A Closer Look at Buying vs. Renting in NYC
A couple of months ago, I wrote about buying vs. renting an apartment in NYC and how I favored renting based on my rough calculations. Recently, I started thinking about the economics again, so I had my data geeks crunch some more numbers for me…seriously I did.
Ok, fine, I’m kidding – I have no data geeks unfortunately. This is how it really went down – I happened to be bored one weekend, so I decided to have myself crunch more real estate numbers.
The short of it is, after looking at the numbers again, one thing led to another and Jenn and I started looking at apartment listings and going to open houses for “fun.” Less than a month after starting our “for fun” search, we were in contract and on our way to becoming homeowners in Manhattan!
Co-ops vs. Condos: In my original analysis, I assumed if we bought a place, it would be a condo. However, upon further review and coming to the realization that nearly 80% of the available housing supply in NYC is co-op, we opened up our search to co-ops. In addition to their abundance, there are other advantages (and some disadvantages) to owning a co-op, which I will cover in a future article.
Unorthodox Calculations: In my previous spreadsheet, I was making some unorthodox calculations such as amortizing closing costs, not inflating maintenance/common charges and taxes, not factoring in homeowners insurance, and not taking into account the value of equity and how that affects your ultimate return.
Now that I’ve actually been through the apartment buying process, I know to generally inflate maintenance/common charges and taxes at a similar rate as annual rent increases, NOT to amortize closing costs, and to account for homeowners insurance, which is more expensive than renters insurance. In addition, closing costs for co-ops are generally lower than condos.
I’ve since updated my trusty spreadsheet for a NYC co-op specifically, which you can play with here. As always, anything in blue is a number you should feel free to change. All non-blue numbers are formulas that you should NOT change. I’ve also added in some links to helpful articles for explanations on some of the line items.
Loan Type: I had always made the assumption that if we bought, we would get a 30 year fixed rate loan since that’s what you hear everyone talk about. But the truth is, if our expected time horizon in this apartment is about 5-7 years, why would we lock in an interest rate for 30 years, which is more expensive. Locking in an interest rate for our expected time horizon of 7 years allows us to save a material amount on a monthly basis and makes the economics look more attractive. The risk of us staying longer than 7 years is mitigated by certain interest rate caps on the loan, whereby the interest rate cannot increase by more than 2% a year over the initial rate in year 8 and 9 and not more than 5% lifetime. For example, if you locked in a rate of 2% for the first 7 years, the rate in year 8 could only increase to 4% at most. Assuming you paid a rate of 4% in year 8, it could only increase to 6% in year 9 and no more than 7% for the life of the loan.
Breakeven Point: In my prior analysis, I estimated that buyer and seller closing costs on a $1 million apartment would be ~$100,000. I assumed you would need to have your place appreciate by this amount just to break even. However, I was not taking into account the value of building equity each month – the fact that the longer you stay in your apartment, the more you pay down on your loan. As a result, when it’s time to sell at some point in the future (5+ years), you could potentially sell your apartment for the same price as you bought it and still break even. This assumes, on a monthly basis, that your tax-adjusted monthly payment is generally around the same level as your current rent.
What Didn’t Change
Location: As I clearly stated previously, Jenn and I have no interest in living outside of Manhattan right now and if buying an apartment meant moving off the island, then we wanted nothing to do with it.
Amenities: While we are giving up having a gym in the building in our new apartment, we’ll still have an elevator, doorman, and be super close to the subway. These are all amenities that we’ve gotten used to over the last 8 years – and that would be shocking to take away one or all at the same time. With no gym, the worst thing I’ll need to do is rejoin Equinox for the 4th time. (Update: I managed to avoid joining Equinox and am now saving $100 a month by being with 24 Hour Fitness).
So there you have it folks. I’ve done a complete 180 in the past couple of months on the buy vs. rent in NYC question. I’m anticipating writing a lot more about NYC real estate and the process I went through over the next several months, so stay tuned! In the meantime, go wild on the revised spreadsheet, specifically for NYC co-ops!