

So this is NOT a doorman bldg? Its too high! In rough neighborhoods especially, doorman bldgs get a big premium. And most still worry about Harlem. With brand new DOORMAN units going for around the same price per sq ft, you are dumb to pay this much for a walkup.