condo vs co-op vs rent

New - don't get hung up on the co-op condo legal differences - you run the danger of confusing substance with form. They are both housing. The precise legal differences are for your lawyer to worry you about - but in general, the outcome of those legal differences are not complicated:-

Coops tend (but don't have to) to have much more restrictive rules than condos around purchase, sale and letting - leading some to argue that you are not "free" to do what you want. Condos tend (but don't have to) to have more flexibility - leading some to argue that this leads to more transience among residents. If there was equivalence in all other factors, we can debate whether a coop or a condo would be more expensive. Most argue coops would be cheaper - due to the restrictions. Some others see value in limiting behaviors.

Your question is really pretty simple. It's buy vs rent. Are you looking for a place to live or an investement/rental property? Most people buy coops to live in. If you are looking to buy and use for rental income at some point, then buy a condo.

New, if you are trying to do a fundamental value calculation for buying versus renting, with the idea that you can make a rough prediction of how much you are likely to make/lose on sale, you don't need to be so complicated.

There are only two ways to predict what prices will be at an undetermined date in the future. (1) Believe that God has ordained that NYC real estate prices always go up regardless of economics or market pressures. (2) Assume that markets work to some degree, so the most likely price at any given time is the fundamental value or equilibrium price. Markets are almost never at equilibrium, so the assumption is NOT that fundamental value WILL be the price. It is, instead, that prices are just as likely to be above as below equilibrium, and are more likely to be close to it than far away from it, so it is the most likely price.

If you are trying to calculate the equilibrium price, the question to ask yourself is not the one you are asking. Instead, you should ask "what would an INVESTOR, with no emotional attachment, be willing to pay for an equivalent apartment if the investor were planning to hold it for rent for its entire useful life."
- An investor, because investors will move apartments from rentals to owner occupied whenever owner occupied prices are higher, thus tending to bring prices back down to equilibrium even if lots of other people are willing to overpay for consumption or other non-investment reasons.
- Hold forever, because the ability to sell to a greater fool gives speculative value which comes from the buyers/sellers not from the investment and doesn't effect fundamental value. In any event, you have no way of predicting whether the overly-optimistic or the overly-pessimistic will be dominating pricing when you sell, so it is best to assume that on average they'll cancel each other out. Obviously, if you are trying to predict prices next year, this is a dumb assumption to make: it's probably fairly safe to extrapolate current trends and predict that the optimists will still be in control but less so than today.

- Rents, because rents have a much smaller speculative component and are much likelier than sales prices to follow actual costs to construct and maintain and actual current demand.

If you want to go further, you need to make some estimate of what building costs (including conversion costs) are likely to do in the future, which will be the main upward limit on fundamental value. If you are worried about downside risks, you need to consider whether demand, which is mainly a function of jobs, will be sufficient to keep prices that high.

Simplifying a lot, right now the cheapest way for investors to create new owner-occupied housing is to take a condo that is currently rented, and sell it. That roughly doubles its value using almost any method of calculating (except for investors who expect bubble gains). So as the bubble winds down, we should expect a large number of bubble speculators to give up: currently investor-owned condos will be sold to owner-occupants. Moreover, it is still possible to build and renovate for quite a bit less than current prices, so other investors will be adding to supply in that way. All this supply will continue to accumulate until either prices drop or the cost of creating new supply increases -- when those numbers match, you've got your equilibrium price.

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There is no way to accurately calculate future fundamental value without a functioning time machine or crystal ball, since it depends on future costs and future demand.

Fortunately for decision-makers today, current prices are so dramatically far from fundamentals that it isn't hard to predict a long and serious decline even using very rough guesses.

Less happily, real estate markets adjust very slowly. And there is no way to know how slow because that depends on the speculative side, which is much harder to predict except in the very near future.

If lots of people decide that now is the time to cash out and move, prices could drop fast, even to well below fundamental value.

