Should I rent or buy?

^A real photo montage of me during an impromptu, unsolicited work conversation

Growing up, I genuinely aspired to be many different mythical creatures; from a mermaid, to an elf, to a pixie, to a witch. Extremely high on that list was the tooth fairy, a dream which manifested itself later in life as a declaration of pre-med at UChicago. Something got lost in translation because the ability to synthesize Napalm in your kitchen shouldn’t go hand in hand with hiding money under children’s pillows. I put my pre-dental plan behind me; partially due to the fairy-fallacy I endured Bio-chemistry for, but mainly because such a career would’ve resulted in the below, which eventually would’ve cost me my license to practice:

So I’m actually deathly afraid of the dentist. Recently I got so cripplingly anxious before my appointment I made myself sick and had to tell my roommate and my cousin that if they got a dramatic text from me stating I had a cavity, that they must immediately leave work and come find me because I, 100%, would have already blacked out and Jekyll and Hyde’d into a Nicholas-Cage-Rage-Stage. So I ended up not having a cavity…but after a meltdown in the waiting room, an anxiety attack before x-rays, and a lot of emotions, you can say that I became close with the dental hygienist. I knew about her family and she knew my opinions on soft-rind cheeses and the viability of ghosts. As she was getting ready to scrape off years of damage, she asked what my job was. Then, as she loaded an entire road crew’s worth of machinery into my mouth and started aggressively jack hammering away at my nerve, she said, “My husband and I really want to buy but we don’t know if it’s unrealistic or better to keep renting – what are your thoughts?”

Me, watching someone touch a topic that isn’t exactly simple

Please don’t get me wrong, I LOVE talking about the path to home-ownership. It’s so exciting and something you can either thoughtfully plan for over the course of many years or dive right into after a few weeks of planning. But now that my mouth isn’t loaded with topical anesthesia and my face isn’t getting power washed by the spray of a battle drill, let me answer this one in the peace of sweatpants.

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. While with a mortgage, you’re coughing up a good chunk of change for interest, it essentially is 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.

Theoretically, the proof is in the pudding. But crunching the numbers and making it work from a financial standpoint is a bit of a different story. Thankfully, the New York Times made this AMAZING calculator that lets you punch in renting costs versus purchasing costs to set what is the most effective use of your finances over a particular timeline. This calculator definitely doesn’t cover it all, but it gives you a solid benchmark to work with.

Since Condos in New York cost roughly 40% more than Co-op’s do (Condo vs Co-op difference here) and make up a large portion of the market, let’s cover what you will need to qualify for a Co-op, since it is much more stringent than a Condo.

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.

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%.

Third: Most co-op’s require a particular amount of liquid assets post-closing. This typically consist of at least two years of housing costs after closing on the property, which is a security for the co-op with regards to your financial health.

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 power in a bidding war, but this is the typical percentage in the city.

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. In this market, it takes two to three years to break even, all things considered. 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. I’m hell bent on owning a loft in Soho someday. If I get a TV show in a few years, this may be a reality sooner than my current much-longer-term trajectory, but nonetheless it’s on my radar.

If you ever want to discuss in person, I’m always down for Buying-n-Breakfast.

Here’s that handy calculator again

*** Please note that I actually enjoy talking about work, but not as much as I love complaining for the sake of complaining so please always ask away, I secretly love it