Renting vs Owning - see the Math - Owning is Superior

sorry it's excel i tried to copy it over, it looked okay on preview..:) The last 2 cloumns are Buy Rent with appropriate decrease/increase..

SteveF is a man of strong principals... er, principles... no, wait.

West is that all you can say after all that work?..i'm busy here ya know..

West..is that all you can say after all that work?? i'm busy here ya know..

West is that all you can say after all that work?..i'm busy here ya know..

West is that all you can say after all that work?..i'm busy here ya know..

steve i can't follow your post so no way i can comment on it. make it legible.

SteveF don't forget to calculate laid off and collecting unemployment.

down payment money earning 8% in the stock market.
HAAAAAAAAAAAAAA!

stevef, you're ability to run the numbers is impressive. did you train under madoff or something?

500k @ 5.75% and 10% down payment w tax and common = 3,426
Tax benefits 30% tax bracket = 884
Net monthly payment = 2,524
Principal paydown = 482
Net cash outlay = 2060

rent = 2,400
1st sec, brker 7,200 down
extra downpayment invested @ 8% = 285
Net rent = 2,115

500k Studio bought w10% down vs rented for 2,400

The 482 is principle paydown. The 884 is tax benefits(30% bracket) and the 285 is not used down payment money earning 8% in the stock market.
The net monthly cost is 2,060 for owning vs 2,115 for renting.

Footnote: the principle paydown accelerates every year, your rent increase long term and your stock investments can make you go insane.

ohh and the longterm price appreciation is astonishing.
here goes...

Oh no...though I tend to advocate owning these math threads always devolve into insanity...

steve,

if you pick the numbers you can obviously make them make sense. this is not a real example, however, it is a made-up 'scenario.' i can simply say "the rent would really be $2,000/month" and then it doesn't work. Or I can say that you have provided what appears to me to be a very unrealistically low monthly tax and common charge. these are made up numbers, you did the making up, and viola! they prove the point you wanted to make.

there are plenty of real examples out there--apartments that are on the market for sale and for rent. if you perform your analysis on one of them it will be a lot more convincing.

Oh Steve, you also only included the frictional costs of renting (broker, 1st, and 2nd). Last time I checked, brokers get a 6% commission on sales, and don't try to argue that it is paid by the seller. if you are a buyer today you are a seller tomorrow. you also need to pay for a lawyer and for inspections. you also don't include the cost of any renovations or wear-and-tear maintenance.

Steve, I'm actually curious. Here is a real example of an apartment offered for sale and for rent:

http://www.streeteasy.com/nyc/sale/351671-coop-61-west-62nd-street-lincoln-square-new-york. The sale price is $1,580,000, with maintenance of $2,487. The rent is $5,850. My calculation is this: Rent-Maintenance=$3363. Multiply by 12 and you get $40,356. Divide by the purchase price and you get a yield of 2.5%.

An alternative calculation is simply to divide the purchase price by the yearly cost of renting. I don't like this method because it does not take into account the cost of maintenance and real estate taxes, but this would give you a Purchase cost to yearly rent ratio of 22x--nearly twice the historical average.

Would you mind running this through your spreadsheet? I'd be curious to hear what it spits out.

Wait--why do you subtract the "principal paydown" from the monthly cost? that makes no sense to me at all.

How did I know it was steveF?

happyrenter is correct.

happy....these are real life studio examples. This is one of my studios. of course I didn't pay 500k I bought much lower. However if you bought now, these are the numbers. The TAX benefits are really what brings owning in line with renting. People, please consider your tax writeoffs against your income. So now that we've established renting cost = to owning costs than we bring in the appreciation. We all know and luv that.

Wait--why do you subtract the "principal paydown" from the monthly cost? that makes no sense to me at all.

why would you not calculate that in...you are paying off your loan balance every month. You are earning money...just like investing that not used down payment in stocks.

wait--you just said it's real life, and then turned around and said it isn't real life. i just gave you an actual, real life example. why not run the number on it?

SteveF forgot to calculate in a 30% loss in value....

That would be a major change in numbers.

Any analysis relies on guesses about future property value, tax rates, investment returns and is therefore just about useless.

Of course if you lose your job or take a pay cut you get no "tax benefit" or a reduced one, and then your rent goes up, according to this theory.

Which is why the tax benefit is calculated as a function of taxes, not as a function of mortgage payments. Those payments still need to be made regardless of the "benefit."

30% loss on a levered 9:1 basis = disaster.

why won't this just die already??!?! die!!!

talljay,

you think analysis is useless? how do you propose making decisions then, rolling dice?

