Rent vs Buy in UWS

Buying simply doesn't work at those numbers - if the apts are truly comparable.

When we bought in '98, the numbers were 5000 for a 2-br and 480k to buy the same. Rent-buy started to tilt in the direction of rent when the prices for a 2br went over 700k.

At 6% interest rate.

ng5t, at those numbers it might make sense for some people. with the interest deduction, your monthlies are now closer to 5k. if you plan on moving in a few years, than you might as well rent. but if you are going to stay put, than owning your own home might make sense here. don't' have to worry about rent increases, and you can make the apartment your own.

btw, what kind of building are you in? door man, walk up, amenities? prime uws, or on the fringe?

Buying looks like a bit of a stretch. It looks like you have a pretty good rental deal. Keep it.

But buying doesn't mean you have to accept the offer price. At 975K with 200K down, and a 7/1 ARM at 3.25%, things start to look better. 3,375 mortgage payment, plus 2,000 monthlies minus about 1,200 amortization and 800 tax benefit things look a bit better. Those are pretty aggressive financing and tax benefit assumptions that some people are not willing to make. Renters tend to scoff at the idea of having to refi or accept a floating rate loan, yet they are willing to renegotiate rent every 1 or 2 years without much concern.

"1,200 amortization and 800 tax benefit"

Can you please explain how the above works?

Thanks for your comments.
Ekartash, the building I am in is supposed to be a 'luxury' building, so it has a things beyond the basic. 24hr doorman, elevator, laundry room and its south of 90th and west of Amsterdam. Its is a good School district too. I think we feel very very lucky with our rental deal and plan to hang on to it for as long as we can, but we are in a large 2br and if it were our own, we would make some changes to use it as a 3br (we have a boy + girl). Plus one kid is in zoned school and we wouldn't want to move more than a few blocks away.
jhochle, we would look into the ARM but I have a couple of problems with it. I really do not know what will happen in 2-5 yrs re our jobs, so I don't want our future payments be an unknown. The second is that I feel interest rates can only go up and when they do it will be 25bps a quarter. I don't know if this should affect my wanting an ARM over a 30-yr fixed. I don't know very well how an ARM works I guess.

Inonada

You don't know what amortization or tax deductions are? I give you too much credit.

I think he's just playing Devil's Idiot, or something like that.

Oops, he's playing Devil's Advocate. I clearly don't know nada.

Rule #1 of Investing..Never Invest Money you are not willing or cannot afford to Lose.

Please show me where I can find a decent-sized two bedroom on the UWS in a doorman building for $4500. I agree if such a thing existed the rent/buy ratios would make no sense.

When buying in Manhattan, if you are not sure if you can afford it, YOU CANT AFFORD IT. Just rent, no risk, and you will save a boat load of down payment money. There are plenty of better asset classes that you can make a ton more money with less risk than real estate now.

Ebabrah: easy, just look at my old bldg, 61 West 62nd. Convertible 3-bedrooms ("M" line) rent for 4500, sell for over 1.1m.

Angeloz. Curious as to what those other asset classes are? I am being sincere.

My comment didn't get posted earlier, sorry. So 1, my building is a 'luxury' building. Laundry room in the building, nice elevator shaft, 24 hr doorman etc. Its 90th and Columbus and its been rezoned for PS84 but a lot of the kids go to PS 166 as well. (ps166 >> ps84). Second, about the ARM, I don't know that much, but shouldn't I want to lock in their interest rates now? I know when it starts to go up, it will do so 25 bps every quarter. Second we both work but don't know what will happen with our jobs in 2-5 yrs. SO I'd prefer to have out housing costs fixed. And lastly, re buying, I am the mom and very involved with the social life of my kids and almost everyone lives within a 5 block radius, so ideally would like to buy in the 80s to 100s and not go to far.

"You don't know what amortization or tax deductions are?"

Here's how I understand it, correct me if I'm wrong.

If you live in it, you get the $800 mortgage interest tax benefit; doubtful you get a property tax deduction because for an $800K loan your income puts you in AMT. You don't get to amortize depreciation.

