NYC: Better to rent than buy

http://www.trulia.com/blog/rudy_bachraty/2010/06/new_trulia_real_estate_index_rent_vs_buy

New Trulia Real Estate Index: Rent vs. Buy

What about the tax deduction?

What about paying in cash and living for free?

What about all the BENEFITS of the extra risk you take on?

Trulia knows NOTHING.

To be fair, they are using list price, which may show that NY sellers are more delusional than elsewhere.

I agree with dwell. For many people, it makes more sense financially to rent than to own their principal residence. Not just in Manhattan, either. There's almost a stigma against renting in some places that I think is ridiculous.

If the US mortgage tax deduction is phased out, as they did in Britain about 10 years ago, that will change the economics of home ownership dramatically. The US is unusual to have this tax break, and it's not clear to me how much longer it can last.

However, a lot of well-off and wealthy people own real estate, and they keep buying more, and the didn't get wealthy by being dumb about money.

If you have more money than you need to get by, then you always have the nice problem of what to do with that money.

You can spend it on a world tour or a lavish lifestyle, you can put it under a mattress, or in a savings account (with current rates that make mattresses look like viable savings vehicles), or you can invest it in something. Or do a mixture of things.

If you invest your extra money in stock, say the stock is called Bear Sterns, if something highly unusual or even unprecedented happens, your investment might be wiped out, or at least severely diminished. And all you have is a piece of paper with numbers written on it, which is not much fun. I think we all know by now that Wall Street is dominated by pro intelligence (if not illegal insider info) and as amateurs the rest of us are at a big disadvantage.

If you invest your surplus money in a place you want to live in anyway--or in a place you can rent to others who want to live there--then if something highly unusual happens and the value of your investment falls, you still have something valuable. You have a building to live in and/or you have cash flow that tends to rise with the inflation rate (called rent).

I very much believe that everybody with extra money to invest, who wants to invest, should have a diverse portfolio. That is my opinion. For most middle class people, their company invests in stocks/bonds for them, so buying more of the same with their extra money incurs the risk of limited diversification. If they aren't going to buy their primary residence, then they ought to at least consider investments other than whatever they already own a lot of--alternatives such as gold, antiques, art, musical instruments that appreciate, commodities and investments in real estate.

It's a lot easier just to send your extra money to an index fund, and Wall Street wants all of us to do just that. But all investments incur risk, including the stocks/bonds in your retirement portfolio, commodities, and real estate, and the only way I know to try to control investment risk is diversification. If you have extra money, it is going to go somewhere, and it's a good idea to stop and think about it where you want it to go.

Karla Harby
Rutenberg Realty
kharby@crrnyc.com

And don't forget pistachio paint.

Karla: From 1990 to 2008, "Wall Street" reaped much larger profits from consumers who levered themselves to the hilt to buy residential real estate than from those who made regular deposits in low-cost index funds. Are you familiar with the economics of the mortgage conduit/securitization business? Does "sub-prime" ring a bell? Where do you think the capital for those origination mills came from? Where do you think the profits went?

Whatever the advantages of home ownership may be, protecting one's savings from rapacious investment bankers is certainly not among them.

Pistachio paint!

Don't forget, though: according to JuiceMan, if you buy in cash you actually live for free, and if you buy 100% financed, it has no opportunity cost.

From Trulia: Ownership Costs include

"Mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. Total costs of homeownership include an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions"

"Total costs of renting include rent and renter’s insurance."

Classic Trulia to speak GENERALLY to buying vs. renting...but then again the most of the US has about 1/10th the attention span it requires to analyze a buy v. rent according to their own situation.

yes, at 35x, it makes more financial sense to rent. if you think the typical person is paying that, you are very mistaken. you need to look at the actual property you would buy, and what that would rent for before making your decision based on some cockamamie trulia formula.

Typical printer - formulas are good, except when they're not.

Are you an advocate of free living, as well, printer?

it's not 35 times, it's 35 years to break even.

according to trulia, new yorkers need to have a 35 year hold period if they pay the average listing price.

methodology, who knows.

