Virgin post! Calling all finance geniuses/trolls

Started by streeteasypost
about 14 years ago
Posts: 30
Member since: Jan 2011
Discussion about
So. I’ve been lurking for a while enjoying the threads, opinions, and trolling. I was inspired to post due to the “How much house can I afford” thread that appeared recently. I’m curious to see what the streeteasy hive mind can come up with for me. My situation. Reasonably stable job @ $300K/annum. No debt. About $250K in 401K/SEP. About $1.4MM in the bank in cash (sold some real estate late last... [more]
So. I’ve been lurking for a while enjoying the threads, opinions, and trolling. I was inspired to post due to the “How much house can I afford” thread that appeared recently. I’m curious to see what the streeteasy hive mind can come up with for me. My situation. Reasonably stable job @ $300K/annum. No debt. About $250K in 401K/SEP. About $1.4MM in the bank in cash (sold some real estate late last year). Another $700K in alternative assets (long term, won’t be touched for a while). My total expenses (including rent) are around $10K/month. I save most everything else. I currently rent a smallish one bedroom for $3,200 month. I don’t love the place, but it’s certainly a nice, newer, reasonably well located, full service building. I’d prefer a groovier place that suited my taste, but feel spending more than this on rent is wasteful. I really wanted to buy a place (was approved for a modest $550,000 max mortgage because I don’t want to carry a huge debt). But I’m more of the mind now this is not a great time to buy, and that NYC real estate would be a depreciating asset, even though I really want to buy a joint, gut it, and make it my own. So - in my situation - what would you do? Buy? Continue to rent? Rent a more expensive place? If rent, what would you do with the cash balance currently in the bank? Let the mayhem begin.... [less]
So is the idea that you wanted to take out a small(-ish) mortgage because you were going to put a large(-ish) part of those cash reserves from the recent real estate sale as down payment?
I'm glad you agree to abide by the group decision on your plans.
Continue to rent, same place unless there are more severe lifestyle problems with the place that you haven't disclosed (like you don't have a south-facing terrace on which you can grow heirloom tomatoes and indoor/outdoor citrus), paint the walls pistachio. Wait and watch for a better buying era, at which time you'll have a better idea what size/location home suits your evolving life needs -- if, for example, you decide to buy or lease a gaggle of children.
There are no groovier places. There's no place like home, there's no place like home, there's no place like home.
Here we have yet another "i'm new here, tell me what to do" posting that will make the finance trolls giddy with delight.
Suspicious?
There are a few things to consider. First--you haven't said if you're married or single, but from your post I'm assuming single/no kids. If you think marriage/partnership/kids are in your future, I'd advise against purchasing a one-bed. You want your apartment to offer as much long-term flexibility as possible.
Second--if you're planning to stay in NYC for the long haul, I personally see no reason not to purchase now if you find something you love. Sure values may bump down a bit more and may take a few years to recover, but if you're not expecting to sell in the next 5 or so years, who cares? There is a lot to be said about the psychology of owning one's home, regardless of what various trolls may tell you :-)
With that said, I wouldn't necessarily rush into anything either. Get super-educated about the area of the city in which you're interested in buying and start looking at what's out there. Nothing's pushing you into an immediate decision. The ball is in your court.
If you're happy with where you are, why complicate a good thing? Are you not in love with your current place because of the size or location? For $3,200 you can find plenty of 1 beds, so it may be a matter of just shopping around a bit. Given your seeming propensity to save, I don't think purchasing something at current prices is going to make you that much happier. What to do with cash now? That's a great question - equities have done quite nicely of late, but if you're coming to the party now, I'm not nearly as confident as I was 6 months ago. I'd certainly put some cash in high-yield savings accounts (even though interest rates are still ridiculously low), but am genuinely curious where others would put their cash.
How old are you, and what are your 7-10 year goals? Are you going to work in NYC for another 10 years+? Are you planning to have a family/kids?
Let's say you are not forecasting any change in your housing needs, and you are ready for a bit of consumption (no need to live like a monk), I'm sure you can find a 1-Br in needs of TLC for a cost (either as a monthly expense or loss of potential earnings) that is somewhat similar to your rent. It maybe not be a great investment, but if you plan to stay there long-term, it will be equivalent to the cost of renting, and worth it if you enjoy your living arrangement more.
matson: Yeah, basically, that's what I was GOING to do. I would've used a large chunk of that recent sale as a down payment (not all!).
alan: oh, why not - it's anonymous, and fun, I can't get hurt, and maybe I'll even learn something!
stfu
$2.1mm at 10% = $210k/yr. Don't get it? Stfu
really: I knew the trolls would love it! Just waiting for W67 to chime in :-)
bram: Single, no kids, none in the future. Marriage might be a possibility (one day, not any time soon), but kids VERY doubtful. Been in NYC 15 years, staying here for sure. Would not expect to sell for quite a while. I (think I) know the city and its areas quite well.
bjw: Well, I'm not 'happy' with where I am - I'm just treading water. I would say I neither 'love' the location (midtown) nor the size (700 sf). And I agree with you - the biggest question for me is how to protect (and hopefully increase) my $'s.
maly: I'm 43. 7-10 year goals are keep working, keep earning money, keep saving. No bucket list. As I said, marriage maybe one day, Kids (very) doubtful. And do kind of feel like I'm treading water and living like a monk, which could be worse, but i can't say I love, either.