If you rent it out, you don't get the $800 benefit against income. You just get to offset the rental income with the interest you pay, but that's just an expense off your gross. For depreciation, you get $1200. But you're running a net loss, so it's no use in deferring taxes on and picking up the tax difference on net rental income. Now maybe you make less than $100-150K and can offset the depreciation against other income, which will defer your taxes (but not give you much of a tax rate spread given the "low" income). But if your income at that level, you're probably not getting an $800K loan.

Maybe I don't know something, maybe you do. So I'm asking you to please explain how you figure there's "1,200 amortization and 800 tax benefit" to be had.

Sorry, newbie here. inonada, I read from another one of your post that a lot of people don't know that the property tax portion of a co-op maintenance is actually not deductible against income...and that it has something to do with AMT. Unfortunately, I don't have an accountant, is there an easy, generic cut off income level where someone can fully benefit from the tax deductibility of a co-op (interest from underlying mortgage + property tax)? I know tax situation varies greatly...but I am just curious if there is any easy rule of thumb or something. Thanks.

Odd how cheap the harmony trades in the rentals. When I do a search on streeteasy for 2 beds below 5k I find short term rentals, first floor, 5th floor walkup, etc.

Inonada

I am not talking about amortizing depreciation. I am not sure what that would exactly. Of the 3375 mortgage payment, about 2100 is interest and 1200 is amortization (it is early and I am not getting out a calculator). I do not consider amortization to be a true cost since the borrower could choose an IO loan and avoid this payment, and the borrow will likely recoup this payment if and when they sell.

I assume you are just playing stupid, but who knows on these boards.

From Wiki

"When used in the context of a home purchase, amortization is the process by which your loan principal decreases over the life of your loan. With each mortgage payment that you make, a portion of your payment is applied towards reducing your principal and another portion of your payment is applied towards paying the interest on the loan. An amortization table shows this ratio of principal and interest and demonstrates how your loan's principal amount decreases over time.:

inonada has repeatedly made the key point that at any given time the available rentals are mostly the apartments that are over priced or otherwise less desirable. good rentals go immediately and turn over less often. doing a search on SE will not give you the real picture of what people are paying.

With interest rate this low these days. A 30 years loan for $800K with 3.75% produces a $3700 monthly mortgage. Among the $3700, 60% goes to principal (even for the first payment. That percentage increases every month thereafter). That is actually $2220 per month. That is the amount of your liability reduced. If networth is total asset minus liability, then it is a pretty substantial benefit.

Thanks, jhochle. I'm not playing stupid. My understanding of your point was thrown off by your use of the term "amortization" in place of that which I would have referred to as "principal".

vic64 - your numbers are way off. The average principal paydown per month over the life of the loan is $2222 (800000/30/12) - it will be much lower the first year. For those loan terms $1200 goes to principal the first month. By the end of the first year that goes up to about $1250.

leecube - no great rule of thumb, but if your income is well over 500k you probably escape AMT.

Leecube, the story is that as you get too many deductions, AMT tax rules are going to define your marginal taxes. For AMT, state & local taxes paid are not deductible against the marginal AMT tax rate of 28%.

If I recall correctly, for joint filers with an income of $300K-ish to $1M-ish with only state & local income taxes as deductions, this is enough to place you under AMT. Below $300K-ish, you'll get to deduct property taxes (only partially the closer you are to $300K-ish).

On the state side, property taxes are not deductible. Interest is, but only to the extent it puts you over the $15K standard joint deduction level. Unlike federal taxes where a decent-sized wage and state taxes put you over the standard deduction level, starting over this level isn't a given for most filers.

Ebarah, you are right. I just looked at the mortgage calculator and saw the 60% principal ratio and multiply that by $3700. The principal portion for the first month is only about $1200. The 60% of mortgage is the average over the life of the 30 years mortgage.

inonada is correct on AMT, above 500k you are not automatically subject to AMT (between 200-500 or so you hit AMT even with only the standard deduction!). However if you are in the 500-1mm range you have a good chance of getting hit with AMT once you take all your state deductions. So you really need to be 1mm+ to be assured of being able to use the property tax deduction.

"So you really need to be 1mm+ to be assured of being able to use the property tax deduction."

