Is renting really cheaper in this case

A lot of words to basically make a comparison which comes out to aproximately.....200 times monthly rent.

Can we coin it "truthskr10's theory of RE relativity?" :)

Or, another way to look at it. Skip the financing, since that is a separate decision. Look at it on a cash basis.

For $736,250, you expect to save $4100 rent less $1739 maintenance. That's a gross return of about 4% on your investment. Actually, that return is a bit high, since there is maintenance that the coop tenant pays for but a rental tenant does not -- say 1/30th of a gut renovation every thirty years, which probably cuts another 1% from your returns.

A bank would want more than that to give you a mortgage, even though the mortgage is safer than your equity position. Doesn't that tell you that the banks think you are overpaying?

You may find this attractive, but investors, who usually are the marginal price setters, won't, unless they are anticipating bubble profits. So they most likely will slowly bid prices down, unless real rents rise rapidly.

---You may find this attractive, but investors, who usually are the marginal price setters, won't, unless they are anticipating bubble profits. So they most likely will slowly bid prices down, unless real rents rise rapidly.

and how much can rents rise with incomes down?

again, sounds like buying is a bad investment decision

-Financing available to purchase an asset is a very relevant factor.
-A renter usually has to move to get a renovation. That costs about 10K (moving fees, plus rental broker fee)
-A bank wants 3.75-4% to give you a mortgage, in some cases less, even including non conforming mortgages. 7/1 Jumbos are 3.25% right now.
-Investors may want more, but 3-4% returns are what they are getting right now in the stock and bond market.

Quick thoughts:

use 3:1 leverage for the 3% rtn you use to acct for the opportunity cost of your downpmt, if you want to be apples apples

and if youre in a condo don't forget the mortgage recording tax, call it 10K

and if you stay 10 years, when you sell, you will be selling an apt in need of renovation, vs having paid for an apt that was renovated--figure minumum 100k of value consumed

I think a 1% per year appreciation is realistic. This already assumes depreciation. If you renovate before selling, I would assume that your apartment would appreciate by more than 1% per year. If you do not renovate over 10 years, I would still assume it would appreciate by 1% per year.

and if anything unknown comes up during your projected holding period that requires re-location...your math just went out the window. and if your 1% appreciation is actually a 12% depreciation because your starting point wasn't actually where the market bottoms, then what happens?

based on all these unknowns, there should be a significant savings to be derived from purchasing rather than renting. do you know anyone who had studios and one bedrooms in manhattan as of October '87?

Wbottom:

You bring up a good point about leveraging in the stock or bond market to get returns above 3%. You can do that, but it still isn't apples to apples. In real estate the buyer isn't subject to a margin call, while a stock or bond investor is. Neither method is really perfect.

yes, cc, i do--they were at breakeven 10 years later, in 96

i sold a loft in 87, used to joke that, had i not, i would have raised my kids there, instead of in far better, more spacious quarters---lucky

"Jhochle: I think a 1% per year appreciation is realistic [with no repairs]"

If you are going to base the price you pay now on the assumption that someone else will be willing to pay more for the same thing (but 10 years older), why restrict yourself to 1% real appreciation?

You should assume 3% and live rent free. Or you could assume 10%, buy 10 and get rich fast. Indeed, why not imagine that your buyer's buyer will be willing to assume 15%, so that everyone can profit and no one will need to work ever again?

Perpetual motion machines are wonderful.

I am not assuming 1% real appreciation. I am assuming 1% price increases, which I arrive at by assuming real estate increases in price at 2% (roughly the rate of inflation) and I assume 1% per year depreciation, which results in 1% per year price increase (nominal, not real). My example is hardly assuming perpetual bubble pricing.

As a finance guy you should know that all future cash flows are unknown, and are subject to risk and assumptions.

Another way to look at it.

According to your math, you will be making over 10% on your downpayment for an investment you view as not very risky.

Given that the risk-free rate is currently zero or a bit less, that either means that (1) you have discovered a super opportunity well beyond the deals that professionals are finding (and when they do discover it, they will bid prices up quite a bit more than the 1% you are assuming), (2) that you have made a major error in your calculations, or (3) the market is irrational and prices are unsustainable.

I am saying that rents are rising compared to sales prices, and there are now some good deals out there. In doing any rent versus buy calculation you have to make some assumptions. I don't think mine are too rosy. I am challenging the widely accepted view that it is clearly obviously much much cheaper to rent than buy, and the sales market is on the verge of a tsunami like crash as prices re-adjust to reality from their current super inflated bubble levels. I just don't see it to be true.

jhocle,

Good analysis. We can also consider the amortization or the equity build up as a buffer to price decline. In a long run, it would likely improve your capital gain. Should you choose to hold on to your "HOME" for a longer term and sell it for a gain for retirement purposes, that gain could enjoy a $500K tax free benefit for married couples. You cannot say that to any other long term investments.

Also, I agree that getting a mortgage actually gets you higher returns. For example, I bought a cheap investment property in the outerboro last year without a mortgage. The rent money I got minus common charge produces a positive cash flow of 5% annual in the form of cash flow. If I bought the same apartment with 20% down and get a mortgage, with the same rent, I will not receive any significant cash flow, but a 10% return in the form of equity build up over my 20% down payment. The return will keep getting better as the principle portion of the mortgage payment increases over time, not even counting any rent increases.

Look at my tennant and his landlord relationship. If the landlord is gaining through his rental payment, the tennant would be better off if he bought the apartment himself, should he has the down payment and willing to invest in his home.

I really like the idea of counting paying down your mortgage principal as a capital gain. Using that technique, I should be able to generate really high returns.