W67: I get it. But don't count the $700K. So it's nice to say $1.4MM at 10% = $140K annually.
IF you can produce that kind of return.
Commodities down, equities down, bonds down, real estate down, art down. So from where do you guarantee this mythical 10% after tax annual earnings?
Flmaoz.
1) so you expect $700k to earn, 0?
2) is your $300k salary after tax?
3) I'm earning 10%, why can't you?
Think my man. Think.
$2mm in bank and not a fling clue. Thank you geitner. Your 'assets' are more based on timing than intelligence. Gotta go workout
sep, you sound like you have no problems, which can be a very boring existence. You need a project that will make you happy and bring some energy into your life, before you find a Russian girlfriend who will spend all your money and then set your rental on fire. I can't tell you what will make you happier, but Alanhart can. I would listen to his advice, then Inonada can tell you how to do that sensibly.
Suspicious, yes. But to answer the question, in my own personal experience, the biggest reason we are buying is that it's difficult to find the nicer, more unique apartments to rent, and if you actually want to customize and call a place home, that's what you have to do. We were in a similar situation as you, couldn't swallow the pill of paying more to rent a nicer place, and since we wanted an upgrade, we have chosen to buy. I continue to do the math and I struggle to make the numbers work to justify the difference, but we only decided to buy when we found that place that you couldn't actually find to rent.
Just my 2 cents...
streeteasypost, maybe it's just a question of exploring another neighborhood and seeing how far $3,200 can go for you. And maybe see if a relatively marginal increase in rental budget gives you a decent return in terms of qol/space. Since you're single, a nicer bachelor pad in the east village might suit your taste. I would think $3,200 can get you that.
As for the cash question, I've been trying to get w67th to answer that one. Yachts maybe?
streeteasypost
Listen to me.
Your 43 and you seem like a hard working guy with a stable income flow. Wait to buy long enough and you can pour you cash into the greatest mausoleum ever. You sound like you would love a bigger hipper place. I read what you wrote. You can shop in the 1.3/1.5mm class. Buy yourself a bad ass place and enjoy your time at home. Trick the place out like Otter's dorm room in Animal House. Giant screen TVs everywhere with a beer launching refrigerator. Sure, I could think of better investment plans if your willing to live in your one bedroom trailer but, when the heck are you going to live? Going to buy that dream pad when your 60? Live life before your testosterone count looks like the interest rate.
falco, I agree with you 100%. We've struggled with the same question for the past few years--married almost five years now--and finally just said 'what are we WAITING for??' I mean, sure, prices could go down more, but they could also go up. Who really cares if you're planning on making this your home for the foreseeable future? Personally I'd rather live in a gorgeous home I've made my own than a rental with shoddy unrenovated kitchen and crummy bathrooms. Or a rental badly renovated with low-end junk, which is almost worse...
i'll add something else to falcogold1's and bramstar's comments: you know, for a looong time i was looking at the cost of renting vs buying, crunching all the #s and, lo and behold, renting was "cheaper" BUT ... let's say the difference is (using round numbers) $300k spent to purchase over the course of 4-5 years vs $200k to rent; i asked myself: am i ok with that $200k literally going out the window? in other words, at what spread does the difference between the greater cost of owning versus the lower cost of renting no longer matter because the numbers on the rent side are stupidly large regardless? (does that make sense?)
Huh? Assuming the buy vs. rent numbers look bad, you're asking something "why should I spend $200K to get $200K worth of housing, when instead I could spend $300K to get $200K worth of housing, but end up with $50K worth of equity at the end?"
The answer to this is, hopefully, pretty obvious: It's better for $200K to literally go out the window than for $250K to go out the window.
I have two very extreme suggestions.
1. Spend your money on charity. It will always make you happy.
2. If accumulating wealth is your dominant way to be happy. Pick a tropical location with more appreciative potential than NYC. Buy a vacation home there and vacation more often. May be then you can find a wife there too.
Make that three very extreme suggestions
3.Take your hard earned money and do a Charlie Sheen. 5 porn stars,(I quote) a Gucci suitcase full of blow and, endless skin flicks. Followed by a nice vacation at the Betty Ford Hotel and Spa.
