Should buy now or wait?

Or possibly go up? Down? Down by how much? Are you buying all 3? Buy 2, get one free? Do you always ask about major life decisions on an anonymous blog? Oh, the pain.

What is the difference between buying and renting to you?

For me buying meant greater flexibility to live how I want to live and be able to make my apartment my own.

So what is the reason you want to buy versus rent?

As to prices, who knows. If you listen to the doomsayers around here you buy now and your home will be worthless next year as your cash put in will be wiped out.

What is your time horizon for if you buy how long you will live there?

so many questions you need answers to and no one here can really help you make them.

Your question leaves out whether you are finding attractive deals.

If buying is comparable to the cost of renting, you will be staying at least 5 yrs, and you've found something you really like, go ahead.

Depends whether or not you want to be priced out forever.

If you're flexible enough to like so many units at a given point in time, I would wait as I personally think the market will soften further. If you find something you absolutely love and can't live without, I would go for it assuming the economics make sense.

Just saw your other posting on contracts so I take it you've decided to go ahead?

"For me buying meant greater flexibility to live how I want to live"

Not so sure about that... renting gives you a TON more flexibility. And there are more rental options than buy options (and you can often rent the buy options).

"If you listen to the doomsayers around here you buy now and your home will be worthless next year"

Nothing like a strawman when you don't have much of an argument.

Please do explain how renting gives me more flexibility. To the point, I want to not worry that a landlord could raise my rent as much as he wants when economy starts to improve more, I can not change anythign in the apartment that i do not want, and most importantly i am not looking to move around at all for the foreseeable future.

Of course you will say i have no agrument on the value of the apartments because no one really does. Should i sit here and rehash the arguments that are going on in other threads?

My point simply was to think about your own arguments for and against buying and apartment and the value you feel you are receiving on either end and make sure own decision.

> Please do explain how renting gives me more flexibility.

Uh, it doesn't cost me tens of thousands of dollars if I decide I want to be in a different part of town... or add a bedroom.... or just try a different type of apartment.

> To the point,

Actually, most of the stuff following your "to the point" is not to the point.

> I want to not worry that a landlord could raise my rent as much as he wants
> when economy starts to improve more

I worry that the government raises RE taxes while the economy got WORSE... my rent went down, but RE taxes for owners went up.

Either way, thats not "flexibility".

> I can not change anythign in the apartment that i do not want

I can rent an apartment that doesn't need changes, and move when I want something different. You can't make your walkup an elevator building, or add a bedroom, or go up a few floors as simply as I can. THAT is flexibility that you don't have.

> and most importantly i am not looking to move around at all for the foreseeable future.

Something thats not flexible doesn't become flexible just because you don't want flexibility.

Again, you're fine having less flexibility. Thats fine... but its worth a lot to a lot of us.

You could always, just to better understand the relative costs of your options, compare:

(a) Monthly interest on mortgage plus monthly maintenance cost plus 1/12 of annual RE tax bill plus about 0.0015 times the amount of your downpayment (representing the amount you could have earned in interest every month if you had instead put the money in a bank account), all on the apartment you are considering buying at the price at which you would buy.

versus

(b) Rent on an apartment similar to the one you are considering and in a similar neighborhood.

If (a) is less than (b), then that would be an argument in favor of buying. If (b) is less than (a), then that would be an argument in favor of renting. This doesn't necessarily resolve your decision but at least it is useful to think about. It's basically a way of comparing the carrying costs.

"about 0.0015 times the amount of your downpayment (representing the amount you could have earned in interest every month if you had instead put the money in a bank account),"

Bad analysis.

The risk of a down payment on 5x or 10x leverage apartment is BY FAR greater than the risk free rate you are comparing it to. Not to mention, its not a short-term investment either.

You can get almost 4 on a darn muni! And aren't long bonds going for 5%?

And if you're ok going 5x or 10x leveraged, then, hell, pick up some junk bonds or stocks. You'll actually have less risk and earn even more.

I believe you need to factor in the after tax interest costs. At least that is the way i would be comparing the two. I think your formula though is a good starting point.