Financeguy,

but it is true. My primary home was bought for $1M in late 2005. I put down $440K as down payment and borrowed $560K. My 15 year fixed mortgage at 5.625% costed me $4500 per month plus property tax and insurance. That is $6K each month. 6 years later, my house can be sold for $870K. A pretty big loss on paper. However, I only owe the bank $390K now. $870K-$390K = $480K. It is still more than the $440K that I put in originally. That is why your equity build up can easily be your gain. It would be more realistic if you buy it in 2012 than in 2005.

Flmoazzz. Vic how's the dog training going?

Now run the same scenario at $800k sale. Take 6% off... And let's see your spreadsheet now! We ain't done deflating. Now toss in your job loss.

Vic So you paid $620k plus taxes and maintenance and you could now get back $480 and you consider that a gain?

I am not saying that buying is free or makes you money net of cost. Housing is an expense any way you slice it. The point is whether it is a gain versus renting. I have no idea what Vic's place would or would have rented for. His housing cost over this period 140K (unclear if the potential sales price is net of fees) plus lost return on down payment and amortization. Not really enough info here but stock market returns over the same period were not great.

jhockle, Have you tried using NY times real estate calculator?

Use the advanced settings.

- It lets you input your apartment maintenance and upkeep costs. Do not use the defaults for Manhattan as the percentage of property prices for upkeep and updates are meant for properties where the land price is low relative to construction cost. For example, if you are paying 300 per sq ft, it is likely that the land price is no more than 150 per sq ft. In Manhattan, if you are paying $1000 per sq ft, land price is probably $700 of it which does not require any maintenance. Do factor in new Kitchen and bathrooms every 20 years. It comes out to $100 per sq ft ($60K for two baths (one nice, the other basic, no layout changes just update) , $50K for kitchen, another $25k). If you apartment is high-end, $150 per sq ft. If you use high-end, do not forget to adjust the rent upwards. A good rent comp for high-end will be Caledonia at $6-7 per sq ft.

- Also, transaction costs at buying are overstated by most people on this board. You can always get a rebate from the buying broker of 1.5 to 2% which will pay for your closing taxes and basis updates such as painting, floors etc.

- Selling cost is appx 6%, 5% to the broker and 1% or so in taxes.

- I would use the same inflation for rent and property. Say 2% per year.

Please let know what assumptions you end of using and how does the buy vs rent calculation look.

In my experience, it will all depend on what you put in for properly price appreciation vs rent increase for 7 year hold horizon. If you assume zero property price appreciation, and use 4% as your cost of capital, you will always be better off renting.

http://www.nytimes.com/interactive/business/buy-rent-calculator.html

I have. In my assumptions, it made no sense to buy unless you were staying put for at least 15 years

I tried the place i live in and came back with around 8%, but this excluded common charges.

I got hooked in SE bcs, I was actually thinking about buying. I used very realistic assumptions too. That calculator is great. I am soo happy I choose not to buy( in 09-11) bcs I doudt I will want to be in the same apartment 8 years from now when my sin is older. I am sure we will want a bigger placethan a 2bed/2 bath

" A good rent comp for high-end will be Caledonia at $6-7 per sq ft."

Yes, by all means compare yourself to apts that sell for $1800-2300 ppsf:

http://streeteasy.com/nyc/sale/592891-condo-450-west-17th-street-west-chelsea-new-york
http://streeteasy.com/nyc/sale/613860-condo-450-west-17th-street-west-chelsea-new-york

And whatever you do, ignore the datapoints of $4000 ppsf places that rent for $8:

http://streeteasy.com/nyc/rental/672298-condo-25-columbus-circle-lincoln-square-new-york

Brooks, it depends on the place. i plugged in the place i used to live in and the rent vs buy break even was under 5 years.

Fk break even analysis. I'm telling you if you fking wait, it will be a one year break even, and when mortgage rate hit 8%, most would rather earn 10% risk free for the rest of their lives bc the flood of sales will make ppl do a double take and a quisitive dog ear perk.

Flmaozzzz. Go get more cream cheese

>and when mortgage rate hit 8%,

When is this going to happen?

income tax for NYC and NY state also should be included in analysis. Property tax hikes in near term and the effect of a vanishing mortgage interest deduction and vanishing fannie mae support.

nada, caledonia rental and condos are not the same finishes, light and views. The management decided to make less desirable properties rentals.

http://www.imdb.com/title/tt0497116/

I suggest people try coop at $1000 per sq ft coops (average) 1 or 2 b/r to rentals at $4.5 per sq ft per month (average rent) for good areas in Manhattan which is the most liquid segment. Break-even will depend on property inflation, rent inflation and alternative assumption. All very subjective.

Try this example.

Decent rental 2b/r 1200 sq ft $5500 per month. Price $1.3mm for a similar coop with 1200 sq ft. Maintenance $2000 per month. Neither rental or coop is super prime or luxury. Both real square footage to include 50% of the exterior wall. I have seen rentals tend to inflate sq footage more than properties for sale.

Other assumptions
- Property appreciation 2%, rent appreciation 2%, alternative return on down payment 4%
- Closing cost at buying 0%, get the rebate from Keith B and do basic painting etc, lawyer and pay for closing taxes of 1%.
- Selling cost 7%. 5% broker, 1% tax, 1% flip tax/others
- 30Y mortgage at 4%
- 25% down
- Annual reno 0.5%. $6.5K, $130K every twenty year (no rental building spends that much btw every 20 years as the finishes are lesser quality).
- Annual maintenance (not coop maintenance) 0.2%. Generous $2500 per year for various repairs etc.
- Home owners insurance 0.3%. $3900 per year is a lot.
- Rental broker fee 5% per year assuming you move every 3 years.

These are very realistic assumptions will give you break-even at 5 years.