In my opinion SteveF's calculations are quite fair.
he is allowing for a 5.75 rate (you could get lower now)
He is using 10% down (it would be considerably less with 20% down which most coops would require anyway).
And he has common charges of about $850 per month (granted that's on the lower side, it's not impossible)

Using today's rate (5.375) and with 20% down, this decreases the payments by over $400 per month.

SteveF, I agree - it is the tax benefit that makes it worth while but almost as important is the fact that you are (over the long term) building equity, as opposed to rent - building nothing.

and NYC 10022 - if there were actually a 30% fall in values it would only affect the numbers if rents fell drastically as well. I do not think that we are goign to see 30% drops in rent...

lobo...glad you agree..i also factor in the principle paydown. Every month your loan balance is being reduced towards ZERO. You are increasing your wealth. When you pay rent you paying down nothing and not building any wealth.

lobo,

you think it makes sense to actually subtract the principle payments from the monthly payments? explain to me why this makes sense. you think it makes sense to include the frictional costs of renting, but not the frictional costs of owning? you think it makes sense to include no provision whatsoever for renovation or wear-and-tear maintenance? come now.

steve made up the purchase price, made up the monthly rent, and made up the monthly mortgage. then he uses a very favorable math formula, and it amazingly proves his point. i gave him real life numbers and he refuses to run them--because, obviously, they show that even using his formula the cost of owning today is far higher than the cost of renting.

excuse me, the first sentence of the second paragraph should read:

steve made up the purchase price, made up the monthly rent, and made up the monthly maintenance.

happy,
yes, just about useless.
Maybe I'm crazy but I'll buy when I find a place a like enough to live for a long time and I can comfortably afford.

Happyrenter, agree that the analysis is quite useful. However, using SteveF's approach on your example would probably also show that owning is better than renting, simply because his methodology includes leverage for the ownership scenario only (taxes help, but only to a certain extent). Theoretically, in the renting scenario, you can also borrow against your existing portfolio, reinvest borrowings and boost returns. Assuming leverage in both scenarios and real estate price appreciation (or depreciation) in line with the stock market over the long-term, your example would probably show that renting is much better. The break-even scenario would probably show that price needs to drop to get to a monthly payment much closer to the monthly rent. The ratio would also depend on assumptions regarding annual rental increases, marginal taxes, capital gains ownership advantages etc.

happy, i didn't make it up...as Casey Stengel used to say.."You can look it up"..seriously it is reality for me at least.

buster, yes but than we have to factor in some large risk assumptions with your stock portfolio leverage. Local real estate is less risky than equity investing, at least in the shorter term say 5-10 years.

stevef:

i think you need to look up the definition of reality. if it is reality just for you, it ain't reality. i gave you real life numbers to plug into your formula, and you won't do it. i disagree with your formula, clearly, but at least that would give us an accurate sense of what your formula says.

buster: i agree with you COMPLETELY about the problems with his formula, but i still think that even his formula would not make this look like a good deal, just running the numbers in my head. i could be wrong. but your analysis is exactly, 100% right.

SteveF, real estate may be less risky in the shorter term, but you can't cherry pick your 5-10 years. After all, if it's always less risky over 5 years, than it's always less risky ad infinitum.

happyrenter, don't tell the other Steve. He will eat us alive for anything that doesn't show a 1:1 ratio...

happyrenter, why wouldn't you subtract the principal paydown? It's not a "cost" of owning, it's paying down your debt. The costs of owning are interest, maintenance, taxes, insurance, and opportunity cost of downpayment. Same reason when you do an income statement for a levered company, interest is an expense, but principal paydown is not.

SteveF's $2400 studio for $500K is an example of a 17x buy/rent ratio. If he had used transaction costs for both buying and renting, or for neither, he would have gotten approximate equivalence. I don't think equivalence at 17X is crazy (I know Stevejhx would disagree), depending on maintenance, tax rate, and other assumptions.

The problem is that from what I've seen, 17x is very low compared to recent years. Most of what I've seen is 20x or more.

I am not familiar with studios, so can't opine on the reality of his example. However, I happened to see the apartment happyrenter refers to on West 62nd, and know that market reasonably well. It's a 22.5x ratio. So if you run the numbers SteveF's way, I am pretty sure it'll spit out a meaningful discount to rent.

The bigger problem is that I think that apartment for rent is overpriced by as much as $1000 (I know that rental market very well, having just completed an extensive rental search). It's beautiful, and in a great area, but is just simply small for the price. So, by extension, the asking sale price is even more aspirational. That's why it's sitting. Maybe someone will buy or rent it and prove me wrong.