Steve, are you a ruturd? The tax-deduction benifit is offset by the maintainence, insurance, and upkeep - especially in NYC. This is why every rent-own ratio out there will find that on average, if you take net cost of renting versus net cost of buying, the ratio is virtually the same as the gross/gross.

HOWEVER because you are too stupid to read what Trulia wrote, it's net/net - including rental insurance and all costs and benifits associated with home ownership.

And every other rent/buy ratio looking at NYC shows the same result, Manhattan is particularly bad on a P/R ratio basis.

no steve, it's more like: formulas are only as good as the quality of the data being input to them,

I am not sure what 'free living' is, but it sounds pretty attractive - is it like free love?

I posted this for info purposes only. I'm not agreeing or disagreeing with Trulia. Don't know if they're right or wrong. It's just something to ponder & debate.

I think the math is a little off in the Trulia calculator -- they are saying the avg. 2 bedroom sells for $1,383,612 and rents for $3,538. I think that's a bit of an apples to orange kind of comparison.

For instance, if you look at the Orion, the avg 2 bedroom listing price is around 1.38 and the average rental price is around $5,200 / mo. If you were to use these numbers instead: 1.38 / (12 x 5200) you get a ratio of 22 instead.

Now, a 22 ratio still implies it is better to rent than to own. But it does make you wonder about Trulia's research. Anyone who has ever looked for a 2 bed in NYC knows that there are many 1 beds / jr. fours masquerading as genuine 2 beds in the rental market.

Trulia did not do any "research." They have tens of thousands of listings in each city from every concievable website for rentals and sales, and they used a simple computer program to do the average of one over the average of the other. They assumed that the net expenses listed on the ads were correct, and assumed an average rental insurance rate based on each market. Its very quick and dirty. Somone like a Miller-Samuels or Case-Shiller would try to control for quality, etc. So the latter would be more precise.

HOWEVER using a single building, the Oro or otherwise, is insanely stupid for such an exercise. Its not even close to statisticly relavent for the entire NYC market. However I suspepect jmkeenan already knows that.

Now of course the flood gates will open, and everyone will point out an anecdote that will also prove nothing.

If it's "free love" it would be with JuiceMan, which I'm afraid I'll have to pass on. I have a long-standing engagement with celibacy.

Doesn't make a bit of sense to include list prices in the b-r ratio; one must look at actual sales prices. Much of the Manhattan inventory -- especially at the high end -- is extremely stale and is priced well above actual market values.

421A is a rent-is-cheaper killer...

Oh and also note, a 5/1 I/O ARM orginated at say 6-6.5 in '05 used to finance such a tax-abated unit that will reset this year per 12 month LIBOR to a nice little 3.0% AMM, which causes the debt service to go down by a $150 AND for about 500-600/month in principal to be paid off going foward. Also take into account 10 year average annual 12-month LIBOR movement of .4 where the indexed rate won't again reach 6% until 2018 JUST in time for values to be back in the swing of things, which is ALSO a rent-is-cheaper killer.

condopresident, no they're not. it's telling that even with no taxes and absurdly low mortgage rates it still makes more sense in most new developments to rent than to buy.

just wait until the taxes increase and those low mortgage rates are no longer with us.

"Doesn't make a bit of sense to include list prices in the b-r ratio"

What else can they include? They include list prices for BOTH rents AND sales. Their IS no actual data on rents actually paid, and sales data is cold and stale. And asking rents can and have been to high or too low.

aboutready show me your math....

Jason: my only point is that this analysis is extremely misleading in the case of manhattan in that asking prices often have little basis in reality currently, and i would agree that you need both actual sales and rental data to do the analysis, and no, it would not be able to get such data. As a landlord in lower manhattan and a recent seller, I would say (very unscientifically) that the current b-r ratio in my niche is in the low 20s. That would still make me a renter and not buyer of manhattan property -- but I think their throwing at a number like 35 is very misleading.