Great memories and a rested and relaxed appearence.
If your going to invest.....invest in yourself
Absolutely, cosmetic surgery. Truly renewable happiness.
dont buy--youll buy cheaper later
live IN you apt, dont live your apt
get the f out of the house if youre 43, single and feeling a bit monastic already--pursue interests far more social and interesting, frankly, than buying/renovating/setting up an apt--take a class--do some volunteer work--you want to spend the next year buying and getting settled into a new apt? then what? sit in the pretty new place and twiddle your thumbs somr more?? your 3200/mo 1 bdrm should be plently nice to live/entertain in
get the f out you monk
bj needs friends bad--maybe shell get out with you
I knew this would be great fun and good for a few laughs, at worst - but OK, now to point...
W67 - 1). Re: the 700K, I would like to see 15% pretax annually, but will settle for 5%-10%. Having said that, this investment doesn't spit out cash annually - only at time of sale. I think of it as retirement earnings, and try not to even consider as a part of my 'net worth' now.
2). $300K salary is BEFORE tax. Sometimes a bit more.
3). "... I'm earning 10%, why can't you?..." Honestly? I've NEVER understood the stock/commodity markets, and they make me nervous. It always feels (to quote Gordon Gecko) "...Wake up, will ya pal? If you're not inside, you're outside, OK?..." And I feel completely 'outside.'
we are all outside the real estate market as well, which will need to appreciate 5% alone to offset the greater cost of owning
maly: Rule #1- NO Russian girlfriends!!!
NYC10007: I share your EXACT sentiments, which is why this is a difficult choice. It's NOT just dollars and cents. If it was JUST dollars and cents, well, you just run the numbers and do what's best. That's easy. That would also be congruent with some aspects of falco's, bramstar, and chiquiquita's observations.
bjw: Agreed - so what IS the best use of/play for the cash now? Oh wait, W67 is admiring his biceps/guns after that workout! :-)
vic: I do a (modest) amount of charity work. Spending my time on charity makes me happy. Spending my money on charity does not. Also, tropical locations are out. Don't love the beach. I'm a city-boy, most assuredly.
falco and alan: HAR! Not happening.
with respect to the russian girl friend....why own when you can rent.
seems universal...
Too bad Mr. Madoff is living in a cell now. Otherwise he can promise you a 10% return in any economic climate. And I know you are not trying to get investment advices here.
Seriously, some people need more bedrooms because they have big families. Some people want elaborate kitchens and living rooms because they party all the time. Some people want large walk in closets because they have too many shoes. You don't seem to fall in any of the above catagory. So, what do you want to gain in the "new" place?
falco: wiser words.....
vic: I'm someone who just really likes (loves) living in a place architecturally designed to my tastes and specs because I guess, at the end, I'm an aesthete. Nothing brings me more pleasure than the enjoyment of my surroundings, since I spend the majority of my time/life there. I will add, however, that I also enjoy putting my head on the pillow every night and getting a great night's sleep because I have no anxieties about my financial situation.
And that's the balance I'm trying to achieve, in the end. Both are equally important to me. I would prefer not to have to give up up one to achieve the other.
Streeteasypost
Your OP is kinda creepy, it could almost be me. Similar age and status, pension's a bit lower, salary and bonuses (this year) lower, cash a bit higher, current rent a bit higher.
Ive been pretty bearish on this forum and in life, I strongly believe in rental income to sales ratios of which NYC is awful. I wouldn't buy anything solely for investment in manahattan as I strongly believe in positive cash flow from day 1 and you can find that outside of manhattan pre and post Lehman. But talking about a home to live in, I'd concede even more and pay 200/220 times rent roll.
Truth is I've grown out of love with every apartment Ive rented rather quickly because Ive always "underented" meaning, I could probably afford an 8K a month place but can't see spending more than 5K a month on just rent so I'd end up in apartments quick to turn unlikeable. And renting has allowed me to invest and make substancial money in other venues but now, north of 40, it's time to spend "some" of it and stop being so future oriented.
I'm somewhat tired of the generic tiles, the cheap parquet floors, and the ho hum appliances most rentals offer.
As you point out on the cash, it's easy to think about collecting 5% / 10% on the cash instead but not everyone is comfortable with the market, Ive played with some bonds and ultra conservative stuff as well as some "friendly" IPOs but like a trip to Vegas, everyone tells you I won $1000 in Blackjack but forgot to mention lost $700 on Roulette.
The truth, in the end for the last 5 years it's been around 2% income per year.Which doesn't really bother me, however, having all that cash did make me a bit complacent and less hungry.
I've been in contract around a month now, not overly excited not paranoid either, Ive decided if I plan to stay in the same place at least 5 years, I'm ok.