I think that's the more general problem, more than the rent vs. buy math - rents are falling, and could fall a lot, putting more pressure on RE. We've had both a housing bubble and a rent bubble in NYC, driven by the credit bubble which in turn fueled wall street, hedge funds, etc. That's come to an end.

newbuyer,

i disagree with you that 17x represents a good value for buying, but i heartily agree that it is very, very hard to find anything to buy for 17x. 30x is more common than 17x from what i've seen.

these formulas are all tricky. to my mind you can't subtract out that principal repayment because, simplistically, it is a payment you have to make every month. since we are talking about owner-occupied real estate, the reason to own is to avoid renting. renting costs x per month, so the question is how much am i willing to pay to avoid having to pay x per month. that principal repayment is part of what i am going to have to pay. if i didn't have to pay it, i would have it and could put it toward rent, savings, other consumption, etc.

happy, I do not necessarily agree that it is as straightforward as just backing-out principal payments; however, as I pointed out, there is something to be said about building long-term equity. how you factor-in principal is more complicated than what SteveF has done but he is just trying to make a point.

As I noted, if you use 20% down and a more realistic interest rate you very easily shave-off another $400 per month (using SteveF's numbers. That still makes it significantly better than renting without even factoring-in principal payments or building long term equity.

about $2,200 vs $2,400 to rent.

To help SteveF prove his point, here is a listing that is almost exactly what he described. A small one bedroom with maintenance around 800 per month for $499,000. plenty of 1 bedrooms in the very same building (the exact same size) have easily rented for $2,600 per month and a few have rented for as much as $3,000.

http://www.streeteasy.com/nyc/sale/352545-coop-45-tudor-city-place-murray-hill-new-york

Percent Down: 20% minimum required
Term: 30 year
Rate: 5.375%
Down Payment: $99,800
Mortgage Amount: $399,200
Mortgage Payment: $2,235
Total Monthly Payment: $3,043
Tax benefit: aprox $800
Monthly payment after tax benefit: Around $2,200

Plus this is in an all utilities included coop. Maintenance is 50% tax deductible too.

So, i come to buy after tax benefits for $2,200 per month vs rent for $2,600 per month (in what I consider to be a very fair scenario).

I'm not trying to say that it always works out but in many cases it can.

right on lobo, makes perfect sense...thx.

I don't know why I wrote "come to buy..." .. anyhow, second to last sentence should read "So, i come to $2,200 to by vs. $2,600 to rent" ...not that it needed explaining...

happyrenter, the reason you subtract the principal is that it's a function of the mortgage type you get, not the apartment. Surely you wouldn't argue that it's more expensive to own with a 5-year mortgage (huge principal payments) than with a 30-year mortgage (small principal payments) or an interest-only mortgage (no principal payments).

If you run an LBO model (surprisingly structurally similar to buy RE with a mortgage), and play around with paying off debt as you go, vs. paying off debt when you sell, you'll be surprised that it makes very little difference to your ultimate returns. Similarly, if you assume you buy an apartment, get a mortgage, live there and sell in 10 years for the same price (since we're taking possible appreciation/depreciation out of the equation), and run your total cash flow, you'll find that how much of your mortgage you pay off along the way, vs. when you sell, makes very little difference.

As for 17x, I didn't say it was a good buy. I said it can be equivalent (i.e. makes me financially indifferent) based on a bunch of assumptions. With some other assumptions, it would be 15x, or 18x - that's why this is subjective. But never 7X, or 25X, at least based on my math, which is why I disagree with those that say the analysis is useless. It can never give you the whole answer, but can be a data point in figuring out if you're close.

lobo, if I'm reading your analysis correctly, you completely ignore the opportunity cost of the downpayment. Now, we can argue about how to properly account for it, but leaving it out seems wrong. You're comparing paying for 100% of something (renting) with paying for 80% of something (monthly costs of buying after downpayment). Hardly seems apples-to-apples.

"it is the tax benefit that makes it worth while but almost as important is the fact that you are (over the long term) building equity, as opposed to rent - building nothing."

Some people never learn.

The economic theory is thus: buying is just capitalizing rent and amortizing it over the life of the asset. Therefore, no rational human being would buy to rent out to himself a property that he could not rent out to an unrelated third party without breaking even on a cash-flow basis. If you accept accepted economic theory - the Kool-Aid drinkers here don't - then the ratio is about 12x annual rent = purchasing price, depending on maintenance, interest rates, etc.

This has been proved empirically, both as price-to-rent ratio, and the fact that rents are correlated nearly 100% to purchase prices. The "tax benefit" is precisely that - a tax benefit. It does not reduce your mortgage or interest payments; it reduces your taxes. You pay a premium to reduce your taxes, thus that effect is already discounted into the price.