I would think you need to factor in what the rents are like in the neighborhood and where they were to factor in the landlord moving up rents higher then you would think. A lot of people have signed leases for 14 months and get there 2 months free which really brought down effective rent. You really need to factor in these incentives going away along with a rental increase.

"Uh, it doesn't cost me tens of thousands of dollars if I decide I want to be in a different part of town... or add a bedroom.... or just try a different type of apartment."

How often does that actually happen? If you're a particularly poor planner, I can see needing an additional bedroom, but that would happen all of what, one time? If you're that much of a nomad that you need to move and enjoy moving (which is by no means cheap or all that fun for most people), then renting is a no brainer. But most people prefer a more stable living environment, especially once they hit a certain age, so all this "flexibility" you talk about is worth very little, and is very likely outweighed by the risks inherent to renting. It's actually not that hard to pick what you like and buy an apartment that meets those needs. If your needs are fickle and constantly changing, buying would be a pretty poor decision, and it sounds to me like you're perfectly happy renting forever. Many others have different preferences.

Fine, you can increase the multiplier on the downpayment if you would be a more savvy investor like somewherelese. I was assuming an FDIC-insured savings account earning something like 1.8% annually.

I agree with Mikev that it should be after-tax interest.

So here is the revised formula:

(a) For the apartment you are considering buying:
(1) mortgage interest times 0.6 (or a higher fraction if you are in a lower tax bracket), plus
(2) maintenance costs, plus
(3) 1/12 of annual real estate tax bill on the apartment, plus
(4) the amount of your downpayment times 0.0015 (or something like 0.0042 if you are a savvier investor)

(b) The amount of monthly rent you would have to pay for a similar apartment in a similar neighborhood.

If (a) is less than (b), then that would be an argument in favor of buying. If (b) is less than (a), then that would be an argument in favor of renting.

> I was assuming an FDIC-insured savings account earning something like 1.8% annually.

Right, which is nowhere near an accurate comparison for a down payment you leveraged 5 or 10x in an asset class that can go down 20% in a year.

Buying a triple long index fund is probably closer to an accurate comparison.

> (4) the amount of your downpayment times 0.0015 (or something like 0.0042 if you are a savvier investor)

And this is just a fundamental mistake. Savvy investor doesn't matter.

What we're talking about is your money being at risk. You simply can't compare a risk-free rate to a high risk rate, which is what you are doing.

The buyer, savvy or not, has money at high risk (by definition) in the down payment.

Somewhereelse, you are correct that the asset could decrease 20%, just like i could lose 20% in the market. However as I think i stated earlier it really depends on your timeframe for living in this apartment.

I truly believe that if you are on a time horizon of 5 years or less at least, then home ownership is just a waste of money. There are 8-10% in costs just to get out of the apartment and you are just not going to most likely get a corresponding increase in value in this environment in that timeframe.

If however you are planning on buying a place to live for at least 10 years or more then i think your concern over short term risk is overrated.

For instance i bought a studio in 2000 for 200k, sold it in 2005 for 435k. That same studio is worth somewhere around 400k a little less today. My point is that it is still way over the 2000 level.

So all things being about equal, meaning i am willing to factor a premium into post87's formula, meaning i will not state that if rent is lower then ownership i would not buy. It has to be more then a few hundred or so, which could be the difference between having the flexibility to redo the whole apartment how you want, versus living with what you are renting.

Are you saying that real estate has higher volatility of returns (standard deviation) than equities? That real estate has a similar risk profile to a 3X levered ETF? Really? You are aware that equities and ETF's can be purchased on margin too right? Also many Co-Op boards in the city limit margin to 4-5X (yes some don't, and many condos don't).

You really think that the risk profile of NYC real estate is similar to a 3X levered ETF? Really?

"And this is just a fundamental mistake. Savvy investor doesn't matter.

What we're talking about is your money being at risk. You simply can't compare a risk-free rate to a high risk rate, which is what you are doing."

swe, I think the point you are trying to make is the right one but it is done through a different calculation. The calculation of the yearly forgone interest on the down payment is correctly calculated as ((risk free rate * (1 - tax rate) * down payment amount)).