ANd ok means even if I sell what I paid for it and lose 10% to transaction fees. I would have spent that in rent.
"I'm somewhat tired of the generic tiles, the cheap parquet floors, and the ho hum appliances most rentals offer."
... you won't know what 'tired' feels like until you experience the specific tiles, the carefully chosen parquet and the fabulous upmarket appliances that you loved so much two or three years earlier.
All right, I've heard enough. I would recommend you up your rental budget by $2,000/month, and get a totally awesome 1BR in the neighborhood of your choice. It will be much, much cheaper to move every year for the next 7 years than buying the equivalent place and then fritter away your money and peace of mind on ill-conceived renovations.
Ahart
I don't disagree, it's just light speed with a rental and it's in "my power" to change whenever I want "pyschologically with ownership."
Streeteasypost,
Thank you for gradually telling more of yourself. Now, I have a feeling that you are very suited for your bachelor life. At the same time, your biological clock is also ticking. You want to a more fulfilled life with this high probability of staying single. Buying a home is one way to reach that goal. Buying a home is not a promise to keep that place for life. At least it is less morally challenging than divorcing a wife. In the case of changing your primary residence, it is much more affordable than divorcing.
Imagine you are buying a 1M place with a $400K down payment and a 15 year fixed rate mortgage. If you want to switch to a new place in 5 years, you will have paid down your mortgage by about $150K already. No matter which direction the market goes, up or down, you are paying for the transaction fees only. In a up market, you will pay higher for the new place and sell higher for the old place. In a down market, you will pay lower for the new place and sell lower for your old place. Because it is your primary residence.
One reason why your primary residence is counted as part of your net worth. In another word, you net worth will be lowered once you buy a house.
correction - One reason why your primary residence is NOT counted as part of your net worth.
streeteasypost
WHAT'S THE QUESTION?
You want to buy. You want a super cool apartment. (anyone remember the batcave on the to of Liberty?)
I hear you loud and clear, a property to rival that of any bad ass James Bond wannabe. Don't ask the folks on this board. They are the disectors of residential RE. Want 1000 reasons NOT to buy...post here.
Here's a reason to buy.
You've got the cash, you want the gash, all you need is the flash, we just had a crash, move out of the trash, you'll be a big smash!
Simple
streeteasypost, you should do what falcogold1 tells you. He rhymes; everyone else merely reasons.
streeteasypost, you seem to have a net worth of around $2.35M with plenty of liquidity, and income of $15K a month after-tax, and $10K life. Given that you're planning on working at least until your early 50s right now and have no interest in stopping, I'll gander that you'll keep at it until 65.
My first impression is that you could more than afford to spend more in your life, and if a renting a nicer place will make you happier, why not? Is the type of place that would fit the bill at $4000 - $5000, or are we talking more?
On your money, you gotta find something that you can get behind long-term. Let's say you increase your spending so that you're only saving $40K a year, and that this $40K increases only with inflation because you're spending the rest of your higher-than-inflation income gains, and your investments simply keep up with inflation after taxes. This still leaves you with $3.2M by age 65 in today's money, which at today's low rates annuitizes to $160K a year. You'll also have another inflation-adjusted $30K from social security (after assuming they only pay out at 78%, which is all that's funded at the moment). So, $190K in today's money (meaning a 2% improvement in lifestyle per year between now an age 65 after a bump to $120K this year).
That's if you just track inflation after-tax. With a 22-year timeframe, you could probably handle more risk (and expect more return) than that.
maly: here's what I want to know - in your opinion, how high can I go in a monthly rent expenditure BEFORE it becomes counterintuitive/counterproductive and I would be better of buying? Are you suggesting that my current $3,200 monthly rent + $2,000 extra you suggest = $5,200 monthly rent is that amount?
vic: agreed - once one buys, although your home has value, I don't count it as part of net worth - it's just my home. I don't mean to suggest that I don't care about the financial aspect of purchasing/owning a home, just that once I bought it, I've reduced my net worth by the amount of the down payment and transaction costs (+/- how much that down payment amount might have performed if otherwise invested during the same period).
falco/alan: best. post. ever.
On this business of rental apts not being up to snuff, who said your choices are restricted to just those? I bet there are plenty of condos in the market that meet your specs.
inon: Your numbers are right. I plan to work until I die. I'm in a field that would allow for this, though I am sure as I got older, I would do less business and earn less, but still - I would never be one to just coast on my savings - unless heaven forbid a health situation forced me to do so. I guess the renting thing gets back to the question I posed to maly - what's the rental number where we start to approach the corona where buying would actually make more sense? If I knew what that dollar range was, then I feel I could make a more efficient decision.