I've shown my math for years on this board. Show me yours.

the 35 number is NOT the rent/buy multiplier. It is the number of years you need to hold a property to make buying become profitable, with any number of considerations being thrown into a rent/buy calculator.

aboutready
about 8 hours ago
it's not 35 times, it's 35 years to break even.
according to trulia, new yorkers need to have a 35 year hold period if they pay the average listing price.
methodology, who knows.

Methodology who knows is correct, but two items are interesting. First, 35 years is a LONG time. Second, they are actually saying that at some point, all things considered, the purchase does work out to be better. I would have thouht that if buying were too expensive and renting were cheaper that once you were in the hole based on your purchase that the hole only gets bigger over time, not smaller.

AR...I'll show you mine if you show me yours.

To me, a 421A is like a ticking time bomb, full RE tax looms larger as time goes on, so unless ya want to pay that, ya have to find a greater fool before taxes kick in.

IMO, a "5/1 I/O ARM " is both a gimmick & a crap shoot which appeals to gamblers or to those who cannot afford the property or to the ignorant. It's these types of loans which contributed to the bubble. I'm not a flipper or a gambler, so for me, purchasing RE is a long term commitment. I'll take a nice, plain vanilla 30 yr fixed & get my kicks from champagne.

New Construction. 25 Year Abatement. 980 Sqft/400 Sqft of Private Roof Space

I/O (30 year 6.0%) Amm (25 year, 3%)
Loan $448,000.00 $448,000.00
DS $2,240.00 $2,124.47
CC's $291.00 $291.00
Taxes $33.00 $33.00
Deduction $(627.20) $(313.60)
Owner Costs $1,936.80 $2,134.87

Rent from Tenants $3,200.00 $3,100.00

Owner Benefit $1,263.20 $965.13

And to simplify what my DP/closing costs would have done in the S&P (401k).....'05-'10 in SP ='s -5.41% whereas my place just appraised at +15% its '05 PP.

while I agree that investments should be diversified, the downpayment required for most decent sized NYC apartments means that most middle class New Yorkers (median income $80k) would have to put at least 50% of their savings (if not their entire life savings) into real estate. That's not diversification. Nor is the problem solved by allowing low downpayments on a jumbo mortgage - that's what got us into this mess in the first place. A lot of current condo foreclosures are properties owned by people who put down 10% or less and the current rents don't come close to covering the mortgage payments.

where's the link, condopres? and what was the asking price? and where is this located? and when was a 980 sf property with 400 sf roof space purchased with a loan of $448,000? 2005, well that's a hell of a lot different than today. although some properties are trading at 2005 levels, it sounds as if your 2005 sale involved an earlier contract date.

we're talking today. not your purchase.

CondoPresident, where/what is this property?

Aboutready your point gets back to the issue previously discussed about getting out "too early" or "too late".

I orginated a Jumbo in '05 (under old limits) and have renters covering debt service as we speak. However, I was a 20% buyer back '05, BUT assuming even 90%LTV and under my loan terms (6%,I/O,30Year,5/1 ARM), my current tenants pay enough to cover the whole shibang. Also note that after reset come January (assuming a 3% reset), I make out an additional $100....

90 LTV scenario.....

I/O Reset
PP $560,000.00
Debt $504,000.00
Equity $56,000.00
PMT $2,520.00 $2,390.03
CC"s $291.00 $291.00
Taxes $33.00 $33.00
Total $2,844.00 $2,714.03

Sorry, but when I hear "new construction", I think of Chinese sheetrock.

I'm livin' on a chinese rock.

yes and no. it depends on where the new development property is, and what it's downside is when taxes and mortgage rates are no longer so favorable. condopres may think today that he/she got a great deal, vis a vis the 2008 prices. he/she may not think so in five years.

i can't think that cramped, poorly designed spaces with hugely escalating costs of a certain square footage will do well over time as the baby boomers retire. and that describes a hell of a lot of the smaller new development units.

it's always the same discussion.
Those favoring renting have one unspoken assumption: that a dollar will remain a dollar.The problem is: it won't. inflation will destroy its value as surely as death comes.
Over time (assuming a free market rent) inflation works for the (leveraged)owner and against the renter.
Have you noticed that landlords are rarely poor but renters usually are.
In a time of high inflation, leveraged real estate (with a mortgage), is the most lucrative investment on a post inflation, post taxes basis.

