Crunching The Numbers: BUY or RENT?
A: I was asked by readers to provide more detail on this so here it is. For those of you who have been reading my blog for some time, you know that I owned a condo at Astor Terrace which is located at 245 East 93rd Street, which I sold 4 months ago. By the way, Astor Terrace is a great building to live in! Now that I am no longer a homeowner, I discussed with you my thoughts on whether I should buy now or rent and wait a few years to buy later. Besides the slowing housing market, there were a few factors that convinced me that renting was the short term decision for me. Here is how I crunched the #'s to come to my decision.
NOTE: Buying and selling real estate is a wonderful investment if understood properly. The tax benefits and track record of long term appreciation in housing prices generally combine to make homeowners very happy when they decide to finally sell. However, you can screw up in real estate! Just look at that guy at Iamfacingforeclosure.com. Always remember that your personal situation combined with transaction fees with buying and selling can equate to a BAD INVESTMENT! Read this post carefully to understand how.
Before going into the number crunching starting with the monies I have leftover from the sale of my condo minus personal debts, credit debts, wedding costs, honeymoon costs, moving costs, etc., it is very important to understand the factors that might influence my decision to buy or rent. These factors include:
HOUSING SLOWING
With the housing market slowing down I must take into account whether future short or medium term appreciation in price will offset transaction fees that go with buying and selling real estate. One should always assume aproximately 4.5% of purchase price in fees on the buy side and aproximately 7-8% of purchase price in fees on the sell side.
Will the profit on your deal cover these costs or will you take a loss?
Plus, all I know is that housing is currently slowing. When the bottom will hit and realizing I missed it is entirely a different story; but one I am focusing intensely on. I just want to get close and I know that NYC bust cycles are fairly short so my eyes are tuned in.
TIMELINE TO OWN
Now that I'm married I honestly don't know when we might decide to start a family. And that means changes in everything! Will I need a bigger apartment? Will we move to suburbs? I certainly don't know. But I'm honest enough to convince myself that these are very real possibilities and as such I really don't know where I might be in 2 years.
So, my timeline to own as of right now is about 2 years.
JOB SECURITY
Ha! Yea right. Not for me! I'm considered an independent contractor and my company makes sure that I fully understand this! Being self-employed means minimal job security unless you are savvy enough to have built up a very reputable and sustainable business for yourself via personal refferals and such, making your job much more secure.
But for me, I'm still building my business and trying to prove myself to new clients. Because of this, I still have some growing pains ahead of me before I feel secure in estimating future years salary! While being self-employed is great in many ways, you must be able to manage your time wisely for it to work. I always use caution making big investments and buying a new home is certainly a big investment!
The combination of a slowing housing market, 2 years timeline to own, plus minimal job security all convince me that I should at the very least EXERCISE EXTREME CAUTION when making the decision whether to BUY or RENT! Now on to the #'s.
Before I signed a 1-Year lease to rent at 160 E 84th street, I looked over similar apartments in this neighborhood that would be a good guinea pig for this anaylsis. I eventually found an apartment at The Plymouth House, a co-op located at 235 East 87th street, which is very similar to where I am renting. Both units are 900 sft, JR4 layouts, 1BR/1BTH, Full-Time doorman, and in the same general neighborhood. Here's some details on 235 East 87th:
APT 7D
Price: $669,000 (Reduced from $695,000)
Size: 900 SFT
maintenance: $1,251
PPSF: $743
**VERY IMPORTANT TO NOTE**: I did NOT include tax write-offs in this anaylsis because I work 100% from home as a virtual agent and as such I write off a portion of my rent as a business expense. This makes the tax write-offs for buying vs. renting pretty much a wash. If anything it skews the #'s slightly in favor of the buy side. Also, I am assuming in the calculations that my income will cover my housing costs and as such will allow my interest income earned to be stable as that money sits in a 5% online savings account for 2 years (you can get better but for sake of this anaylsis its fine). Finally, I assumed a $625,000 purchase price for APT 7D at 235 E 87th, and for sake of this anaylsis, assumed a sales price two years from now of $675,000; a profit of $50,000 which I think is pretty comforting given market conditions and no major work done on the unit.
A snapshot of the anaylsis (LINK TO DOWNLOAD if you want to look into the formula's I used for calculations):
CONCLUSIONS: Because of my 2 YR timeline, insecurity with my job and future salary, and transaction fees to buy and then sell again it makes sense to rent for now rather then to buy. If I did buy a comparable unit to the rental I just signed a lease for, and it appreciated 3% a year for the next 2 years, I still would have about $56,000 LESS MONEY when all is set and done.
Now, with this type of anaylsis time plays a very important role. If I were to chart the rent vs buy anaylsis, at some point they would meet; making buying the better decision. This is due to the combination of more price appreciation in the home, more equity paid off, and the growing benefits of tax write-offs.
This is my anaylsis FOR ME! Not for you! If you are looking to buy because you saved up for the past 5 years and your rent is rising and you know you will be living there for 5+ years, than obviously the #'s change significantly! Plus, most people do NOT work from home negating the tax write-off I use for my rental costs! That means that buying has tax benefits and renting does not, so keep these things in mind! If you would like me to go over your own situation with no strings attached, give me an email or simply change the #'s around in the XLS file link that is provided above to match your own situation.
