Should I Try to Buy or Just Keep Renting?
Ah, Monopoly. The best metaphor for life. It’s all fun and games until one person slowly gains control of the majority of properties on the board and begins the savage, slow, agonizing, friendship-obliterating operation of grinding out other players, one-by-one, until the night has dissolved into a cesspool of despair. Fast forward 20 years and instead of vying over Park Place, we’re playing the game Slumlord, the government is bailing us out of our Monopoly Crisis, and we’re borrowing our neighbors’ colorful money because ~50 board games would suffice to accrue the necessary funds to stay afloat for a few days in this fair city.
A lot of us feel like we’re on a yearly trajectory around a board game, Passing Go when we pay our hefty rent every month but not collecting an extra $200 on the flip side. If anyone understands how daunting it is to purchase in this city, it’s yours truly; I personally see how this cycle seems like it will propagate into eternity. And we don’t even have a cool game piece to pass the time by. I’m always the thimble; it’s unassuming until people realize you’re an impenetrable killer. You can also stick your pinkie in it and have an instant claw. The iron is a worthless token that should only be used by domestic servants and children who don’t know any better. But for this conversation, we’re making you the cannon, because when others land on the same square as you, you can destroy them with it. Its maritime companion, the battleship, is essentially a glorified wedge of cheese, so we’re sticking on land.
So we’re going to discuss (high level because this is an involved and individualized conversation) what things you should start to mull over if you’re thinking about stopping the leasing orbit and instead, sinking your teeth into homeownership.
^ What most people think the step from renter to homeowner looks like
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For a few refreshers before we dive in, we’ve covered the high level differences between Condos and Co-ops, gone over the sparkly and dazzling New Developments, and we’ve talked extensively about liquidity and requirements you need to buy a co-op in New York City (the lesser expensive and more prevalent home structure), which will in turn qualify you for almost any home structure.
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The general argument in favor of home-ownership can be quite compelling, especially for individuals who are looking to own for at least five to seven years. Conventional wisdom will tell you that should you plan to live in your home for 50 years, it makes sense to purchase. On the other side of things, if you plan to stay in an apartment for only 12 months, then it probably is in your best interest to keep renting. That gray area in between gets so much dicier in a market like New York, where it’s direly expensive and equally as competitive.
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With a mortgage on a property you own, you’re coughing up a good chunk of change for interest, however it is essentially a forced savings plan and affords you the opportunity to build solid equity (you’ll be thankful for that at retirement) – both positive behaviors. In a city like New York, where rising rents are unpredictable and seemingly ceiling-less, traditional mortgage payments remain constant. In a study by the Harvard Joint Center for Housing Studies , it was found that during and even after the housing crash of 2008, the median household who bought a home after 1999 still accrued significant amounts of wealth through 2013. The same cannot be said about the stock markets at that time.
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Theoretically, the proof for purchasing is in the pudding. However after crunching numbers and trying to make it work from a financial standpoint, the story can change drastically . Thankfully, the New York Times made this nifty little calculator that lets you punch in renting costs versus purchasing costs to figure out what is the most effective use of your finances over a particular timeline. This calculator definitely doesn’t cover everything, but it gives you a solid starting benchmark to work with.
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So let’s just say you’re looking at a $1.5 million dollar apartment. If you put 20% down (as is standard for most Condos and Co-ops), your mortgage would be $1,000,000. If your interest is 3.6% over a 30-year-fix, your mortgage payments will be around $5,500. Common charges on a unit like that would be around $2,000 a month, then tack on insurance and electricity. So at the end of the day your monthly payments are around $8,000 a month, paid out of pocket. On the flip side, you could spend $8,000 a month in rent and probably get a better home. BUT here’s where the snag comes into play: 50-60% of your mortgage payment is going towards the principal, so you would be building equity. Out of pocket, this end up being $4,600 as the cost of owning in New York. Now if you consider that over the years, the average appreciation of a property exceeds the cost, this is where the games begin.
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Now this scenario makes the most sense for someone who is looking to spend ~4+ years in a spot. It’s called the Tipping Point, which is approximately the number of years it would take for the costs of owning a home to equal the costs of renting a comparable one in the same area. To be exact, the Tipping Point in New York averages at 4.9 years, which varies quite drastically across boroughs and neighborhoods. Tipping Points can fluctuate with mortgage rates, home prices and how the rental market is doing. Neighborhoods with high home purchase prices relative to rental prices tent to have longer tipping points. When it comes to a decision to buy, it’s more so a choice between investing in an appreciating asset (a home) or putting your money in other high-yielding investments. On an individual level, you have to gauge the number of years in which the net costs of renting would exceed the costs of buying.
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Owning:
– Costs: mortgage principal & interest, property taxes, all closing costs, annual maintenance, renovation, homeowners insurance
– Benefits: home value appreciation, mortgage interest deduction
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Renting
– Costs: monthly rent, broker’s fee, rental insurance, rent inflation, rent deposit, electricity/internet/ect, condo/coop fees (if you’re subleasing from one)
– Benefits: potential to invest your money elsewhere
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To assess your qualifications from a financial perspective if you do decide to go down the purchasing route, since Condos in New York cost roughly 40% more than Co-ops and make up a large portion of the market, let’s cover the very rudimentary financial basics for what you will need to possess to qualify for a Co-op, since it is much more stringent than a Condo.
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First: Your “Debt to Income ratio” should generally not exceed 25%. This is based on the numbers once you close on the subject property – the debt portion will factors mortgage payments plus building maintenance fee plus other loans relative to your gross income.
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Second: The basic housing cost should not be more than 25% of your total income. So say the basic carrying cost of your apartment is $4,200, which is about $50,000 a year in annual cost. If you make just under $200,000 per year before taxes and other expenses, then you’ll be right around 25%.
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Third: Most co-op’s require a particular amount of liquid assets post-closing. This typically consist of at least two years of monthly mortgage and maintenance costs after closing on the property, which is a security for the co-op with regards to your financial health.
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Fourth: The average down payment for a home in New York City is 20-30% of the purchase price. This number can change due to the specific Condo/Co-op requirements, your mortgage (if you have one), any negotiations, or be used as strengthening your case in a bidding war…however this is the typical percentage in the city.
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I know these requirements are daunting. For Condos, while the purchase price is higher, the financial requirements are less stringent and the subletting and purchasing policies are more lenient. Nonetheless, the cost of getting in and out of property in NYC – transaction costs, mansion tax, mortgage recording tax, property transfer tax – is totally worth it if you’re going to be there for a long time. The overwhelming take away from this huge block of copy is that there is no better time than the present to start forecasting a home purchase if you intend to make one down the road.
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If you ever want to discuss in person, I’m always down to talk over any caffeinated beverage or breakfast dish. Or whiskey cocktail, let’s be real. Please note that I actually enjoy talking about work, but not as much as I love complaining for the sake of complaining so please ask away!