If anyone wants to use their own made-up economic theories to justify unjustifiable prices, feel free. They will not affect the future behavior of the market.

newbuyer,

just because the exact monthly payment is "a function of the type of mortgage you get" (which is true) does not entitle you to simply disregard the principal payments. In fact, in a five year mortgage your interest payments will also be much higher--doesn't mean you can disregard them. a thirty year mortgage is the longest mortgage you can get, so it provides a monthly cost comparison most favorable to owning. you are not entitled to make it even more favorable by simply subtracting out a portion of the monthly cost.

i'd add something else: i do NOT take appreciation/depreciation out of the equation. it is in the equation as a risk factor. capital is at risk, so we need a potential reward to compensate for the risk. we can't simply take the risk out of the equation, we have to create an equation that compensates for the risk. this is why, in general, one should expect to pay MORE to rent than to own; renters have nothing at risk.

oh god, i knew this would happen. steveF--the expression: don't argue with a drunk or a fool...should be: don't argue with a renter, a drunk, or a fool...

That Tudor City apartment is a JOKE. It's an alcove studio, nowhere NEAR 550 square feet.

Let's give them the benefit of the doubt and round up, adding up the room sizes:

12 x 19 = 228
11 x 12 = 132

228 + 132 = 360.

So somewhere we need to find another 190 square feet, or another living room. That, or the bathroom + the closet measure 19 x 10, because there is no kitchen.

eah, what a silly comment. some people on here (stevef, you perhaps) would insist that owning made economic sense if the ratio were 50x. my grandmother grew up in the depression, and she will stick to the "renting is throwing away money" foolishness till the day she dies. she'd rather spend ten million dollars to buy a dump than fifty bucks to rent a palace. but just because some people love to own doesn't make it a viable economic theory.

i was an owner when i felt it made economic sense to own, an i'm a renter because it makes economic sense to rent. please don't tell me i'm some irrational person who can't be argued with.

The economic theory is thus: buying is just capitalizing rent and amortizing it over the life of the asset. Therefore, no rational human being would buy to rent out to himself a property that he could not rent out to an unrelated third party without breaking even on a cash-flow basis. If you accept accepted economic theory - the Kool-Aid drinkers here don't - then the ratio is about 12x annual rent = purchasing price, depending on maintenance, interest rates, etc.

stevejhx...Sorry, I can't copmment, because I don't know what the f--k you're talking about.

stevef:

let me translate stevejhx for you: why would you buy an apartment that you would have to rent out at a loss? simple as that. if it costs more to own than to rent, then rent.

happy, thx my wife often has to translate for me when my toddler babbles too.

what are you guys talking about? i gave you a current rent vs buy(primary residence) scenario monthly costs breakdown.

well we obviously disagree with either your numbers or your formula or, in my case, both your numbers AND your formula. i gave you some numbers to plug in and you refused, which makes me even more skeptical.

happyrenter...i am offering my opinion and have a healthy respect for the fact that i am often wrong. my experience with renters is that they have a reverse snobbery and/or a chip on their shoulder. personally, as far as I am concerned, rent forever. it makes no difference to me whether one rents or owns. in fact, i often tell some of me renters to buy because they have have long outgrown the property the rent from me. but, either out of comfort or whatever, they often don't. i find renters to be defensive and i can only assume it's because they feel something off about their decision. my only comparison is people who dont go to or drop out of college. of course, some of our greatest success stories are people who dropped out of Harvard, but the vast majoprity of mortals need college to get to where they want to be in life. if you're the renter who plays the markets well, good for you. but more than likely, most renters spend/save as much as owners but miss all the booms and benefits of owning. quite simply, it is sad to not be able to renovate because someone else owns your joint. is one really satisfied with not controlling something as basic as their environment?

There goes stevejhx, with his incorrect price-rent analysis and failure to understand the mortgage deduction. The guy just never learns.

eah,

aren't you a real estate investor? if you invest in rental properties, i would expect you to understand the product you are offering people, and why they want it. yeah, when you own you can renovate to your liking (and spend a shit load of money you will never see again). when you rent, someone else has to pay to replace your refrigerator. when you own, you can stay where you are forever. when you rent, you can move when you want to without worrying about market conditions. there are lifestyle advantages to both. you should realize this given that you actually own rental properties!

as to this comparison with people who dropped out of college or something, i don't get it at all. i graduated from college--from harvard, in fact! going to harvard just means i did well in high school. who cares? looking down on people because they didn't go to college or went to a bad college or dropped out of college is just as pathetic as looking down on people because they rent or own.

well we obviously disagree with either your numbers or your formula or, in my case, both your numbers AND your formula. i gave you some numbers to plug in and you refused, which makes me even more skeptical.

happy what formula?? There is no formula..it's this minus this plus that(see above)

LIC,

some of you guys are going to be clinging to that sainted deduction till you get taken out of your rapidly-depreciating apartments in caskets. a tax deduction cannot magically transform an asset declining in value into a good investment.

this minus this plus that....is the formula, no?