I think your point is that you need to risk adjust the entire real estate transaction against market factors. This is correct but I have yet to see any decent approach to this calculation and when factoring an unknown term, future economic conditions, probability of downside vs upside, it is understandable why no clear cut formula exists.

the best time to buy is when you don'thave to buy,you can stand firm on your offer and walk away if you do not receive your price.i am in process of buying after renting the past 14 months,i was a long -time owner of a co-op and from a quality of life perspective wanted to own again.i looked for apartment that i can live in next 10 years and beyond,i looked at 50 apartments and found one i wanted to own .prices may increase or decrease in short -term,i noticed major decrease in rates for jumbo mortgages and will move forward,however i was prepared to walk if seller did not negotiate.i have my investments in stocks,bonds and alternatives,i look at my apartment as a place to live,that being said i will not pay any price for it,it need to be reasonable

> Are you saying that real estate has higher volatility of returns
> (standard deviation) than equities?

Nope.

Saying that Re (or, hell, a lot of things) leveraged 5x or 10x will have higher volatility than equities.

You can't leave out the leverage

> That real estate has a similar risk profile to a 3X levered ETF?

Again, comparing to 5x or 10x leverage

> Really?

Yes, really.

> You are aware that equities and ETF's can be purchased on margin too right?

Of course, and they are a fairer comparison than the risk-free rate.

> Also many Co-Op boards in the city limit margin to 4-5X (yes some don't, and many condos don't).

OK, 4-5x. Thats still more than equities.

> You really think that the risk profile of NYC real estate is similar to a 3X levered ETF? Really?

Again, one more time, you keep missing this.... versus 5x or 10x leveraged RE.... definitely.

"Somewhereelse, you are correct that the asset could decrease 20%, just like i could lose 20% in the market. However as I think i stated earlier it really depends on your timeframe for living in this apartment. "

Once again, bad analysis. If your S&P fund loses 20%, you lose 20%. If you are 10x leveraged into an apartment and the price goes down just 10%, you've lost 100%.

You're simply missing the power of leverage here.

> If however you are planning on buying a place to live for at least 10 years or more then i think your concern
> over short term risk is overrated.

Who said its short-term risk?

You really need to go back to finance basics. You're missing something big here.

"For instance i bought a studio in 2000 for 200k, sold it in 2005 for 435k. That same studio is worth somewhere around 400k a little less today. My point is that it is still way over the 2000 level."

You're making another fundamental investment mistake - assuming past performance will dictate future returns.
There are lots of other years you can cherry pick and come out in the other direction.

And, of course, at the peak of a bubble, every purchase looks smart. Same thing for dotcom stocks in 2000.

But thats just applying bad logic.

> So all things being about equal, meaning i am willing to factor a premium into post87's formula,
> meaning i will not state that if rent is lower then ownership i would not buy.
> t has to be more then a few hundred or so, which could be the difference between having the flexibility to redo
> the whole apartment how you want, versus living with what you are renting.

Options are worth something. You have to factor in the value of getting to choose again for free (no selling costs) when you rent. There is value there, too.

But, again, your logic is built on faulty premise.

"I think your point is that you need to risk adjust the entire real estate transaction against market factors. This is correct but I have yet to see any decent approach to this calculation and when factoring an unknown term, future economic conditions, probability of downside vs upside, it is understandable why no clear cut formula exists."

Juice, agreed.... but factoring in the risk free rate is just completely missing a huge factor. Not saying finding the right one is easy, but no reason to pick the one that is guaranteed to be wrong.

Just put in 7% if you want to make it simple. but 1% is just nonsensical.

Somewhereelse my issue is i only lose 100% of my money if i sell. It is not as if i get a margin call. Second i am in for 25% so 10% and gone is not a reasonable analysis.

And yes of course past performance is not future.

but then again you invest in stocks, bonds, etf, anything can happen also. So once again you crash and burn out like dotcome, sure you lose all your money and have proved that yes a lot does not come back.

Now flip to real estate, i am looking to live in a home that i do not plan on selling for at least 15 years. even if it goes up with inflation over time, i will walk away with something when i live.

I feel the flaw in your analysis is the assumption that short term decrease will make everyone walk away because they "10%" and that was all there money.