Are my rent versus own calculations right here? I've been trying to convince myself to buy property, but I really don't want to, especially in this heated environment. I like the freedom of renting. I'm never very secure in my job (even though my last 2 jobs have lasted for more than 5 years) and I don't like the idea of having a mortgage hanging over my head. I want the freedom to tell the boss... [more]
Are my rent versus own calculations right here?
I've been trying to convince myself to buy property, but I really don't want to, especially in this heated environment. I like the freedom of renting.
I'm never very secure in my job (even though my last 2 jobs have lasted for more than 5 years) and I don't like the idea of having a mortgage hanging over my head. I want the freedom to tell the boss to stuff it, should I ever need to.
But circumstances have it that I may need to buy something, since I've been living pretty cheaply at a relative's property, and that relative wants to sell. I also don't want to deal with a landlord, and I have enough capital to buy now.
One thing I've been doing is looking at a list of "the ones that got away" -- places I liked enough to buy, but never did for lack of commitment. I don't know if I should feel good about it or not.
One property I liked a lot in Chelsea listed for $275k in 2000. It probably sold for a little higher than that, but let's just say $275k for the sake of argument. I recently looked it up on streeteasy, and the last listed price was $475k. For the sake of argument, I'll say it's worth $500k now.
Using a rudimentary IRR function on my financial calculation, I enter -$275k and 0 cash flow for 15 periods, and $500k for cash flow 16. I get an IRR of 3.8%
I did better than 3.8% on my investments over that time. Should I feel ok in not buying?
* Yes, I know the 3.8% would have been leveraged with a loan, but as I explained, I'm anxious about mortgages, so going without is a risk I am happy to have avoided.
* I paid rent during that time, but that money would have gone into mortgage payments all the same. Is that right? Am I missing anything in my calculations here?
Thanks!
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Response by uptown_joe
over 11 years ago
Posts: 293
Member since: Dec 2011
You can look at the New York Times rent vs buy calculator for a useful (and fairly exhaustive) list of factors. Also remember that past performance (eg the Chelsea example) does not predict future results.
But as you say it is not solely a financial decision, it is a life choice having to do with job, income, location, neighbors/building, control of your space, etc. and especially in Manhattan/NYC the transaction costs (time and financial) make it challenging to get in and out compared to the readily available rental market. It sounds like you are not really comfortable buying, so don't! That's a totally fine choice.
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Response by uptown_joe
over 11 years ago
Posts: 293
Member since: Dec 2011
One more thought -- if you are buying an apartment (as opposed to a standalone house), there will always be some degree of 'landlord' in the form of building management, super, board, etc. -- not sure which part of dealing with a landlord you imagine to be distasteful but there is no escaping parts of it. You can of course avoid haggling over exorbitant rent increases, condition of your unit, many interior repairs, etc.
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Response by Jish
over 11 years ago
Posts: 18
Member since: Feb 2008
The leverage is real, I bought three years ago and the only money that is unavailable to growth in other investments is the down payment, so that is definitely a factor.
The money you were paying in rent is a sunk cost. The money you would have been paying to your mortgage would have been split up:
- Common Charges (sunk cost)
- Real Estate taxes (some tax deduction benefit)
- Mortgage interest (some tax deduction benefit)
- Equity in your unit (money in your pocket long-term)
For me the amount that I actually pay out that is not equity ends up being almost equal to what I was paying in rent before and less than what I would pay in rent for a comparable unit. Combine that with building equity and that pushed me over the edge.
Of course I bought three years ago in FiDi at under $900 ppsf, I agree that the equation keeps getting harder to justify!
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Response by CoopHopeful
over 11 years ago
Posts: 13
Member since: Jun 2014
No matter what living situation you're in, you're going to owe money to someone (true about landlord, super, coop board, etc.), but even in a stand-alone house, you have property taxes and house repairs. Don't get into the mindset that if you rent, you have the freedom to tell your boss to "stuff it". Whether you have rent, mortgage, or property upkeep costs and taxes, you're going to owe money to someone - renting doesn't give you any more freedom to jump from job to job. Buying is always going to be a better deal, especially since you say you have enough saved up.
