Buy or Rent? Learn the Rule of 15

stevejhx- Stop posting the truth. Do you have any idea how much this hurts

Why is it only now that people are beginning to accept what I've been saying forever? Except LICC, who says I only post unsubstantiated garbage - which every expert in the world happens to agree with.

There will be a very fast (for an illiquid asset) depreciation in Manhattan real estate. We're way far behind the rest of the country, and the rest of the country isn't losing its economic engine like we are.

I am not bullish on Manhattan real estate, but to be clear, the 12x ratio sourced incessantly from Forbes magazine is an interesting data point, at best, and nonsense at worst. First, it appears to be for the New York metro area and not Manhattan, though even that is unclear, which is only partially helpful as the outer areas have been much harder hit, and second, the data says that Manhattan RE has traded at the lowest price-to-rent ratio over the last 15 years of any city in the country except Pittsburgh and, I think, Detroit (I don't have the link, pls correct me if I am wrong but that is what I recall). Pittsburgh and Detroit! This also strikes me as perhaps worthy of investigation, which nobody has bothered to do.

Again, I am not bullish on Manhattan RE for a variety of reasons, notably that the crisis on Wall Street (where I - unfortunately - work) has turned out to be more sustained that I would have ever guessed, and there is much evidence that suggests Manhattan RE has room to fall, but the 12x number from Forbes is not one of them. Unless someone can give me some color on the data, I think it should be summarily dismissed.

"color on the data"

Easy. To rent an apartment you must have income of 40x monthly rent. To get a mortgage you can have housing expenses of no more than 28% of your income.

You earn $100,000. You can afford rent of $2,500.

You earn $100,000. 28% of that is $2,333.

Miraculously, nearly the same, and those are your constraints.

12x annual rent is $300,000. 80% financing on that would be a mortgage in the amount of $240,000, which at 6.5% per annum gives you total monthly mortgage payments of $1,516. Add in property taxes and insurance, maintenance costs, etc., and you start hovering around the $2,333 limit.

Is that enough color?

unnamed, since you work on Wall Street, think of it like you would think of stocks. Instead of annual rent, think dividends (or free cash flow, or earnings). Instead of the asking price of an apartment, think market cap of a company. So, paying 15x is a pretty reasonable thing, right? Compare that to the "P/E" of the current market for Manhattan real estate, which is more like 25-30x. And there's the rub. At some point, a stock has to be priced at a reasonable multiple of its underlying income stream. In this case, an apartment has to be priced at a reasonable multiple of equivalent rent.

I understand that math and don't have an issue with it. And clearly that math is appropriate for a most people seeking to buy apartments in Manhattan, but it does ignore a disproportionately large number of buyers here with substantial savings, which should imply a modestly higher ratio here than elsewhere, which it doesn't and which is why I asked the question.

Most importantly, it doesn't explain why pretty much every other city in this country has a 15-year price to rent ratio of higher than 12, some materially higher than 12x, which was my original question and which nobody has been able to answer.

east-cider...not surprisingly I like your logic but I would have thought NYC would and should trade at a higher multiple (or lower cap rate) relative to the underlying rental stream than many other places, which it doesn't if you believe the forbes data. I am no real estate professional, so perhaps my assumption here is wrong, but New York commercial RE seems to trade at lower cap rates than elsewhere so it would follow that residential RE here would also. Thanks for the post...and as you guessed I like the approach.

In my opinion, NYC real estate trades at lower cap rates because it is more cyclical as its fortunes are tied to highly-levered financial institutions. The higher your beta, the higher your discount rate and the lower your multiple - Finance 101. As for the presence of savings, that should be a factor in all asset classes. People with savings could afford to pay >15x P/E for stocks but they don't. All assets eventually return to normal price/cash flow multiples as values are set on the margin by the last buyer (who presumably has to buy based on income and access to credit).