As to getting behind something long term for the finances, I am in complete agreement - but what/where the hell is that?!? Everywhere I look, this, that, or the other is in the toilet and circling the drain (except USO, today!)....
"bj needs friends bad--maybe shell get out with you"
W, hey, are you one of those who thinks calling guys "she" is funny? I mean, you're the only friend I'll ever need, but I don't really like sexists all that much, so I may have to reconsider. Let me know!
"maybe shell get out with you"
Wait, maybe you were calling me a crustacean instead? You don't like oysters or something? I can't stand seafood-haters.
Wbottom = nopigsorshrimp
Good catch! (seafood pun)
*I can't stand seafood-haters.*
Me neither.
Of large asset classes, I like equities best. I liked them much, much better in 2009. But still OK, and my finances / disposition are such that I can handle the ups & downs without blinking. You may be in different shoes, I don't know.
On the "corona where buying makes more sense", what are we comparing to what? I know many people have arbitrary thresholds with regards to rent, as expressed by your OP ("I’d prefer a groovier place that suited my taste, but feel spending more than this on rent is wasteful.") and truthskr ("can't see spending more than 5K a month on just rent"). You rarely hear these days, and I think it's a tribute to the bubble, something like "I can't see spending more than $2M on an apartment". In my book, that's like spending $10K on rent. What seems more wasteful, IMO, is buying that $2M place when you can rent a $3M place for the same $10K equivalent. So I really can't answer your question because I can't get behind an arbitrary limit to what is wasteful w.r.t. rent when there is no counterpart to it in buying. I'm not saying others can't make sense of that logic in their own heads, but I'm not your guy for that.
All that said, I think some people have the attitude of "earn 0% on my cash forever because I just can't get behind anything" vs. "put it in RE". First, I don't think the former is all that bad with a 22-year horizon. I think your money will generally keep pace with inflation if you go down that route, more or less, because short-term rates won't be at 0% forever. With NYC RE, I'd expect your cash would do inflation + 2% over a period like 22 years. Given just those two choices, there are arguments to be made for the latter. The problem is, however, that you can inflation + 2% with TIPS: why take the added risk & illiquidity for no added expected return?
inonada, I'm sure you've posted this elsewhere, but are you 100% in equities right now? I have cash and put in quite a bit last year (all in ETFs), but am hesitating putting more at this point.
> but feel spending more than this on rent is wasteful.
And do you think that spending on a similar apartment and paying more in carrying costs wouldn't be wasteful just because you can say you bought it?
Owner-occupied real estate is consumption, just as renting...
sep - you're spending too much time at home. Hop down to South Beach for at least one long weekend a month during the winter. A few grand buys a helluva weekend. And you wont care so much about your tiles, your parquet or your appliances.
bjw2103: "inonada, I'm sure you've posted this elsewhere, but are you 100% in equities right now? I have cash and put in quite a bit last year (all in ETFs), but am hesitating putting more at this point."
I'm not full-up at the moment, but that is more a function of excess income than anything else. I haven't yet decided what to do with the excess, but there's a chance I'll be looking for pockets of value. Truth be told, if things were still at 1100, I might be happier despite the gains over the past couple of years.
That said, I don't think my situation & resulting risk tolerance are appropriate for most people here. For example, the OP's percentage of excess income to net worth is 2.5%; mine is higher. I also spend a smaller fraction of my income than most people. So although I like to egg spinny on with my "all-in" talk whenever he brings up his "catching the bottom of NYC RE in 2009" goading, it wasn't all that gutsy/stupid an investment for me as it might have been for others.
>maly: I'm 43. 7-10 year goals are keep working, keep earning money, keep saving. No bucket list. As I said, marriage maybe one day, Kids (very) doubtful. And do kind of feel like I'm treading water and living like a monk, which could be worse, but i can't say I love, either.
43, interesting. A poster who lives in midtown east recently described how he was 14 when the drinking age increased from the age of 18 in New York, making that poster 42 or 43.
>My situation. Reasonably stable job @ $300K/annum. No debt. About $250K in 401K/SEP. About $1.4MM in the bank in cash (sold some real estate late last year). Another $700K in alternative assets (long term, won’t be touched for a while). My total expenses (including rent) are around $10K/month. I save most everything else.
So my math is $100K / year in potential bankable savings if the $300K was constant. Multiplied by years in the workforce since age 22, or 21 years, that gives me $2.1MM in savings ~ $1.4MM in cash and $700K in other assets. Or ...
>So. I’ve been lurking for a while enjoying the threads, opinions, and trolling. I was inspired to post due to the “How much house can I afford” thread that appeared recently. I’m curious to see what the streeteasy hive mind can come up with for me.