Yes, that is precisely why I try to have my income at $1M+ ;).

"So you really need to be 1mm+ to be assured of being able to use the property tax deduction."

may be it should be read as "So you really need to be 1MM+ to be assured of being able to fully utilize the property tax deduction benefit."

While I agree that principal paydown/amortization of the loan shouldn't strictly be considered a cost (though it adds to the amount of capital tied up and, so, the opportunity cost of capital tied up in the apt), you need also to account, as a cost, for depreciation in the property (ultimately represented by the cost to the owner of doing repairs/renovations on the property).

"So you really need to be 1mm+ to be assured of being able to use the property tax deduction."

You are "using" your deduction by getting to reduce some of the income subject to a 35% tax versus having all of your income subject to a 28% tax, though. The way you eventually emerge from paying AMT is by paying more taxes than you would have under the AMT, so it's hard to say there's ever a (tax) benefit from being on that side of the line.

John

You bring up a good point. A true rent buy calculation is obviously more complicated. As time goes on, principal payments increase/build up, and interest payments decline along with interest deductions, the rent vs buy calculations change. I didn't think it was worthwhile to get into that level of detail. Ultimately it comes down to your assumption about what your opportunity cost is, or what you think is an appropriate discount rate for your working capital. In the case of the OP, I didn't even think it was worth getting into. If you can really rent that place for 4500, it is a stretch to buy it for 1.1M? At a lower price, it might make sense. Potential buyers can always put in a bid.

I think buying is better than renting right now, but only if you can afford the DP. Interest rates are so low and home values are down to much more reasonable levels, even if they haven't bottomed out yet it's a good idea to buy. There is less than a 1% vacancy rate on rentals in this city and I think it's worse on the UWS, so you know rents are only going to skyrocket.

I broke my lease on a 1 bedroom to buy a small 2 bedroom and while the two units are not comparable, I know that my landlord listed my apartment at 20% more than I was paying, only 6 months after I signed the lease. I am now paying less in mortgage in maintenance than I was paying in rent and the lord only knows how much my rent would have increased at lease renewal if I'd stayed. So for me it makes financial sense to buy - I love my apartment, it suits my life and the monthlies are cheaper than renting. And as long as I stay here for 5-10 years, I will get my DP back in tax deductions and there's alwasy the possibility that my home will increase in value.

Ng: I get that you want to lock in costs, and avoid having to move. But, but, but. My general sense of rent vs. buy on the UWS is that it starts to tilt in the favor of buy v. rent only at the 3br , and if you're picky about building conditions, and very specific about location. If you can give on any one of those issues, then it is less economical to buy.

Oh, and you're not looking at the luxury condo category - it is cheaper by far to rent in that category.

> don't' have to worry about rent increases

the tradeoff (besides possibly paying more anyway)... is potentially higher taxes, and potential capital loss.

> I get that you want to lock in costs,

I get the idea of locking in costs... but is it really benefit if you are locking in *higher* costs?

ng5T, I believe that your building has electric heat, and the average 2 bdr, 2 bath, in that location pays about $450 month to Con Ed during the winter months, and probably something comparable in summer. A year ago, I did DD on an apt of interest. Con Ed is very accommodating in revealing electric bills by address and apt, for past years. They gave me a sample for 4 winter months on 3 different apts. Still, the rent plus the electric is not a bad deal, but not nearly as good as it appears optically.

Columbiacounty has bought into inonada as our emperor with no clothes. So through good rentals are few and far between but that's the representation of the actual market? To secure a good rental you have to go through a 7 step bared knuckle brawl search, buy that's the market? Amazing. And the latest, he now has the need to tell us how much he earns. Columbiacounty bow to your emperor.

ng5T,

Given your parameters at $4,500 rent / 1.1million purchase price, and $1,500 maintenance, your NET ANNUAL COST of home ownership comes down to $30,270.00, or $2522.50/month.

This is also assuming the following parameters:
-After tax return rate on investments is a MODEST 2%. (how much do we get in our savings at this time?)