Of course you should not buy if you believe the prices are going down. No buy vs rent can make you whole for the loss of principal.

BTW, I have been doing the same calculations for the last 9 years and solely based on rent vs buy, there has not been a better time to buy. This is precisely why I waited to buy until now. Thanks to low interest rates.

IMO- and my assumptions- It's a 15 years BE to buy. Of cse, since you just bot, it is time to buy. Additionally, prices are continuing to fall(i did not assume this, i gave it a 1% appreciation) and interest rates will be low for a while. Just ask Ben

oh jesus....stop .... stop .... stop

neither you nor i will know whether or not the assumption of 2% appreciation is right or not. if it is, you're good. if it isn't, then its a question of how much worse.

W67 why do not you short some bonds rather than mixing your rate forecast with real estate. You got you ass handed to you if you shorted bonds unless of course you have been using the interest rate scare to justify your bearish view which is increasingly on thinner ground. Any one who is afraid that real estate prices will go down can short some bonds as a hedge. For more sophisticated, you can reduce your carry by shorting the long dated and buying the short dated in the futures market.

brooks, did not you read this in my post? "Break-even will depend on property inflation, rent inflation and alternative assumption. All very subjective."

ok my apologies

jhochle- did you account for rent increases over time in your analysis?

>columbiacounty
about 3 hours ago
oh jesus....stop .... stop .... stop

Amazing how columbiacounty continues to spend his life paralized by uncertainty and resultant indecision. At some point soon, he'll be walking around in his Rollator, and the irony will be evident even to him.

"nada, caledonia rental and condos are not the same finishes, light and views. The management decided to make less desirable properties rentals."

Why don't you look up the rents on the condo units, where pricing is more transparent? Willful ignorance?

Here's 1905 (a condo) renting for $7 ppsf (or $6.5 if you account for balcony) at the height of the market this past July:

http://streeteasy.com/nyc/rental/773537-rental-450-west-17th-street-west-chelsea-new-york

Two days earlier, 1705 sold at $1900 ppsf:

http://streeteasy.com/nyc/sale/593650-condo-450-west-17th-street-west-chelsea-new-york

Works out to a rent of $3750 per million. Look up other Caledonia condos that sold & rented in the past year, they all tell the same story. Mind you, these are not even "inonada specials". Just random listings in some building you named that I had never before noticed.

Inonada- again I agree.. 15 year BE.. at a minimun

I have looked into trying to incorporate rental and maintenance increases but I think it involves even more speculation and assumptions than I am comfortable with. It would be easy to assume they would both go up at the same rate, but the fundamental factors that drive a rental increase versus a maintenace increase a different Another problem is that with maintenance increases the tax deduction could go up or down (on a %basis) and I really think assuming full tax deductions is faulty since most buyers will get hit by the amt, but if you try to model this you have to assume the % deduction stays stable or you have to model what components of maintenance are rising or falling. Too many assumptions for me. As long as maintenance and rental payment maintain a stable ratio over time there is no need to make a bunch of wild assumptions to try to model this. I figure maintenance can go up 2 times as fast as rent before negatively affecting the comparison.

Brooks, inonada

I agree that the high end condo market appears to favor renting. I just don't think that it is true for all market segments. What would your assumptions be that would cause you to conclude a 15 year BE in my example above?

You put up an assumption of annual rent being 6.7% of price. While I have some small disagreements with your accounting, a rental yield of 6.7% gives decent buy value, not great, but comparable to renting.

The problem is that nobody I know pays a 6.7% yield. I pay 3%, but maybe that's a special case. My friends who try pay 4%, those that don't pay 5%. Why pay $4100 for a just-shy-of-1000-sq-ft 1BR in a non-descript post-war, 4th floor, low ceilings, no corner exposure, no view, poor light, etc. when you can do much better. After all, $4200 can find you this same-sized 1BR in an iconic building, more desireable location, pre-war, high ceilings, corner exposure, 27th floor, great light, and let's not forget direct Central Park views from 4 of the 7 windows, indirect from the other 3:

http://streeteasy.com/nyc/rental/795243-rental-25-central-park-west-lincoln-square-new-york

I bet you can see the park while sitting on the john in there. Now I know finding a $1.8M place like that for $4200 is pretty damn hard, but c'mon -- some $736K apt? You think those are that's what us renters are talking about while you're shaking your head?

Nada, the point of the discussion is what high end finished would cost to replace in a nice coop. Condo market is place for people/foreigners to part their money. In my view, if you want live in a place for some time, want to do buy vs rent calc for that purpose, why would you consider buying a condo and pay a 20 percent premium. Also, high-end condo rentals are temporary and do not define the rental market. There are always some people like you who would generate alpha at the high $ price. I take out condos from buy vs rent as I explicitly stated in my post. You are trying to reintroduce condo prices into condo. Why do not you stick to the discussion and let us know how the buy vs rent calcs work in your opinion in the example I provided? Do you disagree with the assumptions? Post us $5500 rentals for 3 year lease with real 1200 sq ft.

jhochle, for the 2b/r example, I assume 28% deduction due to AMT. Mortgage is less than $1mm.

Correcting typos
Nada, the point of the discussion is what high end finishes would cost to replace in a nice coop. Condo market is a place for people/foreigners to part their money. In my view, if you want to live in a place for some time and want to do buy vs rent calc for that purpose, why would you consider buying a condo and pay a 20 percent premium. Also, high-end condo rentals are temporary and do not define the rental market. There are always some people like you who would generate alpha at the high $ price. I take out condos from buy vs rent as I explicitly stated in my post. You are trying to reintroduce condo prices into calks I posted as example. Why do not you stick to the discussion and let us know how the buy vs rent calcs work in your opinion in the example I provided? Do you disagree with the assumptions? Post us $5500 rentals for 3 year lease with real 1200 sq ft.