Lurking since November 1?
http://streeteasy.com/nyc/talk/discussion/23477-november-electionobama-referendum
What happened to this discussion:
http://streeteasy.com/nyc/talk/discussion/24903-virgin-post-calling-all-financial-geniusestrolls
inon: I hear what you're saying re: the amount of rent paid. But I'm curious about something else you wrote - "percentage of excess income to net worth" - why is this important, what precisely does it/can it tell one, and how is it calculated?
west34: like I said, I'm no sun worshiper!
huntersburg: I suppose there is no real way to respond to your comments, except to say honestly that I'm definitely not the person you seem to think I am. Most importantly, because after reading that Obama thread, if you knew me, you would know that is SOOOO not me!! :-)
Because George W. Bush supporters write like this: "you would know that is SOOOO not me!! :-)"
huntersburg: Seriously. If I can't tell you straight out what the deal is, and have you accept it, then it's easy enough to ignore you.
12 babies shoot out from your vagina. 200 different sized penises in your hole, and you're virginal? Huh? WTF r u talking about?
Renting in pure financial sense would be more economical (or efficient) if you have a larger family. For example, $4,000/month divided by 4 people = $1,000/person/month. With yourself only, the $4,000/person/month is more expensive.
In a owner occupied home, it doesn't have to be all expensive. For example, your $3,200 one bedroom apartment may have a market value of $750,000. If you put $300K down and get a 15 years fixed mortgage. Your monthly payment would be about $3,500, plus common charges. In the life of the mortgage, you will pay about $170K in interest. With you income level, you will get back say 30% of tax benefit = $51,000. If for some reason you need to liquid this apartment after 15 years for the same $750K, then you will have a profit of $750K+$51K-$300K= $510K. With your monthly payment = $3,500+common charge ($1,500 will be quite enough) = say 5,000. Multiply that by 180 = $900,000. Your expenses for shelter in this 15 years period is $900K-$510K = $390K.
Therefore, your monthly expenses for shelter in this 15 year is $390K/180 = $2166. Which is less than your current $3,200 rent. Assuming any rental hike may be balanced out to your common charge hike.
So, your $300K initial investment gets you a $1,034 monthly saving. Which is like a 4.1% annual return.
I hope my math is correct.
w67: ?
vic64: interesting - to complete the math, in my building, units like the one I'm renting currently for $3,200/month seem to be asking $1MM (-ish) for sale. Common charges run a bit under $1,000 for a place like the one I'm in.... but your suggestion is definitely something to chew on - thanks very much for that...
Using the same math and logic. With now a $500K down for a 1M apartment with 4.2 % 15 years and a $1K common charge, your initial $500K down payment investment will only get you $1470/month saving or about 3.5% return annually.
Besides, how is your landlord going to make any money with this $1M property? He is only charging you $3,200/month including his common charge. He is only getting $2,200/month after common charge.
vic: I know!!! And that is precisely what provides my inertia against the gravity (or pull) of buying!! And once again, thanks for the math.
Wow. For once, I see w67 was rendered completely speechless in the post directly above. Amazing.
"inon: I hear what you're saying re: the amount of rent paid. But I'm curious about something else you wrote - "percentage of excess income to net worth" - why is this important, what precisely does it/can it tell one, and how is it calculated?"
I don't know if it's anything formal out there. What I meant is that right now, you gross $300K, which nets $180K after tax, and you spend $120K, saving $60K. Your net worth is $2350K, so $60K / $2350K is 2.5%.
Suppose you allocate your net worth & diversify so that you think you'll make 10% +/- 20% on your investments. If you are banking an additional 2.5%, your net worth will look like 12.5% +/- 20%. If your excess income is 10% (either due to higher income, lower spending, less assets, or some combination), then it's more like 20% +/- 20%. Your excess income counterbalances the risk to your net worth to a greater extent. Of course, there is risk to your excess income, and this risk often has some degree of correlation to your investments, but typically the uncertainty is much lower. But the point is that this excess income reduces the chance of a large drop in net worth at the same level of risk taken by investments, thereby allowing a higher-risk (and hopefully higher-return) portfolio.
"Besides, how is your landlord going to make any money with this $1M property? He is only charging you $3,200/month including his common charge. He is only getting $2,200/month after common charge."
You should probably take another $800/month out to amortize the $90K transaction costs over 10 years plus a little for upkeep & insurance. Puts you at $1400 a month, or $16.8K a year. I'd guess "asking $1M" translates to $900K actual sales, which is a 1.86% return on cash. When you account for rent increases at the rate of inflation, you get an effective return of inflation + 1.86%, assuming you can sell to a buyer in 10 years who also likes being in an investment for inflation + 1.86%.
MidtownerEast, what do you think about all of this? Not to mention streeteasypost talking about Trolls and suggesting putting me on ignore, it all seems too familiar?
