What should I have saved in order to buy a property in NYC?
For anyone who works with me, know that I get more emotionally invested in the transaction than you. If you’re not sleeping, I’m not sleeping. If you’re upset about losing out on something, I’m blasting emo rage music whilst penning some angsty diatribe to an impotent co-broker. If you’re worried about becoming homeless, I’m worried about how I’ll fit you inside of my apartment and how to offer that to you without sounding like a complete psychopath.
First time homeownership is one of the most exciting and empowering moments in someone’s life. You’ve made it! You’re no longer shoveling money into a smoldering fire, barely keeping it alive while wondering which will run out first: your energy or cash flow. Finally, a home that legally belongs to you. You you want to paint the apartment in chalkboard paint, affix hammocks to the walls, and harbor a supersized feral cat? Go for it.
So usually when someone approaches me to talk about their quest for homeownership, I get very excited (imagine feeding a 3-year-old 45 giant pixie sticks) then need to give myself an emotional insulin injection to bring the conversation back to the very serious and often overwhelming discussion of what qualifying for homeownership in NYC means…
As you can assume, the entire financial picture will be the determining factor for whether or not you’re ready to purchase. The components to consider when you’re tallying things up:
1. Monthly expenses – So the big two expenses related to your purchase will be your mortgage (which you can calculate using nifty calculators online) and the specific carrying costs for the home. For condos, those will be your property taxes and common charges. For coops, that will be your maintenance (which includes both taxes and common charges). In the event of a townhouse, you’ll be solely responsible for property taxes, but should consider a yearly allocation for maintenance and potential city-mandated facade upkeep.
2. Financial Reserves – If you’re going the coop route, the board will definitely be adamant that you have a specific amount of cash liquid post-closing. Upside, this is the building’s way to best ensure that there are no foreclosures in their future. Downside, it can be a lot of money. With Coops, the rule of thumb is you should make sure that after downpayment and all closing costs, you have two years of maintenance and mortgage payments liquid. In some instances, it can be higher, as I’ve seen a coop require $400,000 liquid post closing. With condos, you aren’t facing the same scrutiny but any condo board would like to see that you haven’t emptied your pockets completely as that poses a liability and also will make for a bit of an uncomfortable situation for yourself out of the gates after closing.
3. Downpayment – Required downpayment will vary building to building but typically condos will require a minimum of 10% down, with 20% being more common however, and coops will range somewhere between a required minimum of 20-25% down. However, always make sure to ask because I’ve seen plenty of coops require 40% down, which is usually the hallmark of a particularly tough coop board. Also note that the downpayment will play into your carrying costs. The more you are able to put down, the lower your mortgage, and the less that you’ll be paying on a monthly basis.
4. Debt-to-income ratio – Debt-to-income ratio is found by adding up all your monthly bills (including loans and all carrying costs) and diving the total by your gross monthly income. Most coops will tolerate between 25-28%, however you must be below 30% to pass a coop board in New York. Condos and townhouses don’t have this requirement but if you are financing, your lender will be keen on this percentage as well.
5. Closing costs – Closing costs vary between coops, condos, new developments, and town houses. Typically you should reserve 2 to 4 percent of the cost of the apartment – more like 2 to 3 percent of the purchase price if you’re under $1 million and 3 to 4 percent if the apartment is over $1 million. Because a lot goes into closing costs themselves, shoot me and email and I’ll send you a much more detailed breakdown.
There are other elements of purchasing to be wary of such as expected timeline (which can unfortunately be extended due to any unforeseen issues during the transaction), level of rigor associated with particular types of purchases, income generation potential, and the list goes on. If you don’t know if you’re ready to buy tomorrow, in a year, in five years, I love breakfast and bourbon more than your average grandfather and would be more than happy to discuss over one, or the other, or both…preferably not neither.