>After all, $4200 can find you this same-sized 1BR in an iconic building, more desireable location, pre-war, high ceilings, corner exposure, 27th floor, great light, and let's not forget direct Central Park views from 4 of the 7 windows, indirect from the other 3:

http://streeteasy.com/nyc/rental/795243-rental-25-central-park-west-lincoln-square-new-york

"AVAILABLE IMMEDIATELY: FURNISHED….ONE YEAR PLUS OK"

While your own furniture is in storage.
Can you get more than a two year lease?

Looks like rents were dropping in that example too HB

>Looks like rents were dropping in that example too HB

Yes, basically the owner is looking for someone who will babysit his furniture - there's a limited universe of people interested in that. Did you note how long the prior tenant stayed?

A;lso for this owner who needs a housesitter for his bed and couch, what happens when the dishwasher breaks ... is the owner going to be attentive?

I tried not to put up an assumption of a rental yield, I tried to be as real as possible. I know people renting in the building, the prices are accurate, and they even believe they got a good deal. I understand your point that renters may be able to do better, but you help to show my point that buyers can do better than a 4M 2 Br. I dont really see how renting a 2br for 10K is really a good deal either, but that gets into tastes and preferences. People are really paying 4K plus for nice junior 4's when they could buy for 735 ish. I also think the purchase option is a much nicer apt, but that really depends on how you value that extra .5 bath, again tastes and preferences. Apples to apples comps are very hard in the co-op market segment.

Gotta love idiot HB. Here's an apt with a comp north of $2.2M asking $4200, monthlies of $1800. Take it down to even $1.8M for condition, and the carry barely covers transaction costs. Borrowing $1.8M for free. Yet he sweats over a dishwasher breaking. Tell you what: take it out of the $7500 a month you're making on you $1.8M in cash.

Right, because these people moving every 18-24 months over $200-$300/month and getting into disputes with their landlords with a great degree frequency are going to be sitting on $1.8 in cash.

Each example you've shown, including your owm, has evidence of high turnover.

I'm also struggling to see where this $4200/mo apartment is on sale for $2.2MM. But never let facts get in the way of a good story, right?

"Post us $5500 rentals for 3 year lease with real 1200 sq ft."

To what end? I posted a goddam rent-matching $4200 apt that matched the specs of the original post from the OP, 1000 sq ft 1BR, whose value was 2.5x the coop shown by the OP. It had been available for rent since at least 2006, when SE came into existence. Do you think if it were a coop, the price would be lower by a factor of 2.5x?

You can live in that $736K apt thinking you've found value compared to some $4100 rent. But the fact is that some guy/gal is living up in 25 CPW, same space as you, higher ceilings, great light, better location, 27th-floor unobstructed corner views of the park. Do you know what it means to a guy like w67th to have that sort of view sitting on the john? That sort of relaxation is priceless.

To this guy, it was worth $2556 ppsf:

http://streeteasy.com/nyc/sale/556206-condo-25-central-park-west-lincoln-square-new-york

"Apples to apples comps are very hard in the co-op market segment."

OK, fine let's play coop. Here's another view apt in an iconic CPW building that sat for a year on the rental market despite an asking rent of $5.4 per month. You tell me the price you think it'd fetch on the market

http://streeteasy.com/nyc/rental/725217-rental-300-central-park-west-upper-west-side-new-york

>To what end? I posted a goddam rent-matching $4200

inododo is getting in over his head and his anger has started to get the best of him.
All of those misleading comps, bad advice, denial about the increase in the rental market this past year ... starting to become too evident. The person who he says "Sounds like she knows what she's doing." has had disputes in two prior apartments before the current one that has him in fear of eviction.

>Do you know what it means to a guy like w67th to have that sort of view sitting on the john? That sort of relaxation is priceless.

And borrowing someone else's toilet humor to cover it all up.

>OK, fine let's play coop. Here's another view apt in an iconic CPW building that sat for a year on the rental market despite an asking rent of $5.4 per month. You tell me the price you think it'd fetch on the market
http://streeteasy.com/nyc/rental/725217-rental-300-central-park-west-upper-west-side-new-york

Another wonderful example. $14.5K per month rental apartment, as if that's representative of anything. How long can the renter live in this co-op before either the co-op's rules term him out, or, he has a real life and can't perpetually live in a short-term rental?

By the way, is anyone increasing the $14.5K montly rent by the brokerage fee for the place? Or are transaction costs in rentals too irrelevant?

>But the fact is that some guy/gal is living up in 25 CPW, same space as you, higher ceilings, great light, better location, 27th-floor unobstructed corner views of the park, someone else's furniture in your space, and an apartment that turns over ever two years or less meaning your time there "living it up" is limited.

nada, by apples to apples I mean what apartment you can buy to live in (coop) vs what apartment you can rent without significant hurdles. Apples to apples in my view is a coop and a rental building. NOT a coop and a coop rental as coop rentals are hard to find and have a time limitation and board approval process. NOT a rental building vs CONDO buying as CONDO buying as CONDOS has foreign ownership premium built in.

300, too many requirements. next you are going to say that the rental building apartment has to be delivered empty, without someone else's furniture taking up space, or some other silly thing like the foreign condo owner won't want to raise the rent in 2 years or choose to put it on the market for sale meaning that the tenant can't renew. stop being silly 300.

I think rent-vs.-buy does not work in all NYC submarkets (which is one reason we bought our co-op two years ago) but I do grant nada his higher-end examples, including this latest one at the El Dorado. That apartment is somewhere in the range of $4mm to purchase, so you're tying up $2mm with your down payment.