Streeteasypost,
Your current rental apartment demonstrates some very important points:
1. Buying expensive rental property in Manhattan won't give you much (if any at all) return.
2. Buying a primary residence and live there for a long time will usually pay off when you have a lot of down payement with shorter mortgage terms on low interest (even in your apartment). Of course, you need to be in the right income bracket to enjoy the full tax benefits too.
vic64, how do you figure? I read Inonada's post as a clear proof that at current rental and purchase prices, the "return" on buying is close to nil.
wait - in re-reading, I'm a little confused by that as well - vic?
Maly,
See my earlier posts above for explanations on how buying a primary residence can make financial senses. The OP seems to understand that. However, for the same property, it could give you lousy return if you just rent it out.
Buying a primary residence can make sense when you compare the overall out of pocket expenses between buying and renting throughout a long period of time, say the life of a 15 years mortgage.
Vic, isn't there a point when the ratio is so out of whack that the cost of ownership is higher than the cost of renting, even over 20 or 30 years?
For example, I took the OP's info and aded the following assumptions:
-Rent: $3,200, increasing at 3% pa above inflation
-Purchase price: $995,000, maintenance $1,000, tax $1,100, 15 year mortgage at 5%; maintenance and tax increasing at 1% pa above inflation.
-assuming the same rate of return on the lost opportunity for the downpayment as the rental deposit,
- assuming 35% of the monthly costs of ownership are mitigated by a tax credit.
Assuming the OP stays in the apartment 20 years, here are the results:
If you stay in your
home for 20 years,
renting is better.
It will cost you
$711,732 less
than buying,
an average savings of
$35,587 each year.
The more important number would be the property's value at the time of the sale. In my first example to the OP, assuming he is buying a $750K apartment, not necessarily the one he is renting now, paying $300K down on a 15 years mortgage with 4.5% interest rate, plus $1,500 monthly common charge. Your cost of buying is roughly equally to renting (assuming $3,200 per month) if the property to be sold at $573K (a 23.6% loss in sales term)at the end of his mortgage. That is quite a bit of margin for errors for the buyer.
More precisely, I should not say the cost be equal. It is more like a zero return for the initial $300K investment of the down payment. Because there could be inflation. However, if there is inflation, then the apartment will have a better chance to do better than a 23.6% loss in sales price.
"t will cost you
$711,732 less
than buying,
an average savings of
$35,587 each year."
Does that account for the fact that you own a $1.2M apartment at the end (I'm assuming 1% over inflation for housing appreciation)?
However, several of your other assumptions favor buying over renting in an unrealistic way, so you might get to the same conclusion in any case.
You would think so, but changing the numbers:
- from 995K to 750K
- adjusting downpayment to 40% down
- adjusting interest rate to 4.5% for conforming 15-year mortgage
- adjusting tax and maintenance down to $1,500 from $2,100
- NOT assuming a lower sale value, but keeping the assumption that property will increase at 1% pa
OP would still find that:
If you stay in your
home for 20 years,
renting is better.
It will cost you
$143,164 less
than buying,
an average savings of
$7,158 each year.
The tipping point where buying is somewhat equivalent to renting after 20 years? $660,000 (not talking of investment grade here, just similar consumption.)
Let me try to do this one more time. Total cost of living in your bought property:
Down payment + 180 months of mortgage payment + 180 months of common charge =
$300K + $900K ($3500/month) + $270K ($1500/month. The OP said only $1000 per month including property tax) = $1.47M
Money recouped throughout the same 15 years:
Sales price + Tax benefit on mortgage interest =
$750K + $55K = $1.05M
Total out of pocket expenses in 15 years = $1.47M-$1.05M = $420K
Average monthly out of pocket expenses = $420K/180 = $2,333
Which is less than the $3,200 monthly rent
Jordyn, I actually assumed the price of the apartment went up 1% pa. I tried to tilt as much towards buying without tripping into fantasyland.
And I assume the rental hike is a wash with the common charge hike. Which they are co-related and conservative
vic, you are forgetting a number of factors. I would suggest you play around the NY Times rent vs. buy calculator with the advanced settings.
Your problem is that $750K $55K does not =$1.05M
So, which factors that I have forgotten. My calculation actually gives me a lot of rooms for unexpected costs. Forget about any rent vs buy calculator. Just compare the money you will spend on buying a home and the money you will get back. Basic accounting rule. Don't let unnecessary things to confuse you
Actually, there are several mistakes. $3500*180= $630K, not $900K ( I double counted the common charge). So the cost part should be revised to: $300K + $630K + $270K = $1.2M
The money received part should be: $750K + $55K = $805K
Net expenses= $1.2M-$805K = $395K. Average monthly expenses = $395K/180 = $2194
Compare that to $3,200 monthly rent. Buying still wins
I was typing and working on a window calculator before and made some mistakes.