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Response by NWT
over 11 years ago
Posts: 6643
Member since: Sep 2008
I don't get why you used $0 cash flow for the 15 years between buying and selling. Your 3.8% is based only on increase in principal, but that could've gone either way. If you know what the rent savings would've been in year 1, and in year 15, you can guess at the years in between, and calculate a better IRR.
Buying in 2000 will always give you a decent number, but in your other columns you could put other scenarious, e.g. buying later and having to sell in late 2009.
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Response by NWT
over 11 years ago
Posts: 6643
Member since: Sep 2008
But as uptown_joe said, an IRR function in Excel is just a tiny part of what a real rent-buy calculator does.
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Response by chendere
over 11 years ago
Posts: 0
Member since: May 2011
you're not taking into account the tax savings you'd have by having uncle sam pay for part of your interest. In addition, if you actually plan it before hand, you can bump yourself down into a lower tax bracket. In addition, there's lots of tax rebates in terms of property tax, senior citizen, veterans, etc. associated with owning
You can look at the New York Times rent vs buy calculator for a useful (and fairly exhaustive) list of factors. Also remember that past performance (eg the Chelsea example) does not predict future results.
But as you say it is not solely a financial decision, it is a life choice having to do with job, income, location, neighbors/building, control of your space, etc. and especially in Manhattan/NYC the transaction costs (time and financial) make it challenging to get in and out compared to the readily available rental market. It sounds like you are not really comfortable buying, so don't! That's a totally fine choice.
One more thought -- if you are buying an apartment (as opposed to a standalone house), there will always be some degree of 'landlord' in the form of building management, super, board, etc. -- not sure which part of dealing with a landlord you imagine to be distasteful but there is no escaping parts of it. You can of course avoid haggling over exorbitant rent increases, condition of your unit, many interior repairs, etc.
The leverage is real, I bought three years ago and the only money that is unavailable to growth in other investments is the down payment, so that is definitely a factor.
The money you were paying in rent is a sunk cost. The money you would have been paying to your mortgage would have been split up:
- Common Charges (sunk cost)
- Real Estate taxes (some tax deduction benefit)
- Mortgage interest (some tax deduction benefit)
- Equity in your unit (money in your pocket long-term)
For me the amount that I actually pay out that is not equity ends up being almost equal to what I was paying in rent before and less than what I would pay in rent for a comparable unit. Combine that with building equity and that pushed me over the edge.
Of course I bought three years ago in FiDi at under $900 ppsf, I agree that the equation keeps getting harder to justify!
No matter what living situation you're in, you're going to owe money to someone (true about landlord, super, coop board, etc.), but even in a stand-alone house, you have property taxes and house repairs. Don't get into the mindset that if you rent, you have the freedom to tell your boss to "stuff it". Whether you have rent, mortgage, or property upkeep costs and taxes, you're going to owe money to someone - renting doesn't give you any more freedom to jump from job to job. Buying is always going to be a better deal, especially since you say you have enough saved up.
I don't get why you used $0 cash flow for the 15 years between buying and selling. Your 3.8% is based only on increase in principal, but that could've gone either way. If you know what the rent savings would've been in year 1, and in year 15, you can guess at the years in between, and calculate a better IRR.
Buying in 2000 will always give you a decent number, but in your other columns you could put other scenarious, e.g. buying later and having to sell in late 2009.
But as uptown_joe said, an IRR function in Excel is just a tiny part of what a real rent-buy calculator does.
you're not taking into account the tax savings you'd have by having uncle sam pay for part of your interest. In addition, if you actually plan it before hand, you can bump yourself down into a lower tax bracket. In addition, there's lots of tax rebates in terms of property tax, senior citizen, veterans, etc. associated with owning