steve takes very isolated assumptions and makes broad conclusions. Where is it said that most of Manhattan is at 25-30x rent? The post the other day with the heat maps showed that some neighborhoods are high, but the majority of Manhattan was within the 15-18x range, I believe. You also should look at the numbers from a practical point of view. Do you think every person buying a $1.2 million apartment is taking a $1million mortgage (or higher)? Even if they were, the after-tax cost of their monthly payment is probably around $4,000. Their monthly maintenance or common charges can vary, but their after tax cost there may be $1,000-$1,500. Also, maybe you have a great deal, but most 2-bed, 2-bath rentals in Chelsea are significantly higher than $4,500. I just did a search on street easy for 2+bed and 2+ bath rentals in Chelsea. Eyballing it to take out the 3-bedrooms, there are approximately 250 listings. Only 9 were for under $4,500. If you really want to compare, you should assume closer to $6,000 rent.
Taking all that into account, the monthly after-tax cost to own is not that much higher than to rent, and you don't have to worry about future rent increases. Within 5 years, the monthly ownership costs could even be lower than renting, depending on how the rental market moves over time.

Good observation on the cap rates. I do tend to agree that the equilibrium P/E for Manhattan is probably higher than that of the broad market, just like the P/E of a company with competitive advantages, intangible assets, etc would be higher than others. So if 12x is the theoretical number, and 25x (or thereabouts) is the currently lofty reality, the right price is probably somewhere in the middle. For the sake of argument, let's say it's 18.5x. So a one bedroom renting for $3,000 a month should be asking $666,000. Is that reasonable? Some might say yes, others might say no. But I think everyone would agree that an apartment like that would probably be asking at least $950k in today's market, which is where the problem lies. It's overvalued, plain and simple.

That hypothetical 18.5x multiple equates to a cap rate of 5.4%, or roughly 100 basis points above 30-year Treasuries. 100 basis points is not much of a risk spread.

And keep in mind were talking 12-15X the exorbitant rents in this city.
This in sense brings down the multiple.

The question on the right P/E is not whether Manhattan has some competitive advantages - those are already priced into the rents. The question is whehter those advantages are greater or less than what is already priced in. The fact that rents are coming down tells me that multiples should be low as it is a shrinking cash flow stream (not a sexy asset by any definition).

I've always said 12x was unrealistic and even though steve said he would buy at 15x, he continues to ramble about 12x. I like the 15x rule when it is used with truly comparable rental properties. People on this board manipulate the numbers to fit their story, so it is best to do your own calculations. Here is a table that may help assuming a 1000 sqft place (round number for a 2 bed)

Price to Rent Ratio

4500 4750 5000 5250 5500 5750 6000

Sqft PSFT Price

1000 900 900000 16.7 15.8 15.0 14.3 13.6 13.0 12.5
1000 1000 1000000 18.5 17.5 16.7 15.9 15.2 14.5 13.9
1000 1100 1100000 20.4 19.3 18.3 17.5 16.7 15.9 15.3
1000 1200 1200000 22.2 21.1 20.0 19.0 18.2 17.4 16.7
1000 1300 1300000 24.1 22.8 21.7 20.6 19.7 18.8 18.1
1000 1400 1400000 25.9 24.6 23.3 22.2 21.2 20.3 19.4

As you can see, anything in the $900 to $1100 psft has a reasonable multiple. As you move into a higher price per sqft ($1200 to $1300) comparable rental properties will need to be in the $6000 range for a 1000 sqft property to make sense. Based on the markets I look at, with the exception of new developments, I believe Manhattan is priced in a range of 16-18x.

Table didn't post as neatly as I hoped. Line up the rents at the top with the column starting with 16.7.

I keep looking at large buildings to get a sense of buy vs rent and i get some very high numbers. When possible I use the exact same unit.

