New York Times on Buying vs. Renting

This is an interesting but werid discussion, and I think there are some definite facts going on and some total mistakes. It is good to depreciate property of a house but not land but not to amortize a loan or apply debt service when calculating a company earnings.

By the way I am buying an apartment not because it is cheap but because I want something I own long term for my family.

The NYT piece makes a lot of sense! The right decision about real estate purchase needs to be about personal circumstance.

For me buying was the right choice. I had been renting a 1 bdrm for $3500 and bought a 1 bdrm new construction high-end apt for 775K (waited a little under a yr for the apt to close). Rent ratio is 18. I plan to stay in the apt for next 5 years and I could not be happier with the decision in terms of economics and personal satisfaction. The fact that I love interior design, I now have the satisfaction of being to decorate an apt to my liking that I own!

Can someone review these assumptions and explain to me whether they seem to be correct? If they are, how can anyone justify buying an apartment based on where rents are?

Assumptions

Square Feet 750
Purchase Price 750,000
Price / Sq Foot $1,000
Maintainence 1,200
% Maintainence Deductable 33.0%

Mortgage Rate 7.00%
Effective Tax Rate 35%

Expected Inflation 3.0%
Expected Premium to Inflation 1.0%
__________

Expected Annual Appreciation 4.0%
Leveraged Appreciation 20.0%
Add: Required Cash ROI 15.0%
__________
Total Annual Return on Equity 35.0%

Total Return on Asset (unleveraged)7.0%

"Real" Purchase Cost
Cost of Apartment 750,000
Add: Capitalized Mo. Maint 212,044
__________
Total Cost 962,044

"Real" Cost / Square Foot $1,283

Equivalent Rental Cost
% Down Payment 20%
Down Payment 150,000

Monthly After Tax Mortgage Payments (Interest Only) 2,275
Add: After Tax Maintainence Costs 804
__________
Total Monthly Payments 3,079
Add: Required Cash ROI (equity down) 1,875
__________
Expected Monthly Rental 4,954

mrsspock: I can't comment on most of your parameters, but I will say that with maintenance that high, I would expect the deductible percentage to be higher. Also, a required cash ROI of 15% may not be realistic, and it's pushing your expected rent through the roof.

West81st: I appreciate you looking at it. The maintenance assumption wont change the rent that much. A 15% current ROI is translates into a 6.65% capitalization rate $4,954 - $804 x 12 / 750,000(I think) - current return on asset (assuming no leverage) Rent - Maint / Price