Merging my comments from another thread here, since this is more appropriate.

"let me translate stevejhx for you: why would you buy an apartment that you would have to rent out at a loss?"

You pay income tax on rent you collect from others. You don't pay any tax on rent you collect "from yourself".

Heres my math that I calculated earlier:

Here's a rough 20x support: Rental costs $1/year, purchase costs $20, annual maintenance $0.40 (scale up figures appropriately, of course). $4 down payment, $16 mortgage, at 6% (I never unsubscribed from Manhattan Mortgage's daily rate emails, and thats roughly what they quote for an agency-conforming coop loan, up to about 700k loan value I think).

Annual interest on that $16 is $0.96. Lets say half the maintenance is tax deductible, for a total annual tax deduction of $1.16. At roughly 40% marginal taxes (federal and local), that's really only $0.696/year out of pocket. Ignore principal payments as that all adds to equity. Add in the $0.20 maintenance that's not deductible, you're at $0.896/year. Add in the opportunity cost of the down payment - I personally use 8%, taxed at 25% (15% federal cap gains, 10% local) and you get $0.24 opportunity cost, for a total cost of $1.136. 13% more than renting. Keep in mind my opportunity cost is probably on the higher end of what others use.

Bring the ratio down to 18x, and you're doing just fine.

As for people who say 18x is unrealistic, and the market has 30x: I think any property at 30x rent is grossly overpriced, and will drop down almost 50%. However, it isn't *that* hard to find 18x out there now. Or even 6 months ago.

"a tax deduction cannot magically transform an asset declining in value into a good investment."

That's circular logic. A prediction of a decline in value can't be used to explain that buy vs. rent math doesn't work, if the buy vs. rent math is the reason you believe the decline will happen in the first place.

"As for people who say 18x is unrealistic, and the market has 30x: I think any property at 30x rent is grossly overpriced, and will drop down almost 50%. However, it isn't *that* hard to find 18x out there now. Or even 6 months ago."

But with rents declining, its a moving target...

techguy, you have jumped threads! do you not feel the need to be compensated for putting your capital at risk? i mean, you justify ignoring principal repayment because it "adds to equity." but clearly right now most people are seeing their equity diminish due to falling prices. not a factor in your calculation?

excluding principal payments and only compensating for 'opportunity cost' but not capital risk is the huge and obvious flaw in this formula. even with this huge flaw, you have demonstrated that 20x is NOT economically viable--in this case by 13%. Indeed, even with this flaw 18x would not quite be viable. 17% would get you to break even under your formula, only by subtracting out principal repayment and providing no compensation for putting capital at risk. Correct those flaws and you get close to....wow, 12x!

happyrenter, why is the interest on a 5-year mortgage higher? Interest is interest.

Let me try it another way - I think it was you that called renting consumption of housing. So a fair comparison would include all the costs to consume, on both sides. In other words, the stuff that the naysayers would For renting, it's simple - rent. For owning, it's interest, opportunity cost of downpayment, maintenance, taxes, etc. It's NOT principal repayment, because you're not repaying principal in order to consume, you're doing it to reduce your debt, which will all even out when you sell.

Anyway, read the rest of my post, try the example with the LBO model (or house) and just think about this. Let me give an even more extreme example - if you choose to prepay more of your mortgage in a given month, that doesn't make your monthly "cost" to own more, does it?

As for capital at risk, I agree with you, but I account for it by assigning some opportunity cost to the downpayment.

I view rent vs. buy as a 3-part decision. 1) What is "cheaper" right now? 2) What are my thoughts about the appreciation potential and depreciation risk over my time horizon and 3) the non-financial factors. I try to evaluate each of them separately, rather than mixing and getting confused.

nyc10022: the best numbers I've seen for rental declines is 5%. Can you link anything showing more severe downturns?

If rents go down 20%, property prices absolutely will follow down. That's my biggest worry.

Whether he's using circular logic in his argument or not...An estimation of the decline in value of your asset should totally be factored into the buy vs. rent math. Entry point is vital for owning any asset - stock, bond, home.

Think of it this way, in more normal times you factor in the appreciation of your home vs. the rise of rent due to inflation.