OK, I was trying to be nice about it. What I really meant to say is that you are obviously math- and fact-challenged, and need a calculator and a brain. Inonada, who is a saint, would take the time to list all you've forgotten and also point the obvious and gigantic flaw in your calculations, but I don't have the patience, since there exists a totally awesome rent vs. buy calculator on the NY Times' website, free of charge.
Fking financial idiots. RE is veryfking interest rate sensitive. Current interest rate, as try as bernie might try to tell the world otherwise, is artificialfking low low low.
When rates rise prices will continue to deflate signifikingly decline. The Fking funny part is almost to the unit, it is way way way cheaper to rent. What's even funnier is the fktard that be, let's imagine ONE landlord, will lend you fk the whore for $10, buy if you wanna take it out to the movies it will charge you $1k. -shrug- in this interest rate environment, id fk for a $1.
If you take your investment so lightly as just believe in a "black box" created by a newspaper, instead of understanding a few lines of additions and substractions. I have nothing more to say. Hopefully others can benefit from my calculation
w67th, that's all well and good, but where do you put your cash?
The assumptions are the important part of these calculations. You should assume rents will track inflation and prices will drop in real terms. Here's why.
Rents:
It's hard to see how rent can go up faster than inflation long term for two reasons:
1. Rent is such a large part of income that if goes up faster than income for long, people won't be eating. So over extended periods, income increases (which have trailed inflation for 3 decades) are a ceiling on rent increases.
2. Rent is such a large part of measured CPI, that if rent goes up, so does CPI.
Of course, these are national arguments. If a particular city goes up or down in popularity/jobs relative to its competitors, rents will adjust -- but they won't keep moving apart forever, because at some point people will switch cities.
Prices:
House prices can go up faster than fundamentals for a while -- that's a bubble. But when they do, it creates enormous and inviting investment returns to professionals who create new supply. That tends to end the bubble eventually and bring prices back down.
--
So, your rental calculations probably should assume that rents match inflation over long periods, unless you expect Manhattan to keep getting better and better than Brooklyn and LA forever. (Not to BE better -- that's already built in).
And you should assume that real estate prices will drop significantly from current bubble prices and then rise only with inflation. Over time, prices can't stay much higher than investor-value-to-a-landlord-holding-to-rent: if prices are too high, investors will sell to owner-occupants, thus increasing supply and bringing prices down to investor-value. Unless you think it costs $1000 psf to build in NYC or that condos bring in enough rent to make being a long-term landlord an attractive investment, you should expect prices to drop -- and then to go up no faster than rents.
Finally, be careful with the historical statistics. Housing quality (size, etc) tends to increase as people get richer. This means that measures of the price of an average house will increase faster than inflation because the average house is getting bigger and more modern. But YOUR house will be heading in the opposite direction -- it'll be aging, not growing. Unless you are including the costs of major renovations every couple of decades, your own house is likely to underperform its sub-market average.
w67,
It is exactly because of the low interest rate that gives the buyer this opputunity to lock in 15 years of low rate. Should the interest rate go up, that would be a reflection of the economy moving forward. Landlords at that time will not settle for cheap rent anymore. If you had bought with fixed low rate, you will pay the same mortgage disregard.
"I'm not full-up at the moment, but that is more a function of excess income than anything else. I haven't yet decided what to do with the excess, but there's a chance I'll be looking for pockets of value."
inonada, thanks. I obviously think those pockets of value are harder and harder to find. Not that cash is burning a hole in my pocket, but I am actively wondering if I should park it somewhere.
Financeguy,
In my calculation, I have already assume rental hike will be a wash with common charge hike. In real life, the percentage hike on a $3,200 figure can translate to a larger real dollar amount over a $1,000 common charge.
And don't get me wrong, I want people to rent too because I am also the landlord of 3 rental units. At the same time, I am also enjoying all the benefits of owning and living in my primary residence. I am not a broker or lawyer, but I am good at math as an engineer.
Vic? Really really? So you buy at 20yo, and you turn 50yo, and you're a financial genius Bc you can say 'honey, I kept my monthlies the same?'
Here's my version. 'I'm a Fking genius!, rented till 25, bought for 1/2 of vic's in price, paid cash with all the savings from renting versus buying. I locked in a 'lower monthly lifestyle for the rest of my life!!!!!! Fk you vic.
Bjw, start a company. Cure cancer, make better dildos. Ppl that sit around deserve 1% on their cash.
Vic, you've fixed two of your large mistakes. That leaves 3 more, plus a couple of smaller ones, and a very large omission. Keep on trucking.
Maly, I humbly ask which 3 large mistakes that I have left