Are we in a time of high inflation?

plus, do not forget that there are a hell of a lot of empty lots out there that have been purchased in the last ten years for large amounts of money, many with loans for demolition and foundation work. banks, absent a complete financial collapse, will likely start offering loans shortly to develop these plots. "in two to three years demand will be heavy." rinse and repeat.

developers develop, and banks go along if they can to avoid writing off losses. have fun.

nicercatch, we have had a bubble in prices since the early 000s due to factors including easy financing (until recently) and people's fear of equity markets after the tech bubble and resultant desire to invest in real property. Your statements are not off for the long term, but are misleading today.

nicercatch, what exactly is the dollar going to massively decline against? everyone wants their currency debased. in case you haven't noticed, we don't always get what we want. this isn't carter's economic world.

renters are only poor in the US. in other countries they often do just fine.

Further, as columbiacounty points out, we are not in a period of high inflation, making it difficult for landlords to have pricing power, and making it difficult for investors to assume even normal rates of property appreciation. In my opinion.

So if no one responds, best to create your own responses.

Dwell sounds like a Palin. "Well, you betcha, I'll take my plain jain 30 year and these adjustables are what got into this mess and by god, my policies will get us out."

Look, it's easy for the unlearned to simply read Trulia headlines or NYT aritcles and hear ARM and Adjustable and this is what got us into the mess and make the truly ignorant statements - such as 'ARMS are for the ignorant or those who can't afford'....and to certain extent, that's very true (for example, consider the 2 year ARM's orginated in 2005, in the hheartland no less, that reset in '07, after a bunch of Fed tweaks upward, that YES did contribute to the problem), however, the REALITY is that there's a whole buncha product out there that's actually working in favor of the borrower - whether the populous wants to accept that or not - and certainly in spite of such generalized, ignorant statements such as what dwell is spewing.

So, be it a surprise for you or not, I TOO am in it for the long haul and I'll be glad to compare values and YTD cost at the end of my abatement - did I mention I pay 30 bucks a month in taxes?

condopres, that's exactly my point. you are basing your views entirely on your purchase history. we're talking examples today. i don't think dwell is spewing anything at all, you on the other hand.

today the rent/buy options aren't so good. really.

CondoPresident, you bought at a good time. Out of curiosity, $3100 in rent, what was it with the first tenant after you closed on the purchase?

I bought '05. Lived in it until '08. Had baby. Needed to get out of walkup. Moved 8 blocks away. Signed tenants in Aug. '08 for 3200/month. They talked me down (as did most tenants to the landlords) in Aug. 2009 to 3100. They renewed at 3100 Aug. 2010.

Wait a minute, your 2005 condo with an abatement is a walkup? What kind of development is that?

Understandable and cetainly some are not. Some are terrible rent-to-buys. However, I argue in my area and even in some spots in Manhattan, the PP's are down, the Loan amounts are down and if you can get some good subsidies like a 421A, owning is better right now (and will only get better). I even argue that absent the subsidies, owning is ALWAYS better than renting beyond a 15-20 year hold.

huntersburg - they are ALL OVER THE PLACE.

I don't think you should argue anything, try to do the calculations.

But please answer my question about the walkup. Where are we talking about??

assuming you'll need the space for the 15-20 year hold. and you "know" that your circumstances won't cause relocation. your analysis is superficial at best.

CondoPresident, WHERE? You've given very detailed calculations but the property you are suggesting seems hard to believe.

here - let me give you my address...right. wburg...that's all you are getting.

and aboutready....it's now an investment propeorty, remember? you're gonna have to tear my dead body away from this thing.

Williamsburg, ok, alright.