"If you accept accepted economic theory"

A pretty funny phrase there, stevejhx. This is the crux of why your theories and formulas don't always satisfy. Markets are never perfect, which you obviously know, so it seems a bit foolish to try to fit them into these neat and tidy formulas. Nothing "must" drop x% - it might, but there is really no way to predict the impact externalities and future policies/decisions will have on the market here. I figure you would have learned that from what happened with Lehman Brothers, but you seem fixated on pinning the whole thing on Paulson.

To get back to the real point here, newbuyer99's got, IMHO, the far more rational approach to using the rent-buy math. It's a rough data point to compare properties. Use it, but don't let it dictate your thought-process.

happy renter, as I said..it doesn't matter to me if people rent or own. i am saying i have observed a renter psychology that is kind of uniform...best described as somewhat defensive. that's great you went to harvard. see, a renter might argue..why spend so much on harvard when you can get the same education at SUNY or Rutgers or whatever state you're from. clearly, you chose Harvard for some reason and felt it offered some hard to describe advantage. that's, i think, what owners feel. we're not sure why but we're certain owning offers something way more than renting.

newbuyer,

why would there be an opprtunity cost for the downpayment but not for the repayment of principal? either way you lose access to the money. what i meant to say for a 5 year mortgage was that interest payments would be lower--obviously, because its a far less risky loan. my point being that interest payments are just as much a function of the type of mortgage as principal payments.

when i bought an apartment in new york city in 2003 it was approximately 12x renting an equivalent apartment. rents subsequently increased, but sale prices increased a lot more, forming a bubble. no reason, IMHO, that we should not see 12x again. Since rents are also declining....do the math. apartment prices are going down a long, long way.

I'm guessing you got out since you are now a happy renter and not a sad renter. When did you sell?

lol eah, ok. enough. anyone who makes a "we're not sure why...but we know" argument can't be argued with. if you aren't sure why, you might want to go figure it out. if you "know" something, but have no reason, what exactly is the value of your so-called knowledge?

happyrenter: First, 8% opportunity cost includes quite a bit of capital risk. If I was ignoring the possibility of capital risk, I'd have to ignore it in opportunity cost as well, and use treasury returns. Rerun the calculation at 2.3% (or whatever 10 year or 30 year treasuries are at) and see how much capital risk is there.

The stock market is pretty damn risky too.

"even with this huge flaw, you have demonstrated that 20x is NOT economically viable--in this case by 13%. Indeed, even with this flaw 18x would not quite be viable. 17% would get you to break even under your formula"

You'll note that I said 18x was break-even. I used 20x in the formula because it made sense in the original context. Are we really quibbling between 18x and 17x? Hardly seems worth either our times.

"do you not feel the need to be compensated for putting your capital at risk?"

happyrenter, I agree with this. What is the right risk factor? Wouldn't the risk factor depend on the term of ownership?

"why would there be an opprtunity cost for the downpayment but not for the repayment of principal?"

There would be, but that's much harder to calculate (and a much smaller factor). If we're debating between prices holding steady vs. a 50% drop in value, the opportunity cost of the repaid principal is not where our disconnect is.

"Think of it this way, in more normal times you factor in the appreciation of your home vs. the rise of rent due to inflation."

If the math didn't show buying being significantly cheaper than renting if prices remain flat, I wouldn't expect any appreciation above inflation. I would be equally critical of anyone who used future expectations of appreciation to justify why today's rent vs. buy math strongly favored buying.

yeah, when you own you can renovate to your liking (and spend a shit load of money you will never see again). <--when I renovate it's for me, my spouse, and my children..not for some unknown buyer in the distant future. a renter is consigned to a space and told what to pay for it. they control little. i can't see a successful man or woman not resenting that. yes, as a landlord, i do have to replace a refrig./stove/whatever breaks but, it put in whatever i want. i can cheap out if i hate the tenant. i can torture tenants throug my property manager. sure, the one off will file a complaint but they rarely do. they find a new place to live, pay in most cases a broker fee and pay higher rent for the same space. there is the odd market where they do better..but they rarely do, because there is this inertia that sets in. again, this is not in all cases, but most of my feelings about renters comes from my tenants who just look for the next tail and follow it. anyway. whatever, in the end we all end up dead whether we rent or own, so..does it truly matter?

happy renter...i accept your concession. :) rent on, my friend!

tech_guy, I would use the prevailing rates on long-term CDs as your opportunity cost and not treasuries (or stocks). You can get 10-year FDIC insured CD for 5.25%.

"nyc10022: the best numbers I've seen for rental declines is 5%. Can you link anything showing more severe downturns?"

Observer had 8%...

"If rents go down 20%, property prices absolutely will follow down. That's my biggest worry."