Maybe in the future I can whip up a java program that does this anaysis automatically.
THOUGHTS? DID I MAKE THE RIGHT CALL? WHAT WOULD YOU DO? DID I MISS SOMETHING?
Posted by voracious reader
Fri Nov 3rd, 2006 01:28 PM
Why did you choose NOT to include the tax write off in the "buying" catagory? While I'm not an accountant, I'd assume the tax right off would be a significant amount of money. Likewise, many buildings do not have a flip tax so why chose one that has? If one chooses a building without a flip tax, then it would appear to me that in a "flat" market, there would be no difference between renting or buying for 2 years in the catagory you highlighted. While none of us have a crystal ball about where the market is heading in the next two years, since you have to live somewhere, I would take the 67% risk that you would break even or make money owning a roof over your head, rather than take the 33% chance you will lose money while paying someone elses mortage.
Posted by Noah
Fri Nov 3rd, 2006 03:13 PM
Voracious Reader - thanks for the comment.
For my anaylsis, I left out tax write offs because I am writing off a portion of my rent as a business expense; I work as a virtual agent from home full time and my internet, cell phone, and phone bill are all write-offs for my business. Including 20% of my rental expenses. So, $580/mth or so.
That fact made me think to leave out the homeowner tax benefits for my calculations as to get more accurate data for observation. If I'm wrong in this thinking please tell me why/how. I noted all this in the post.
Not sure about flip-tax in this co-op, but if I bought a condo, it would have been MORE expensive as real property closing costs on the buy side will have been closer to $26K, NOT $8K. So, items like flip-tax vary greatly and really won't make any significant change from the #'s I used. What are we talking about here at most? $10K for a 1BR's flip tax? #'s still favor renting.
You say in a flat market, well for this anaylsis I assumed a rising market and gave the property a $50K increase in value in the 2 years. Pretty positive thinking I would say and the numbers still dont work. What if it doesn't increase by $50K?
Plus, this is for my situation. If I knew I would NOT be moving for 5+ years, perhaps the numbers will change; as I noted. But for me, I used a 2 YR timeline.
I dont like paying someone else's mortgage, but I also understand that buying/selling involves high costs. Hence the anaylsis.
Posted by Jeffrey
Fri Nov 3rd, 2006 04:50 PM
What about the possible maintenance costs in the apartment (rather than the building maintenance)? What if the fridge dies? Or the boiler? Obviously these are not definitely costs, but they are certainly potential costs that would be involved with buying but not renting.
Posted by Noah
Fri Nov 3rd, 2006 07:11 PM
good point. Chances are most people will replace the entire kitchen or perhaps more renovations to the unit.
But if they do, they will also get some of that money back in resale value; especially if they spend $20K+ on a small kitchen and $15+K on a bathroom. I'm also assuming that the buyer prices in this needed work when subtmiting a bid.
More unknowns I'm thinking of:
1. Maintenence Increases?
2. Property Tax Increases?
both of which make the property more expensive to live in and restric affordability come resale..
Posted by George
Sat Nov 4th, 2006 01:18 AM
I think another factor that should at least be broached is the Alternative Minimum Tax. I won't get into the current administration's failure to address its encroachment upon the middle class, but given that NYC homeowners will generally earn a high income and are likely to itemize their deductions, the effect of AMT becomes decidedly relevant. Unfortunately this will continue to be something of an x-factor until Congress/President addresses this for the long term. The short-term extensions do nothing but put off trouble, expose a greater number of individuals to the possibility of being subject to AMT, and cause a great deal of shock to many come April.
Posted by drtomaso
Sat Nov 4th, 2006 11:20 AM
You might want to check out http://www.sheynkmania.com/housemath/
It has the most thorough and well documented rent vs buy calculator I have ever seen. One nice feature is it breaks down the cost of owning over a period of time into a 'equivalent starting rent', that if you had chosen to rent at that rate, over the time frame, would have put you in the same financial state as purchasing.
One of your posters lead me to think of the risks that arent captured in these kinds of calculations: what if the AMT tax bites you? What if the repub congress, as they have discussed, repeals or dramatically lowers the mortgage interest deduction? What if, contrary to popular belief, we are actually on the cusp of a Japan style depreciation in housing prices?
I am not saying that any of this is in fact happening- we wont know til afterward anyway- but one has to admit that the *risk* of this has never been higher.
Given that prices are not rising (yes, some property types and neighborhoods are, but lets admit reality- they will feel the pinch eventually), the interested buyer is safe in taking his/her time, doing it right, and ignoring those NAR ads.
Speaking of the NAR ads- have you seen them? Ridiculous! When has it ever been a good time to buy or sell something, simultaneously? Answer: never, unless you make a commission on the transactions!
Posted by didi
Thu Dec 7th, 2006 01:41 PM
Would like to know what is the percentage of Condos charging a Flip Tax in New York city and how is implemented
thanks.
Posted by Mbt
Thu Jun 3rd, 2010 01:55 AM
I think another reason fees are not being paid and free months not offered is that prices have come down. Apartments are moving but part of the reason is that prices came down to a point at which they will move.
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