300, if you want to use a rental as a comparison that actually makes the point stronger. The comp rental building would probably be 350 CPW. Finishes not necessarily as great, but you can get a three-bedroom there with nice views for $9K.

ali r.
DG Neary Realty

FP, you really think you can get 12th-floor park-view Eldorado at $1500 ppsf? This 10th-floor non-view apt, same size, went for $4M last year (1500 ppsf). It is currently in contract, last ask of $4.6M, after a renovation.

On 350 CPW, let me give 300_mercer's response. It lacks the "prestige" of Eldorado. No building in the area carries the same prestige, therefore all rental comps in other buildings are invalid. Rental comps in the same building cannot count, since it is a coop subject to the vagaries of a coop board and rentals. What of the vagaries of a coop board and purchases, you ask? Not the same thing, sorry.

Was talking to some guy a while back, looking to sell his coop to a family member and upgrade to something else he'd already found. The coop board rejected, and this was soon followed by a note from the managing agent explaining how things would perhaps go better if they used a broker like herself. A while later, talking to someone on the coop board, it turns out they were following the managing agent's recommendation to reject. Meanwhile upgrade place went to shit, of course.

>Was talking to some guy a while back, looking to sell his coop to a family member and upgrade to something else he'd already found. The coop board rejected, and this was soon followed by a note from the managing agent explaining how things would perhaps go better if they used a broker like herself. A while later, talking to someone on the coop board, it turns out they were following the managing agent's recommendation to reject. Meanwhile upgrade place went to shit, of course.

Anyone else want to anonymously provide an unverified third party account of what someone else heard from some guy a while back about something bad in a co-op, and then use it as support for why a whole market is inferior to the smooth-sailing NYC rental market?

Nada, you keep comparing only ultra high-end buildings or unique apartments view to rentals. Everyone of this board knows that it is cheaper to rent very high end vs buying. However, you seem to avoid comparing basic 2 b/r doorman rental to buying a 2b/r in a coop with doorman without any special views or location (5th ave, park ave). Help me understand why?

>Help me understand why?

Isn't it obvious? This is about his ego, nothing else. Yesterday he was talking about w67thstreet sitting on the toilet - 99% of us are disgusted by such a discussion.

Nada knows that without manipulating the assumptions to be unrealistic, the argument that renting is better than buying doesn't work.

And you Mercedes keep looking at food stamp buyer analysis of buying 50lb of mac and cheese versus buying filet mignon, to justify your buying 15k lbs of mac and cheese.

Flmaozz. Do you think I'm concerned a about the rent/buy for a 1bdrm walk up?

Licc, dude you should work harder to make up for your poor LiC condo buying in 2007. Seriously. Fair warning go work.

>Fair warning go work.

Did you just threaten him?

"Help me understand why?"

I have about as much interest in 3rd-tier Manhattan apts as I do in Las Vegas condos. Not something I'm interested in or follow. I think you can do much better than the OP thinks, but even if it isn't possible, why should I be interested in such places? The OP puts up a 950 sq ft / $775 ppsf apt and claims its cost to own is about $4K a month, about the same as some rental he claims is representative. OK, but why would I want either of those when I can have a top-tier apt, worth 2.5x as much, for the same cost? Or if that 2.5x place is too hard to find, are there no 1.5x places?

If I've got $4K to spend, I'd like to spend it as best I can. I don't like to spend it on some crappy choice, and then justify it against some othe crappy choice. You seem to ignore the better and best choices.

Help me understand why?

Perhaps because those places you point out are temporary.

And maybe your "worth 2.5x as much" isn't justified either.

>I have about as much interest in 3rd-tier Manhattan apts as I do in Las Vegas condos. Not something I'm interested in or follow.

You don't follow, but yet you managed to go out of your way to give inappropriate advice to a young woman living in an studio on the ground floor of a building. So she could salivate over the high and mighty inododo, the man who is interested in how w67thstreet likes to go use the toilet.

Nada, I get it now. Realize it is free for all on a public discussion board and you do post very interesting comments. However,perhaps a disclosure in your futures posts that your buy vs rent is meant only for high-end $1300 per sq ft properties will be helpful? $1000/1100 per sq ft is certainly not third rate for coops. Third rate Manhattan coop is $800 per sq ft.

Why ino?- because they are trying to justify their purchase to themselves when, in Manhattan, it is clearly cheaper to rent. I would strongly recommend any would be been buyers put in their own assumptions and not listen to anyone else in the NY Times Rent Vs buy calc.. It is quite simple and very revealing..

>Why ino?- because they are trying to justify their purchase to themselves when, in Manhattan, it is clearly cheaper to rent

Great, how about providing realistic links to apartments that are available to people? Not short tem, furnished, $5MM specials. How about when a young woman asks about an alternative to her ground floor studio, inododo either says nothing, or provides helpful advice appropriate to the young woman?

Mercer, I enjoy our poking back-and-forth very much here. No offense taken, and none intended.

FWIW, I recently helped a friend find a place that was more in the 800 ppsf range than higher-end. I won't give details for privacy's sake, but Manhattan (not Upper Manhattan). Rent of $3650 per million, not a high-end place -- in the range of the OP's original numbers.

Yay!

If you are thinking LONG term, you need to think about non-bubble pricing.

Not because prices are going to go to equilibrium -- in a dynamic market, they never do. But because the fundamentals act as an attractor: actual prices fluctuate around them. You can't predict whether prices will be above or below equilibrium when you actually want to sell, but you know that the fundamentals constantly push the market price back towards equilibrium, and the fundamentals are strong enough to prevent prices from getting too far away.