Property prices are already down 20%. Whatever rents go down, prices will go down significantly more, to make up for the ratio gap and because we'll overcorrect when the fear hits...

jgr: That's fine. I said my opportunity cost is significantly higher than most. A lower opportunity cost means a higher ratio is supported. happyrenter, however, claims 10% stock market gains. Which is entirely possible, but involves quite a bit more risk. Capital risk shouldn't be his argument against real estate.

nyc10022: Link supporting either value?

just as an aside happy renter...where did i say i look down on people who dropped out of college? i said there is an odd exception where people drop out of college and end up the most successful people in the room. but, for the average being college is the entry fee. your defensive mentaility leapt to some conclusion that i look down on people who didn't go to college. back to that chip on shoulder renter mentality.

Nice to see that LICC appears to be commenting on his alter ego tech_guy's posts. I don't read either of them.

JM, good question. There is also a benefit to buying, which is the hedge against increased rents. But rents can't increase faster than incomes, so it's not a significant premium. I remember having a risk-free premium argument with you. Nothing is risk-free, not even treasuries, as we may have seen today.

"Markets are never perfect, which you obviously know, so it seems a bit foolish to try to fit them into these neat and tidy formulas."

Not in the short-term, but barring distortions (which can be significant) over the long-term they are extremely efficient.

"Nothing "must" drop"

You need to read what "must" means. It has many definitions. You're misinterpreting me.

"Wait--why do you subtract the "principal paydown" from the monthly cost? that makes no sense to me at all. you think it makes sense to actually subtract the principle payments from the monthly payments? explain to me why this makes sense."

Ok, let me explain:
When you pay down your principal, you debit your cash account and reduce your liability by the same amount. Your net worth remains the same. So it's not an expense.
When you pay rent, your cash position decreases and and your net worth goes down. That's an expense.

Make sense? No?

eah,

i bought an apartment when i was 22 years old in 2003, and i sold it last year because the cost of ownership had become unjustifiable. now i rent a nicer apartment pay half per month what the guy who bought my apartment pays. believe me, no chip on my shoulder :).

i love that you explain the value of owning v renting because "i can torture tenants throug my property manager. sure, the one off will file a complaint but they rarely do." you actually "torture" people who live in your apartments, and then you judge them based on how they react? can you not see the insanity of this? how about i judge you for wanting to TORTURE people. personally, i leave torture out of the equation.

my concession, i take it, was the fact that i went for two hours without responding to you on an anonymous message board--ie, that i have a life?

eah, as i said, i can't argue with a person who says things like "whatever, in the end we all end up dead whether we rent or own, so..does it truly matter?" if it doesn't matter, then why are you arguing? yes, in the end we will be dead whether we rent, own, murder people, molest children, jump off bridges, write sonatas, or stare at walls. if you actually believe that nothing you do means anything, then you might reconsider arguing about it.

as for renting away...i will rent away until such time as i decide it makes sense to own. a friend and i are probably going to buy a beach house this winter--the second home market is quite depressed in some places, not yet in the hamptons but i prefer fire island (the family part, not the wild sex part).

"why do you subtract the "principal paydown" from the monthly cost"

You need to do that b/c if you look at your purchase as an amortized rental, you can't deduct principal payments from the cost of renting the unit.

hvd:

here's the problem: if your house declines in value, you still have to make a principal payment every month. if it rises in value, you still have to make a principal payment every month. if you run out of cash, you have to commit an armed robbery to get the money to make a principal payment each month. it is silly to say that it is simply moving cash around and keeping your net worth the same, when the fact is you have to pay out cash.

happyrenter: When you sell in 10 years, you get the principal payment back. Clearly that should be accounted for in the buy vs. rent math, no?

"nyc10022: Link supporting either value?

Type "observer" into that box to the right there..

"here's the problem: if your house declines in value, you still have to make a principal payment every month. if it rises in value, you still have to make a principal payment every month. if you run out of cash, you have to commit an armed robbery to get the money to make a principal payment each month. it is silly to say that it is simply moving cash around and keeping your net worth the same, when the fact is you have to pay out cash."

The contractual nature of a payment does not determine whether it's any expense. When a corporation's bond matures, is the par payment a massive expense that will bring down earnings for the quarter?

If the $1k I shell out to pay down my debt were an expense, how do you describe the benefit that no one can later claim that $1k against my assets. I guess it'a $1k income?

Do you think interest only loans are always much better deals than amortizing loans because the "monthly expenses" are so much lower?

Here is some serious advice: Hit the accounting books for a few days. You will need it in the investment world. I know Harvard does not offer accounting to undergraduates (guess how I know, and based on what you posted I don't think you bothered to do that cross registration thing at MIT.

