Buy Vs Rent
A very difficult decision for most New Yorkers, especially given the variety of factors involved. There will always be a lot of speculation surrounding the NYC real estate market, making it even more difficult to decide between renting and buying.
Is my interest rate too high? Are my common charges or maintenance outside of my means? What if my property loses value? These are all questions you will be able to answer with the help of our analysis and research.
Market: NYC Upper West Side (Nearest Intersection 86th and Broadway)
Type: 2 Bedroom / 1 Bathroom, Elevator, No Doorman, Minimal Amenities
Purchase: $900,000 ; Coop Maintenance $1000, 50% deductible
Down Payment: 20% ($180,000)
Interest Rate: 5.125% (30 Year Fixed; Major Bank)
Time Frame: 5 Years
Benefits of Renting
Flexibility and mobility, but at what cost? Money paid for rent is money you cannot get back in the future. We will refer to this as “lost” money. It is strictly an expense, contrary to a mortgage payment which we will discuss below. Renting does allow you to easily move every 12 months in most cases. It also reduces your liability should you have an issue with the property you are renting. For example, say an appliances breaks from old age, the owner or landlord is responsible for replacing this as long as it was not purposely broken by you as the tenant.
Benefits of Home Ownership
Granted you do not have the flexibility and mobility as renting, but you are now living in and utilizing your investment. The “lost” money we referred to above is now your mortgage interest, closing costs, and coop maintenance (or condo common charges and taxes). Below we will break down your monthly payment during home ownership to determine whether you are better off renting or buying. There are a number of factors at hand here such as interest rate, down payment size, purchase price, and common charges / maintenance; so we took a look at one of the most common price points for purchasing over the past few years.
The figure to the right breaks down the “lost” money from a $900,000 purchase in NYC. The money you will not get back after 5 years of ownership is just above $250,000.
This may seem high at first, but let’s break down the rent paid over the same 5 year period for a like kind apartment.
$4500 x 12 months x 5 years = $270,000
The savings of buying when compared to renting are almost $20,000 spread across 5 years. We understand that $4,000 a year might not be worth making such a large purchase, but this is assuming a 0% return on the property (actually a net loss when factoring in fees and taxes). Let’s look further into this taking into consideration various returns on investment for the purchased property.
ROI: Return on Investment; Sale Price: Gross Proceeds
Cash Return: Gross Profit or Loss
5 Yr True Cost: “Lost” Money over 5 years of property ownership. ($250,000 +/- Cash Return)
Rent Equivalent: 5 Yr True Cost converted to monthly rent assuming 5 years of tenancy
Monthly Savings: Actual Rent ($4500) +/- Rent Equivalent
Is It Worth the Money to Buy?
The big question at the end of the day.. is it worth the money to buy? The correct answer is not yes or no. It depends on the projected return on the property, and also the buyer’s opportunity cost.
Let’s look at the money saved assuming a 0% ROI; about $20,000. Keep in mind the buyer is still taking on the risk that the property could lose value. It depends on the buyer, but is $5,000 a year worth taking on this risk? Or does it make more sense to continue to rent.
Now let’s look at a 10% return on the property. Your savings are now over $90,000. Drastically different than the previously estimated $20,000 in savings. To most people almost $20,000 a year would be worth making the decision to purchase. In a perfect market, we can look at a 10% loss as the risk here (although in practice the risk of course would be more depending on the market). A 10% loss would mean the buyer did not save more money than if they rented, they now “lost” about $70,000 more than if they just rented for 5 years.
Here is where the quick and simple math comes in:
A 10% loss adds on $70,000 in “lost” money when compared to renting over the same period
A 10% gain increases the savings by over $90,000
*Keep in mind a 0% return still increases savings by $5,000*
In theory, the risk:reward is about 1.3x so from an investment or risk perspective it makes more sense to buy in this situation. If interest rates were to increase closer to 6%, it might be a different story and if rates were to drop below 5% the benefits would be magnified.
At the end of the day, given where the NYC market is at right now, it does make more sense to buy than to rent. The market is currently at lows. Could it continue to drop? Yes. Could it drop another 5-10%? Of course, but with the market coming down for the past 6-12 months there is less downside risk than there was when the market was at its peak.