This is like predicting the position of the earth by figuring out where the sun is (at equilibrium and at average, the earth is in the sun), so it needs to be used carefully. But it helps to prevent you from predicting that the winter will continue getting colder forever as the earth heads out to Alpha Centuri. Or that sales prices can rise faster than rents or building costs indefinitely. Or from the true-believer's faith that there never was a bubble and prices have definitely now recovered from it so they will go up with inflation from here on.

The NY Times calculator invites you to make a basic conceptual error that will always overprice apartments: to assume that prices can go up without inducing more supply. That's not going to happen if you are talking about periods of more than 5 years or so.

NYC rents have basically tracked inflation since they got high enough to induce new building in the late-70s. That's because the cost of construction/renovation/conversion tracks CPI inflation pretty closely. If rents go up faster, which they do whenever incomes take an unexpected jump or the quality of life in the City gets better faster than in competing ones, the developers ramp up production until they increase supply enough to stop the increases for a few years until inflation catches up. If rents go up slower, because the local job markets are hurting, the developers get the message and slow down, until demand catches up with supply. It's imperfect and lags, but works well enough (so long as demand keeps rising in general) to count on it for long term planning.

(This model will fail dramatically if the supply of new jobs shrinks as opposed to just growing faster or slower: it takes a very long time and sharp rent decreases before developers can REDUCE the total number of units available.)

Sales prices are much less stable than rents, because of the psychological factors you guys are all arguing about. If enough people decide that prices are going up (or down), they will, because of jhocle and mercer and w67 and all the other people who plug imaginary future prices into their decisions about how much to pay now. Momentum, not just gravity, determines the position of the earth and also RE market prices.

But the gravitational pull of the fundamentals is the same as in the rental market: if sales prices get too far from the cost to convert a rental into a sale unit (or vice versa) or build a new one, the developers will change their plans.

In the long run, the developers develop more whenever they can make a profit. They can keep increasing supply until it meets demand. Therefore their profit calculations set the prices.

So JHocle is asking the wrong question. It is basically irrelevant whether you think YOU can earn more than 3% on your downpayment or what YOUR breakeven point is given YOUR assumptions. The real question is what you think the DEVELOPERS will think is THEIR point where they should develop or not. That's what's going to determine future prices, and that is going to overwhelm all the other numbers in your projection.

That's why professionals are always taught to use the MARKET risk adjusted rate of return for comparably risky investments as their expected return on the downpayment, not some number that is based on a personal investment alternative.

In better English:

If you run any rent-buy calculator using 3% on your downpayment -- or any number that is not significantly higher than the cost of financing the same investment -- you are going to generate a higher price than any developer would.

If that number is also higher than the cost of building or the cost of converting a rental to a sale or the cost of renovating a lower quality unit to compete with yours, the developers will be able to make a profit under-selling you.

Which means that prices are going to be lower than your projection [unless you are lucky enough to be able to sell at a moment when the psychological factors (bubble, trend chasing, temporary shortages) overwhelm the fundamentals (building, conversion, renovation and the productive forces of the market)].

If you are making projections of sales prices 5 or 30 years out, you need to be thinking about the developers' alternatives, not psychology or demand or your own private investment alternatives.

Of course, none of this applies if, like the mythical foreign "investors", you don't care if you lose money, or if you are so young and rich that you know you will be able to time your sale for the next bubble, or your tastes are so idiosyncratic that the rental market will never meet them and you are buying purely as consumption. Or if, like several posters here, you believe with perfect faith that a divine ordinance mandates that RE/coop prices shall always go up regardless of market forces or harm to the economy and Americans. Or if, like some of those same posters, you expect economic Armageddon, in which case NYC RE prices are likely to plummet far below replacement costs, since unlike Will Smith, even gold bugs need to eat.

If you do care about resale price, standard economic theory and all the empirical research agree: you should assume that those groups rarely determine prices except in bubbles and panics.

And even the most casual look at the fundamentals makes it obvious that you are buying at bubble prices. The NYT calculator invites you to project that you'll be selling at them too.

Financeguy:

I understand your point relating to potential to increase supply, returns to investors, cost of capital, etc. I think you are ignoring a basic point though. A developer or investor can look elsewhere, and has many options of where to put their money. A resident of NYC has to choose between renting (and investing in stock market, bond market, etc) or buying (of course they could move out of NYC, but lets just assume they dont want to because their job is here).

When I look at the numbers it is cheaper to buy in an NYC co-op than to rent in a similar rental building. I am not assuming any real appreciation of the asset (2% inflation minus 1% depreciation = 1% nominal increase). The reality is that investors are not getting after tax returns above 3% (1% real returns). Sure, you can argue that you should really use 4% or 5%, but looking actual returns recently, I think 3% is accurate. Most hedge funds lost money in 2011, but debt investors did pretty well when they didn't get wiped out.

Your arguments seems to be that it can't be cheaper to buy than rent since an investor would just buy a building or unit, and rent it out....and that isn't happening. Well there are many barriers to that happening (this isn't really a free market). The primary barrier being that investors cannot buy in a co-op and rent out the unit. A potential resident can buy in a co-op instead of renting a unit. That is the choice that I want to compare. I would say that if an investor could buy a co-op unit and rent it out, they would (meaning they would find some profitable opportunities). An investor could possibly buy an entire co-op building and convert it to rentals, but obviously there would be a ton of transaction costs, and I don't think the opportunity is that large, nor does it have to be to understand my point that buying can be better than renting in some market segments.

If you can get the financing, why not buy? Rents in NYC are just going up. Apartment sales were down in the 4QTR of 2011 compared to 2010. There's supply. Why not? Of course, getting financing. That's a challenge in and of itself.

Jhocle:

My problem with your analysis is that your calculation that it is cheaper to buy than rent is entirely circular.