"You need to do that b/c if you look at your purchase as an amortized rental, you can't deduct principal payments from the cost of renting the unit."

No, I don't look at my purchase as an amortized rental. I don't look at my car as amortized cab rides either. Maybe that's just me.

actually, hvd, when a corporation has to pay down its debt it often runs into major problems--have you been paying attention for the last six months? this is not a question of accounting, as i certainly know very well how to read a balance sheet. in the real world, yes, when debt comes due it often causes major problems. there are many ways to calculate the relative costs of owning verses buying. personally, i prefer the tried-and-true discounted cash flow method. but if you want to compare monthly cost to monthly cost, you absolutely have to include principal payments--if you don't you will convince yourself (as, quite obviously, many people did in this real estate bubble) that you can afford a much more expensive home than you actually can. just like a corporation, you can't take out a huge loan and not consider how you are going to pay it back.

tech_guy,

you do NOT get the principal payment back when you sell your home, no. the principal payment is gone forever and isn't coming back. when you sell your home you get some number that is NOT GUARANTEED BY YOUR PRINCIPAL PAYMENTS. This is made plain by the current real estate depreciation. Principal payments reduce your debt obligation, that is true, but then, since we are comparing to the option of renting, you were never required to take on debt at all. that is, if you rent, you do not have a debt obligation. nor would you have a debt obligation if you paid cash for your home.

let's put it this way: one would never pay all cash for a home and say "well, i'll get all of that back when i sell it." no: you will presumably get some amount of money when you sell your home, but that amount is not determined by the purchase price. likewise, amortizing that purchase price over many years does nothing to guarantee that your principal payments will be returned to you.

LICC - there was a time that the gross carrying charges of a NYC coop (mortgage + maint) was about par to market rents. In those days, if you subtracted your tax savings from the mortgage interest + RE taxes deductions from what you paid, you could argue that you were paying LESS to own than to rent. It is a different matter entirely to subtract your income tax savings from your cash housing outlay in order to feel that your "net" rent is about equal to market rents.

I have no opinion on the existence of an immutable law of economics which reads RE purchases strictly as a function of market rent, because I think that is tunnel vision, but you are going around in circles with steve by debating how much money one saves on taxes, marginal rates, effective rates, lost opportunity, etc., etc. If it works for you to buy instead of rent, then it works.

Why is everyone still arguing principal payments. I just gave an example of an apartment (a real listing) that is cheaper to buy than to rent. Excluding principal payments. And as you have noted happyrenter, you get "something" back when you sell it - that's more than you get back when you rent. Granted, you may need to hold it for 10 years.

And Stevejhx, call the apartment whatever you want (joke) - it's still an active listing in the price range that SteveF was quoting. The only reason that I picked it. I'm not saying that you have to live there, just trying to prove that you can buy for less than it costs to rent...p.s. - it is easily 500 square feet. This is the standard size tudor city one bedroom. The studios are about 300 square feet.

I'm not sure how you back out the tax savings but I am happy to try it with another apartment.

p.s. stevejhx - SteveF was claiming a studio in his example so even if mine is small it is comparable to what he was talking about.

Either way, need a bigger apartment: http://www.streeteasy.com/nyc/sale/347637-coop-505-east-79th-street-yorkville-new-york

same shit.

steve, include the nys+nyc taxes on transfers and on the mortgage origination. around 4% both ways.

also forgot the 8% on the downpayment, $4,000 per year (almost 2 rents)

I like Lobo's example at tudor city. But I think Lobo. you and SteveF also need to include the real costs of buying and all the upfront costs of ownership including transfer taxes. recording fees, lawyers, title insurance, (mortgage taxes if it is a condo) etc which can approach 4-5% of the purchase price. These are upfornt out of pocket expenses and very real. And of course there is the very real 6% commission and transfer taxes etc on the way out. And lobo you neglected the income produced from the down payment on the rent side.

On the other hand, and I really hate to say it because he needs no encouragement, but the more interesting point is that your example proves stevejhx's point on rent versus buy multiples. If those units can rent for $3000 as you say then the multiple is 499000/3000/12 = 13.8. And that assumes they can get full offer for that unit. And OMG if that unit traded for 10% less than the ask the mutliple
is 449,100/12/3000 = 12.48. 12X???? say it ain't so!

I'm not sure why this is so difficult. Let's pick some real life examples. Find someone you know who purchased an apartment exactly 10 years ago, paid the interest on the mortgage, didn't invest the down payment in the market, and sold this year. Compare that to someone who was in a similar job, say 2 Goldman Sachs investment bankers or choose two teachers, and the second person rented an apartment, invested money in the stock market and paid annual rent.

Who did better?