Without sounding like a jerk, I think most of us are thinking about non-boutique markets. A risk in Williamsburg is that the trend moves away from its popularity.

Plus you are likely to have to find a new tenant every other year or so, and you've got transaction costs associated with that.

condopres, i have no problems with you thinking you did well buying early in b'burg with a long-term abatement. i thought of the area myself as early as 2000 (and to rent in the '80s).

but that doesn't mean you can extrapolate your success to the current market, in williamsburg or in manhattan.

hunter/AR. you can see RE as buying a home which is true.down from a RE bubble which is true.ina non inflationary world: which is false.
What we have is asset deflation and monetary inflation at the same time. RE prices are not going down anymore in the city, but commodity prices are already reflecting the massive increase on the monetary base.consumer prices will follow.
Those cycles come back and bail out the debtors: which includes the mortgage debtors.That's why over the years landlords assets get more and more valuable as free markets tenants treadmill to stay even and end poor in the process.
I own RE in a few countries and I know my tenants'wealth: small.
The currency always gets debased against the real.

nicercatch, since you own RE in several countries, you must also know that real estate is all local.

hunterberg....i have no idea what "A risk in Williamsburg is that the trend moves away from its popularity"....or wait...isn't that what nay-sayers have been saying about ALL NYC neighborhoods. And aren't they continually proved wrong? "Nah, those factories at the foot of the Williamsburg bridge - trash!!". "Wait you want me to invest in a bunch of industrial product underneath the manhattan bridge - you're retarded!!!" or "those f'ing artists in those crappy lofts below houston....you are out of your mind" or best yet (true story, too, from my buddy's dad) "please take this tax lien off my hands...it's encumbering this piece of crap wareouse just below canal." c'mon you are going to have to do better than that.

also per trasnaction costs - i am an attorney and a RE broker. the only transaction costs i deal with are mental (and admittedly around renewal time). oh and didn't i just PROVE to you that I have had great tenants now for three years? at this rate, i'll have a total of 4 tenants by year 15 - DAMN!

to finish: RE is far more than a home. It is a financial extension: the mortgage is a long term put against the purchasing power of the currency (with an embedded option:refinancing). against a fiat currency, over the long term it is a sure winner

CondoPresident
1 minute ago
hunterberg....i have no idea what "A risk in Williamsburg is that the trend moves away from its popularity"....or wait...isn't that what nay-sayers have been saying about ALL NYC neighborhoods.

Sorry but Williamsburg is not the Upper East Side. Williamsburg is not the Upper West Side.

aboutready - i KNOW i did well. let's not confuse who's stuck in the abstract.

also per trasnaction costs - i am an attorney and a RE broker. the only transaction costs i deal with are mental (and admittedly around renewal time). oh and didn't i just PROVE to you that I have had great tenants now for three years? at this rate, i'll have a total of 4 tenants by year 15 - DAMN!

Transaction costs include the months that your apartment is on the market with while your price discovery ($100 price chops) recognizes that hipsters are moving away from Williamsburg because some other new neighborhood is hotter.

CondoPres, ultimately, you bought at a fair time, but face it, you bought a building that is a walkup. What in your real estate brokerage training suggested that was a good idea? Even you don't want to live there.

condopres, this thread isn't about whether YOU did well. it's whether people buying NOW will do well.

that was the thread. let's not confuse who is stuck in the misleading.

this is getting laughable....i'm out.

CondoPresident, you are a lawyer and a real estate broker, surely you ought to be able to hold your own?

real estate is global:the bubble hit everywhere. US coming out of it.Paris still full blown in it. SE asia in it with Hong Kong and Singapore going ballistic.
"real estate is local" is what the idiot greenspan used to say

What in the world does it mean that real estate is global? Water is global. Air is global. The moon is global.

