Trying to understand buying vs. renting

get ready for a flood. easy answer, rent.

You need to do some more homework - there's no way you'd pay $4k/month on the mortgage for that place. 15yr rates are around 4%, maybe less. At 20% down, that's a $400k mortgage, with a monthly payment of about $3k.

finding a rental or a coop that allows the two dogs and the cat may be difficult. But I agree, I would like to buy either an apt for weekends or investment and I just can't justify it with the numbers the way they are

My sister lives in a co-op on the UWS always talks about Manhattan like it is totally immune from the real estate downturn that has gripped the rest of the country. I know it's not. I know of someone who bought a one bedroom in Gramercy Park two years ago for 925K that is now worth about 650K. That's an "in your face" kind of loss. People seem to rationalize that it's only a "paper" loss until you want to sell.

Pelican, your sister is perhaps in denial.

On your hypothetical $500K purchase plus $1000 maintenance vs. a $3000 rent, I actually think buying is financially sound for someone looking long-term. Let's say that there is $150 in tax benefit from maintenance that's offset by $150 in insurance (assume a coop where the coop insurance covers most of the stuff). Let's also say you have to pay 10% transaction costs amortized over 10 years, $400 a month. Let's also allocate $200 to amortize upkeep / renovations to keep the place in-line with current quality (e.g., a $50K renovation every 20 years).

That works out to $500K plus $1600 a month to own vs. $3000 a month to rent. So basically, you're putting up $500K to save $1400 a month, or $16.8K a year. That works out to a 3.36% return on your money. That's not all, however. Each year the $3000 rent grows with inflation, as does the $1600 in ownership costs. So your $16.8K savings from putting up $500K grows with inflation, which the market current puts at 2% a year.

Without explaining the details, it works out to being equivalent to adding 2% to the 3.36% to get the equivalent fixed yield, or a 5.36% yield on $500K, which is $26.8K. Suppose you finance with a 20%-down 15-year loan at 4%, which works out to 2.8% after a 30% tax deduction. On $400K, this works out to $11.2K in interest. This means for the $100K you're putting up, you're netting a $15.6K return, or a 15.6% yield.

IMO, that's an appropriate level of return for the risk being born and the illiquidity of the asset.

I'd like to know where you can find a one bedroom for $500k...i'm only seeing large studios in the $400-$500k range.

Now, there were several things that made that example work. First of all, I don't think a $500K price vs. a $3000 rent is typical of Manhattan. At $3000, you'll easily find $700K condos, and with effort you can find $800K places. That being said, non-descript coops in non-prime locations do offer better buy value. On the other hand, the higher-priced you go, the more things tilt in favor of renting. E.g., for $15K a month (i.e., 5 times $3000), you can probably rent places in the $5-6M range (i.e., 10-12 times $500K).

Second, there is a tremendous amount of government support to everything. There's the traditional support (tax deductions), and then there's the keep-the-shit-from-hitting-the-fan support (subsidized interest rates). As you move up the price scale, these supports disappear. Only the first $1M has tax deductions, which get limited the richer the buyer gets, and you don't get Freddie/Fannie interest rates above $700K.

You start removing or adjusting any of the items in your example, the rug starts getting pulled out from that 15.6% yield on the downpayment, and you are in well-loved bubble territory, which much of Manhattan still sits in.

Julia, what about something like this?

http://streeteasy.com/nyc/sale/538042-coop-425-east-79th-street-yorkville-new-york

I rent only because I only have about $200K for a down payment. That does not get me a 2BR apartment in Manhattan in a desirable location. Assuming 80% LTV.

If I had $400K, I would buy a place for $1.4-$1.5M.

Has nothing to do with the economics of renting vs. buying. Condos for sale are often better quality than those that are rentable. You have control over your home, and your neighbors tend to be more established and secure. i.e., no pot smoke in the hallways.

So Manhattan real estate will have a floor to the extent people with $200-$500K in readily available cash are around. Given what Wall Street paid over the past ten years, there are many in that category to soak up inventory.

That, in a nutshell, is the Manhattan market.

So why not just rent a condo?

Always buy, never rent. Real estate never goes down in value. Manhattan is an island. Marble countertops are worth their weight in - Formica.

I currently rent a 1 br condo in the UES on the 29th floor. My rent is 2,300 but to buy a place in my building on a high floor it costs 650,000 . Even with the tax benefit I can't justify buying. Same with my friend, renting for 3,000 for a jr 4 that a similar unit is trying to sell for 1 million.

pelicanellie- If those are really the numbers it sounds like it does not make sense to buy. I would think your costs would be a little lower, but that is besides the point. Also ask yourself what you are earning on your down payment money right now. As a retired person that income may be important. Also keep in mind that on a 15 year mortgage you are getting significant amortization, and you are really paying yourself about $1500 a month. The numbers may not be as bad as they first appear, but without a mortgage deduction, it sounds like you are better off renting.

Zzzzbuyer, two yrs ago $200k would barely get you into studio. So if you had $500k back in 2007, you'd pull the lic 2bdrm trade? Or small 2bdrm at 110 St trade? So your only limitation was you didn't have enough cash to be the large lemming. M'okay.

Do ppl just just wait till you got dp and go balls deep? I don't assume to own anything until it's 100% paid off. Gives 'me the sweats if I can't pay off the mortgage in 2-5 yrs. Am I insane? Or are ppl just financial retards?

OP might be surprised by the number of rental buildings that would have no problem with two dogs and a cat. It's a dog-crazy city - definitely one of New York's upsides.

So, Nada, if you find a condo that costs slightly less to buy than to rent (~$300/month), without accounting for any tax breaks (i.e., they are gravy), you really like the area and the apartment itself, and you're not exactly expecting much of a return on your down payment over the next few years, and you have good job security and 20% down and the NY Times calculator basically says it's a good deal...would your advice be, "go for it"?

You know, hypothetically and all. Just checking.

If you get a discount to buy before tax savings, and you like the apartment and neighborhood, why ever would you not buy? If you get a discount to buy after tax savings, you should still buy. Heck, if you have a long time horizon why not pay a small premium to buy. After all, within 15 to 20 years, a lot of folks pay off their mortgages early, and then they basically have the economics of a rent controlled apartment that they can renovate to taste and resell--sweet.

Evnyc, if I'm understanding you correctly, absolutely.