You start by assuming that prices will go up. Using this, you conclude that prices are fair now and will go up by inflation. Plugging this in, you decide that it is cheap to buy, because prices will go up.

If you started by assuming that prices will go down, your method would generate exactly the opposite conclusion.

So despite all your careful calculations, the conclusion is generated by your assumption that prices are going to go up. That assumption is hanging in the air. On the skin of a slowly deflating bubble.

The rest of what you say misses the point. The investors are mobile, as you say. That's why they will determine the market price over time. They get to choose between condo/coop/rental/owner occupied/commercial based on purely economic considerations. That's how ALL moderately responsive markets work. Some buyers see no alternative to their chosen car, but the price doesn't stay up because of their willingness to pay or in anticipation of capital gains when they sell it second hand (more precisely, it does go up, but then the manufacturer or competitors take advantage of this to make more, which brings it back down). The main difference here is that the developer-side adjustment is very slow, with long lags.

In the SHORT run, you might be able to make money buying at today's prices and selling in a few years, if demand picks up enough to create local shortages of the sort Urbandigs tracks. In the medium run -- not so likely. When Brooks2 says that you shouldn't buy unless you have at least a 5 year holding period, he has the analysis exactly backwards: in the 5-30 year holding period, you are as certain to lose money as anything is certain in this uncertain world.

well.. I said at least 15 years BE with very conservative assumptions(ie RE not going down which I don't believe).. But, I was trying to give the buyers(jhochle) argument the benefit of the doubt.

in the SHORT run, you might be able to make money buying at today's prices and selling in a few years, if demand picks up enough to create local shortages of the sort Urbandigs tracks

sure-- if you don't consider transaction costs. I don't live in a theoretical world. In the real world which I live in, you must consider transaction cost. In this market, I think it's absurd to think you can make money in the short run in this RE market "on the skin of a slowly deflating bubble" as you say.

Financeguy

I think you know that assuming real estate staying flat in real terms is not the same as assuming that prices are going to go up. From your pots I would guess you have the intelligence to understand the difference. Of course flat in real terms is still an assumption, but assuming real price declines would be too onerous of an assumption for nearly any asset purchase analysis. As I said in the original post, if you assume prices have further to fall, buying will not work in nearly any example.

jhochle: If you are going to assume your conclusion, then the analysis doesn't add much.

In contrast, standard analysis suggests that current prices are well above fundamentals. If that is right, then real price declines are highly likely. That's not so much "onerous" as "realistic".

The main ways I've seen people trying to reject the standard analysis are to claim (1) that bubble psychology is strong enough to overcome the fundamentals indefinitely, or (2) that prices are currently low enough relative to rents to make buying-to-hold-indefinitely-and-rent-out is a reasonable investment, or costs to build/renovate/convert are so high that it is not possible to make a reasonable profit creating new units, upgrading old ones, or moving them from the rental to the owner-occupied market, or (3) that the fundamentals are going to change in a way that the market does not anticipate (rents or building costs are going to jump in real terms) and market processes will be unable to adjust to compensate, or (4) that, contrary to the estimates of the financial markets, we are likely to have serious wage/price inflation, with wages and rents rapidly rising to meet current RE prices, but the resulting massive losses to the financial markets will not reduce NYC RE demand.

Of these, 1 and 3 require believing that market incentives don't work, that the RE market is highly inefficient, wasteful and seriously detrimental to the national welfare, that all the standard ideological justifications of market systems are false, and that standard market analysis is seriously in error, in which case it is hard to see why you would want to invest in NYC, which is completely dependent on the functioning of our markets. 4 seems to require that plus magic.

That leaves 2. 2 doesn't raise theoretical problems, but still seems obviously wrong on the facts. Nothing in your rent-buy analysis should convince an investor to buy a condo as a hold-and-rent investment, or convince an investor who currently owns such a unit that renting to Inonada would be more profitable than selling to you.

#2. The example wasn't a condo, and I think the numbers show it a good investment versus renting.

jholche, I think the dangers of your assumptions are the following.

- You start with a very skewed & unrealisic rent vs. buy comparison, so much so that i can find an apt worth 2.5x as much with the same specs. The real market is probably more like 1.5x away.

- You add on even more skewed assumptions. For example, 3% expected returns on money. Even after an epic stock bubble, stocks managed to return 3% over the last 7 years. Bonds did 8%. Historically, stocks have returned inflation plus 6.5%.

- You ignore the downside pressure of Fed rates no longer being 2.5% below inflation. A good fraction of buyers today (e.g., 300_mercer) are willing to blindly look at current interest rates only. For them, a move from 3% interest rates to 1.5% interest rates justifies a doubling in price. It is doubtful that we'll have Fed rates 2.5% below inflation in a decade.

jhochle.
lots of people have an emotional bias against buying.lots of people for buying.
all kinds of justifications will be used to prove this or that.
but in the end it's about you.
do you like it, does it fit your needs, do you want to live in Manhattan, can you easily afford it?
Market consideration are great but markets are not rational at all.Customers make markets, not developpers.you live in the city because you like it (like me) or your job requires it (not because NYC is dependant on the functioning of the markets).
Your assumptions are not dangerous at all.You can always find better but this requires a lot of work, not necessarily enjoyable.
renting requires quite a bit of work,and god forbid you lose your job in between..good luck applying wothout a job.
also a portfolio which will grow enough to throw cash at you, post tax, to pay the rent, requires a lot of maintenance and especially a lot of stress (you're marked to market daily, many people lost sleep in Oct08).
I would add 2 elements in your cash analysis.
1) you can add appreciation: RE as a mirror of inflation,3% over time (25k/year tax free on your property)
2) assuming you fixed your mortgage you gain balance by inflation/year (3% by 500k: 15k/year)
add that to your equity (600/month) and tax benefit (600/month) and owning seems a no brainer in your case.
and then stop worrying about it. live in it.enjoy life. don't time anything.
and in 15-20 years live rent free.