"i am an attorney and a RE broker." Me, too, CondomPrez. I consider your choice of an interest only, 5 yr ARM to be amateurish, but I do hope it works out for you.
Something I don't understand: You're a condoprez, yet, you have tenants. Do you own various condo units & rent them? Did you buy these units with 5yr I/O ARMs? If so, I again wish you luck, but remind you of Harry Macklowe, who also used heavily leveraged financing.

many first-time buyers are going from renting an orange to buying an apple, something we older ones don't like to admit - starting out in prime Manhattan squeezed into rentals, then those that can't buy in their first prime Manhattan area buy out in Brooklyn, as an example - it's not apples to apples in practice

and huntersburg....dude you've said nothing that holds any meaning in real life. sure based on your fanciful delusions, you're making some good points, but as far as actually doing instead of just blow-harding with yer pal dwell, you add nothign to a substantive NYC RE conversation.

Dude, I guaranty you I have way more RE experience (both biz & law) & net worth than you. You're like a day trader, working in your underwear in the basement. Good luck finding a greater fool.

Exactamundo, dwell

Hey alan :)

alan, are you ok with how dwell earned his net worth?

but dwell you spout moronic know-nothing BS. how can anybody reasonably think you have ANY RE experience? and we can compare balance sheets anytime.

and only a fool is a dwell client.

CondoPresident, are you related to The_President?

I mean, so many people have so many different names here. We have columbiacounty, greenecounty, conradcounty and herkimercounty as just one example. Or wbottom and apt23 as another example.

I don't argue with idiots, again, wish you all the best.

dwell you're one big f'ing circle. your logic starts aand stops in the same damn place.

condoprez, EXCELSIOR unicorns!

"The moon is global."

I don't know about that. It may be round(ish), but I don't think it's global.

www.lunarregistry.com

>>The moon is global.

Depending on the adjudication of the law of the sea treaty, that may or may not be true. It really depends on how the militarization of space progresses and the balance of funds are resolved in the next 3-5 years. If China takes control of the IMF, that probably changes things. I'll just make a wild guess that, at this point, the CIA thinks we think we own the moon. If the IMF moves to China, Italy separates from the Euro, and Boeing can't launch the 787, we probably lose the moon.

That would be humiliating for us. We must do something to save face.

Sorry, Juicy, but I think that website is fraudulent. I have it on good authority (Dan Quayle) that property on the moon is sold exclusively in metric, that is, hectares. Things like this make it easy to ferret out fraud.

I will say, though, that even the fraudulent website values land on the moon more than land in Long Island City. The moon has water that's potable - Long Island City only has water that's inflammable, or walkable-on.

There are certainly a lot more choices at all ends of the spectrum for renters.

I just bought. I'm paying less than my rent was and I own a place. Best decision of my life.

Deets, MRssell, deets.

Congrats MRussell! Any hints on what you bought and where?

Yes. MRussel was renting a 2-bedroom 2-bathroom 2-balcony apartment in Central Midtown for $3,600 a month. He traded it in for an alcove studio in Long Island City with a view of the railyards, for $3,600 a month.

Best decision of his life. Because real estate is a good thing.

Oh! Did I fail to mention the tax benefit?!

steve, no reason to be a jerk.

Hey BJW, maybe MRussel can give us some deets on his apartment so I can make that decision you've been asking me to make. Since he says that he's saving money vs. his rental.

HAHAHAHAHA!

steve, you don't understand the question to begin with - that much is clear. Additionally, I know it's difficult for you to believe/understand, but some people pay less to own than to rent.

"but some people pay less to own than to rent."

Who said they didn't? That, in fact, is the norm, which is why people assume the extra risk.

Yes I understand your question; your problem is you can't find a real-life example that suits your premises.

But MRussell says he has one. So - DEETS?

"your problem is you can't find a real-life example that suits your premises."

Again, that's not the point of the question AT ALL. The point is to discover your (as in stevejhx's) personal preferences when it comes to renting vs buying, ALL OTHER THINGS BEING EQUAL. That means you're going to be living in the apartment regardless (and again, you love the location, layout, etc) and all you have to do is choose to own or rent. The next step is determining at which point cost would matter enough for you to switch your preference. It's that simple. So, answer the damn thing.

You are thick, bwj. I've answered that question already.