If, as is more likely, most prospective sellers decide to hold on in the hope that the bubble returns, and enough buyers continue to assume future bubble appreciation in their calculations, demand will be high enough that it will take a long time for the investors to create enough supply to catch up.

Historically, most real estate bubbles end with long periods of flat nominal prices, until inflation brings costs and rents up to prices. Existing owners hold on and refuse to sell for nominal losses, while builders/converters/renovators add new supply too slowly to force nominal prices down. At 1% inflation, that could be a very long time indeed. Of course, the NYC bubble was so big that even with a 50% drop, lots of people would have paper gains and lots of developers could profit at far lower prices, so perhaps the standard scenario won't play out this time.

Thanks much all, here is the final list per all of your feedback, feel free to correct it

"Why do people buy co-ops as opposed to renting (from a condo or other building) ?"

1. People think of coops and condos as basically equivalent despite the rules and regulations that come with coops. But because coops typically sell for less then condos, with lower taxes and closing costs, people like to buy coops. Coops are cheaper due to building's underlying mortgage and lesser restrictions.
2. Many people prefer co-ops *because* they're not easy to rent out "I like that my neighbors all have a stake in the building." People are willing to pay more at the end of the term, putting down 100K+ and pay interest on the loan in addition to maintenance fees and repairs (as opposed to monthly maintenance on a rental) for privilege of living with others who are subjected to filtering by the coop board as opposed to having no cash risk exposure and live with renters.
3. People think that because you can't rent a condo/apartment for less than the monthly carrying costs of a co-op, it justifies massive cash outlays that come with purchasing a co-op (much larger than a rental if considered in totality)
4. As "70% of buildings are coops", people are either forced to purchase them or consider it a wise idea. There just aren't enough condos in the area to meet all the demand; so people decide that co-ops are a "good enough" substitute, and buy them.
5. People think of real estate as a consumable, so budget an amount of money that they're comfortable having illiquid, and then buy into the best building they can afford, whether it's a co-op or condo.
6. People would rather own a co-op than rent because they think owning a co-op creates a forced savings mechanism
7. Unlike rentals, Co-op tenants own the corporate landlord
8. People assume that co-ops will appreciate based on past experience
9. People think that co-ops are well-located. Condos are more recent and more often had to be built in less desirable areas.
10. People associate status with owning a co-op
11. Once co-op is purchased it's difficult to sell/move out due to restrictions as well as associated realtor and other fees, so people stay in co-ops long-term therefore supporting inflated prices due to lack of supply and causing co-ops prices to remain more or less at same level or appreciate which reinforces perception of price stability

A constant frustration I have with all of these "rent vs buy" arguments is that they need to be narrowed down to focus on the details of the specific proposed transaction. And while many of the critical variables, (such as home appreciation, capital appreciation, annul rent increases, etc) are completely unknowable (at least to someone with my mediocre intelligence, or ability to predict the future), the one thing the we do have absolute knowledge of is the rent to purchase price multiple. That's also one of the biggest drivers of the case to do either (run a data table in excel to confirm this).

In truth, at an 18x multiple ( $1,000,000/($4,500 * 12))- it takes a long time (and some pretty rosy assumptions), to make the "buy" decision. Knock the multiple down to 15 and it's an entirely different story.

Personally- I bought at a multiple of around 13 and am definitely having some regrets.

thanks guys, that was useful

This "new" poster is the same "new" poster on this thread streeteasy.com/talk/discussion/24949

12. buying anything in Manhattan right now is a mistake. The bubble has a lot more air to let out.

I think you nailed it

http://streeteasy.com/nyc/talk/discussion/24949

2, 3, 6, 8 should all read like 5 - whether it's a co-op or condo. 4, 10 and 11 are just silly.

bob, tney may be silly, but people do think that. I personally have heard folks say they think it's much more prestigious to own a co=-op than rent.

that was a good post thanks Brooks.