A property at $600,000 with CC & RE tax of $300 (2br/2bath Williamsburg) renting at $3200/month
I am not going to even run the numbers but it makes ABSOLUTELY NO SENSE to rent.

In current market, given high rent, it makes absolutely no sense to rent than own. One can find one easily by going through the inventory on SE and brokers.

Jhochle's unit has little higher CC/tax but still beats renting.

Just an observation from the low end... I am finding that it is now cheaper to buy with 20% down than to rent. Much cheaper. I am talking specifically about studios in Chelsea/Greenwich Village/West Village. The going rate for the CHEAPEST studio rentals in full service buildings in the area is currently about $2600. The purchase prices for equivalent full service studio coops are in the $300-$425K range with monthlies of about $575 - $1000. Putting down 20% and obtaining a 30-year mortgage @ 3.75% results in total gross monthly payments of around $2200 - $2500. Net, after factoring in mortgage interest/tax deductions, brings the monthly payments down below $2000 in some instances. Sure, there may be an "opportunity cost" to the 20% down payment, but I am hard pressed to find a financial instrument that returns $500/month (savings compared to renting) on $70K. I've been a housing bear for a very long time, but the recent uptick in rents, combined with lower/flat pricing and insanely low interest rates, has pushed me onto the buy-side.

Suze orman says, ya wants a big mortgage when you lose your job girlfriend. I mean who's gonna rent to ya wo a job.

On a serious note. If there are any commercial tenants willing to pay cash up front on 20 yrs lease. Please email me w67thstreet@ gmail.com.

I'll even give up a 20% discount.

Wow, glad to know I am not the only one that has actually looked at the numbers. I am assuming that none of these examples are high end condos since everything I have seen in that space still clearly favors renting.

I am actually looking to buy one this month.
1.2 buy,loft,100k to renovate. ccs 650 (no amenities, no doorman),taxes 450.
most recent sale 2 floors down 1.55mil.
2 actual rentals in the building, same layout, same sqft:$6100.
decent location.
No brainer

Good luck Midtowner. I hope the purchase goes smoothly, and the reno costs stay under control.

i wanted to add to your calculation.
let's round up at 750K buy.15 years mortgage. 20% down.5%inflation (actual long term US)
we assume your fixed monthly payment is equal to renting as you showed.
1) your monthly payment is fixed (besides maintenance). huge peace of mind. in purchasing power the payment is lighter by 5% each year. compared to rental increases each year.
2)in 15 years the price has doubled (in nominal, if RE mirrors inflation) to 1.5mil.you own free and clear.from a capital of 150K (20% down).return 1000%(minus equity payments).huge.not relistic with the markets post tax unless you're a professional trader.

>1.2 buy,loft,100k to renovate. ccs 650 (no amenities, no doorman),taxes 450.
most recent sale 2 floors down 1.55mil.
2 actual rentals in the building, same layout, same sqft:$6100.

$6100 times 200 = $1,220,000

200 times monthly rent, truthskr10's manhattan RE theory of relativity. :)

midtowner... flmaoz... R u serious? What happens when mortgages goes to 6%? Yep, PV analysis says leveraged assets come DOWN in price so that the NEW price = the same ECONOMIC value as midtownerretarded.

In simpleton borker speak, PRICES will go down. NOT YOUR PRICE, cause you are a complete NOT GONNA SELL ninny. I'm NOT BUYING FROM RETARDS like YOU.

I'm buying from the BANKS, DIVORCEES, DEAD, NO JOBBERS.... and THEY set the MARKET... not some ninny who thinks the RENT/BUY equation is IMMUTABLE.

THE CONSTANTs in this equation IS: YOUR INCOME and the FACT, WE ARE COMING OFF THE GREATEST RE BUBBLE KNOWN TO MANKIND.

but, go ALL IN fktard. BUY TWO, BUY THREE.... BUY FOUR... LEVERAGE PLUS MULTIPLICATION = > GREAT WEALTH.

Excellent! Perpetual motion machines for everyone! In all other markets, competition limits profits, but in NYC RE, trees grow to the sky and prices go up regardless of costs. It's democratic Ponzi finance: anyone can get rich without producing anything at all or even holding the economy hostage as a too big to fail bank!

But why limit yourself to assuming that you can borrow at 2% negative interest rates or that future investors will be willing to accept a negative return on a highly risky, undiversified, illiquid investment, or that rents can go up indefinitely at 5% when wages are flat, or that prices well above costs won't affect developers' plans, or that prices are set by buyers without regard to suppliers? Why not just double all the numbers?

Then you could "earn" 2000% in 15 years, and so could everyone else (except of course for the stupid renters and youngsters and people who decide to work for a living, but they deserve what they get so who cares?).

All you need is another 15 years of bubbliciousness and the Miracle of Immanent Profit.

It's right out of Lloyd George: All wealth will end up in the hands of the landowners (and coop tenants).

financeguy in his dry way called you the biggest financial retard with a healthy double dose of selfishness and laziness, midtowner. NOW GO MAKE SOME OPEN HOUSE schedules for this SUNDAY. Looks like THERE WILL BE PLENTY of OPEN HOUSES..... and another HUNGRY borker READY TO STAB YOU IN THE BACK as soon as you MENTION PRICE cuts to your "clients."

THE MUSICAL BORKER CHAIRS..... and the RETARDED BUBBLE BUYERS who'd rather bleed $4K month for eternity than take a "loss" on RE.

Here's to hoping PETS.COM makes a comeback... .there's always hope.