-Your marginal tax rate being 35% (assuming you can afford something above a million w/o anyone's help)

-And the estimated annual appreciation on a two bedroom around 2% per annum

Your annual cost of RENTING, assuming that you are also enrolled in basic renters insurance, comes out to $54,400.00, or $4,533.33/month. (ASSUMING YOUR RENTERS INSURANCE IS 400/month, or 4800 per annum)

Calculations are simple: Cost of buying including the annualized mortgage payments, home owners insurance, taxes, maintenance, and all other costs associated with ownership at the end of the year, and you subtract by the principal reduction in mortgage, tax savings of interest deductions, and tax savings on your property tax.

Principal reduction in mortgage for your first year is $14,946 (the amount you already paid down and invested towards your equity), as well as your interest deductions at $12,628, and your eligibility on your deductions on your property tax $263.00) comes down to $52,270.00

We then deduct your estimated annualized appreciation of your home at 2%, or $22,000.00, your NET ANNUAL COST OF HOME OWNERSHIP comes down to $30,270.00

If you can afford the down-payment + show liquid assets of 12-24X maintenance, have good credit, pre-approved by bank, then it's a no brainier at this point.

Hope this helps.

columbiacounty
about 10 hours ago
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inonada has repeatedly made the key point that at any given time the available rentals are mostly the apartments that are over priced or otherwise less desirable. good rentals go immediately and turn over less often. doing a search on SE will not give you the real picture of what people are paying.

inonada has repeatedly touted one apartment with a wonderful view, available for only $4K, with a comparable sale for $2MM.
columbiacounty's point about why this apartment IS representative of the market, is because those apartments go quick.

Here's the listing: http://streeteasy.com/nyc/rental/795243-rental-25-central-park-west-lincoln-square-new-york

According to SE, the apartment took almost 3 months to rent, and despite being comparable to a $2MM apartment, required a 7% price cut. It was also marketed by one of the top brokerage firms in the city:
08/25/2011 Listed by Corcoran at $4,500.
10/04/2011 Price decreased by 7% to $4,200.
11/15/2011 Listing is no longer available.

Furthermore, this same apartment had been available several times before and had turned over several times in only 5.5 years:

05/06/2006Previously Listed in StreetEasy, but no longer available, by Corcoran at $4,500.
05/06/2009Previously Listed by Corcoran at $5,000.
09/23/2009Corcoran Listing is no longer available.
10/04/2010Previously Listed by Corcoran at $5,000.
03/17/2011Corcoran Listing is no longer available. Last priced at $4,500.

takkyamaguchipro, there's a lot of missing math in your post.
But where you do show your work ... rental insurance on a $4500/month apartment costs $400/month? Is this for someone who drinks and smokes in bed and keeps his door unlocked and ajar while out of the apartment?

In 30 years, you will sell it for quadruple your cost. That's how it's always worked for the last 100 years.

Not always. E.g., in the 1930s-1940s many co-ops went under, with the owners losing their entire investment.

A typical co-op (most were high-end) sold for ten times the annual maintenance. That maintenance included a share (amounting to almost the cash price) of a large underlying mortgage.

Rents were high in the late 1920s, so the difference between maintenance and rent (the landlord's profit) justified the opportunity cost of the cash invested.

When rents plummeted in the 1930s, dropping to much less than maintenance, owners walked away from their apartments and proprietary leases, and co-ops had trouble getting new owners (at a nominal price) who'd take on the hefty mortgage-driven maintenance. The co-op would then default on its mortgage, and the remaining owners lost the cash they'd paid and became tenants of the lender. Twenty to fifty years later the then-landlord would co-op the building again. A few of the original co-operators would still be there and would buy again.

That happened at 40 Fifth, 834 Fifth, and a bunch of others I can't remember off-hand.

Dealboy: what is the probability that they will own it in 30 years? I own, and the likelihood of us still owning this place in 30 years is nil. 20, yes. 30, no.

hunterburg, thanks for catching that.

The renters insurance is "40/month, or $480 per annum" which brings your annual cost of renting to still the same above stipulated amount of $54,400.00.

The cost of ownership vs renting still stays the same.

-Takk

what happens to your analysis if you have to sell at a loss?