Here is the first example I found in 325 Fifth - priced at 25x rent.

http://www.streeteasy.com/nyc/sale/248383-condo-325-fifth-avenue-midtown-south-manhattan

http://www.streeteasy.com/nyc/rental/351105-condo-325-fifth-avenue-midtown-south-manhattan

JuiceMan
Go to any new condo building on SteetEasy and you will find the condos are priced way higher than 15X ren for the same/similar unit. And as far as fudging #s are concerned, yours don't look too good. There are not a lot of condos in the $900-1000/sq ft range. There is where the pricing should be.

mbz, good point about competitive advantages being priced into rents, but renters by definition don't share in the potential appreciation, therefore we should consider the unique premium that the buyer would pay (in the form of a higher than normal P/E) because of their belief that the competitive advantages will drive price appreciation over time. Just a clarification.

are you guys all a bunch of internet millionaires with nothing else to do? Why don't you all meet up at the nearest starbucks or something and circle jerk each other with your doom and gloom shit, seriously.

east: what would drive price appreciation other than higher rents? a lowering of the discount rate via easy access to cheap capital is the only thing i can think of - and that is obviously going the other direction.

surdy, have a closer look, I'm not fudging anything. I took a range of rent and purchase numbers and put them on a grid. I agree there is little out there under $1000 psft, but it shows a range. The table was meant to be helpful for people that were looking at rent vs. buy for the first time and to help understand the multiple conversation above. Not sure how you equate that to "fudging"

"Go to any new condo building on SteetEasy and you will find the condos are priced way higher than 15X ren for the same/similar unit."

Have a read of my post again surdy. I specifically highlighted new condos as an exception. Maybe the California air has hurt your reading comprehension?

By the way, just got back from a trip to the Inland Empire and there are many empty houses and strip malls sitting on former diary farms. Is that where you are moving from? Ouch.

totallyanonymous = owner whose 1br is under water by ~10%. i'll buy it once you foreclose for ~75$ of current value. thanks!

JM

Wrong as usual.I am not moving.

JM:'By the way, just got back from a trip to the Inland Empire and there are many empty houses and strip malls sitting on former diary farms. Is that where you are moving from? Ouch.'

Manhattan = Second Home. Tho I have reservations about calling it a Home.

What does Al Roker know about buying vs. renting? Isn't he a freakin' weather man????

Yes surdy, I understand about those reservations. After spending a week in LA and the surrounding areas, I feel very lucky that I don't live there.

"totallyanonymous = owner whose 1br is under water by ~10%. i'll buy it once you foreclose for ~75$ of current value. thanks!"

those who presume others are schmucks are in fact themselves schmucks.

I've got to remind you all that not every apartment in manhattan was overbought nor does every apartment violate this 15x rule. you want to run around and jump and scream like a toddler about how smart you are for renting during this downturn, great., but plenty of folks like me made several hundred thousand from selling at the end of the boom and buying back in selectively. We'll make more loot a few years out. you've got a captive audience here for your rants but i'd suggest you renters start looking for desperate sellers right now and toward the end of the year and into '09. you'll make money long term.

Now that it's been a number of years what do you all say? Rent or buy? I have been renting my whole life and want to buy because the landlord raised my rent over 12% in one year and mortgage rates are low. The current rental is in a class action suit because it's supposed to be a rent stabilized building but who knows how long it will take to resolve. Between that an the fiscal cliff what is everyone thinking

Always buy. Besides 1 time in the last 100 years, you will have a windfall when you sell (or retire)

Owners have tons of gravy, including a multi-million dollar payout when they retire or 30 more years of rent free living.
The deduction is almost a moot point, and most owners earn too much anyway. Take the million dollar lottery payout at retirement and be happy.

Renters, they can't afford to buy. They will need to be broke renters until they can amass 6-figures liquid. Most idiots can not manage to do this. Hence, they do not get the jackpot at retirement and 30 years of rent-free living, to boot. Lifelong paycheck to paycheck renters?

Buyer buys $80k townhouse in 1980. Sells it for $6mm when he retires. And no, saying he could have taken that $8k downpayment to the racetrack and put it all on some horse (or investing into a company on the verge of bankruptcy) is not a valid opportunity cost comparison, you blithering imbecile.

What if stupid renter eventually buys in old age? Owners would be living rent-free at that age. Instead, she subjects herself to $60,000 a year in rent. LOL, nice "retirement" sucker. Correct, she is a ginormous fool. This is a case of "too little, too late" She should have bought something back in the 1970s or 1980s, like other people her age. She'd be sitting on millions and be living rent free. A true idiot renter who had made things even worse. At the least, should have moved to a $1500 studio.

Maybe not NYC, but owners have literally recouped 100% of the cost of their apartment in the 10 years of paying below market cost to own than to rent (owning is much cheaper than renting). Even if the apartment was today valued at $0, owners am still ahead. Wrap your mind around that.

2 years ago, I recall seeing $200k studios being posted here. Of course, some of SE crazies told buyers they were CRAZY. Now, there seem to be none of these $200k studios. If the cheapest studios are now listing for $300k, can we infer that the smart investors who bought 2 years ago are now sitting on a 6-figure profit cushion? Pretty damn incredible. Live for $1000/mo, and get paid $100k to do so. A renter doesn't see that sort of money in a lifetime!

Renters LOSE: Bought in 1983 for $1m. Sold in 2012 for $8mil. Owner walks away with a $7m profit. Renter's profit? $0. Yes, those brilliant renters can avoid the increasing cost of electricity and point out the 6 people who bought in 2009 who are underwater. They are so frickin' smart! Just think owners live for free for decades after paying off the mortgage. And get $7 million bucks as a parting gift.

Renters get ZERO percent return. And, renters pay MORE every single month, both during the mortgage and after it's retired.

Average renter net worth $5k
Average owner net worth $250k

Renting is for short-term thinkers. People used to say Manhattan was overpriced in the 1950s, 60s, 70s, 80s, and 90s. Guess what? Anyone who paid off their mortgage over 30 years was looking at a jackpot of wealthy when they retired. Renters? Nothing. Just sniveling ants trying to keep their rent control. If you take a long term perspective, buying is ALWAYS a no-brainer jackpot lottery system for your retirement. And, no, being down on your purchase from 2010 does not negate this.

Wow, anyone who bought a studio or 1BR in the 1990s is sitting on about $300,000 of cold hard cash for apartment sitting. Real estate is truly a money tree, if there ever was one. Oh, and you'be be living mortgage free by now as well. For the rest of your life.

NOT BUYING NOW VS. NOT BUYING EVER? BIG difference. Sure, this is a stupid time to buy at inflated prices after prices have gone up x00% in the last x years. Anyone who already bought from 1850 to 2008 has made out like a robber baron. That boat has sailed. Anyone who bought in 2009 or 2010 lost lost money. BUT, anyone who never EVER buys in their entire lifetime is a stupid f*cking renter idiot funding someone else's retirement. It's an important clarification that some here are too dumb to understand.

I am 100% agreement that prices are headed down. If you're not already sitting on a mountain of pre-2008 profit, then don't bother. That ship has sailed. Owners should now just concentrate on paying off the mortgage, and living rent free for the rest of their lives. Renters, well, I guess can just keep paying off their master's mortgage.

dealboy, what do you own?

huntersburger, what do you own?

I own a nice place up in Columbia County.

where?

next door

how many acres? what does it look like?

I'm right next door

next door to what?

Yoohoo! I'm right here!

happy?

Yes, it's wonderful.

look...you made it.

Dealboy appreciate ur brutal honesty. r u familiar with manhattan neighborhoods? I looked at a place on the lower east side 10 years ago. and believe or not, the value has not changed at all.

"(owning is much cheaper than renting)"

When you start with this as your PREMISE, then you argument is fundamentally worthless.. and the rest is useless.

"Renters get ZERO percent return"
The long term stats say buyers get zero return.

Renters get whatever return they put the money they save on a down payment and/or cheaper monthly payments.

>look...you made it.

Thanks Barry.

>When you start with this as your PREMISE, then you argument is fundamentally worthless.. and the rest is useless.

Seems to conflict with the statement that "renting is ALWAYS financially more beneficial over time than owning" http://streeteasy.com/nyc/talk/discussion/3500-renting-is-always-financially-more-beneficial-over-time-than-owning

lol that would put my place in brooklyn heights at around $750k (2br/2bth@4k a month)

at $750k......I'd be buying 3 of them.

@deanc

I hope you are laughing because you bought them for $750k or less....otherwise, what does all of the info above basically tell you?